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Growing Business Risks from Global Water Scarcity

With global temperatures increasing, scientists have told us to expect water scarcity problems like those California and China are now experiencing to increase and become even more severe. The consequences for an already reeling global economy will be profound. Numerous industry sectors should expect decreased water allotments, shifts towards full-cost water pricing and ever-more stringent water quality regulations.
by Mindy S. LubberHarvard Business Review Posted on Mar 10, 2009

"Water Shortage Threatens China." "California Faces Water Rationing." "Drought in Australia Food Bowl Continues."

Water scarcity is becoming eerily prominent in recent newspaper headlines — and for good reason.

With global temperatures increasing, scientists have told us to expect water scarcity problems like those California and China are now experiencing to increase and become even more severe. The consequences for an already reeling global economy will be profound. Numerous industry sectors should expect decreased water allotments, shifts towards full-cost water pricing and ever-more stringent water quality regulations.

Water is one of our most critical raw materials — even more important than oil, for there are no alternatives. Peter Brabeck-Letmathe, chairman of Nestlé, put it starkly in an article in The Economist: "I am convinced that, under present conditions and with the way water is being managed, we will run out of water long before we run out of fuel."

Already, China, India, and the western U.S. are seeing growth limited by reduced water supplies from shrinking glaciers and melting snowcaps that sustain key rivers. Meanwhile, power plant production has been cut back due to more frequent and more intense heat waves and droughts in Australia, Europe, and the southeast United States.

A new report by Ceres and the Pacific Institute evaluates water-related risks to eight water-intensive sectors: technology, beverage, food, electric power/energy, apparel, biotechnology/pharmaceuticals, forest products and mining. Our conclusion is that each of these sectors faces serious near- and long-term economic risks related to their water dependence.

For example, silicon chips, the backbone of our information economy, require huge amounts of clean water to produce. Yet, 11 of the world's 14 largest semiconductor factories are in the Asia-Pacific region where water quality risks are especially high.

In the beverage industry, Coca-Cola and PepsiCo bottlers lost groundwater operating licenses in India because of water shortages, and beverage companies, including Nestlé Waters, are facing strong opposition to the building of new bottling plants because of water supply concerns.

Water scarcity is forcing up the cost of food. Rice prices soared last year when drought caused the collapse of rice production in Australia. Some 70 percent of global water use supports agriculture.

Yet, despite water's importance, few companies are thinking strategically about the profound business risks that will exist in a world where climate change is likely to exacerbate already-diminishing water supplies. To succeed in a water-constrained economy it is essential that companies:

  • measure their entire water footprint;
  • assess physical, regulatory, and public perception risks associated with their direct water use, water use throughout their supply chain, and end product use;
  • align their water footprint evaluations with the company's energy and climate risk assessments;
  • elevate water as a governance priority for executives and board members;
  • disclose to investors and other outside stakeholders water management strategies, performance data, and goals;
  • boost engagement with key stakeholders such as local communities, shareholders, suppliers, government regulators, and employees.

Albert Einstein once said, "We shall require a substantially new manner of thinking if mankind is to survive." While he was speaking of another threat and in another era, Einstein's admonition is appropriate here. Businesses need to bring new ways of thinking to using the most essential ingredient of life: water.

Mindy Lubber is president of Ceres, a coalition of investors and environmental groups working with companies to address sustainability challenges such as climate change.

Read the post at Harvard Business Review

Meet the Expert

Andrew Logan

Since joining Ceres in 2002, Andrew has launched and directs two program areas for the organization. The first focuses on working with investors to engage the oil sector on key sustainability issues including climate change, biodiversity and water. Andrew's second area of focus is the insurance sector, particularly the role that insurers could play in encouraging solutions to climate change.

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