The escalating pressure on freshwater resources, exacerbated by the intensifying effects of climate change, poses a significant threat to global economies. Extreme weather events like droughts and floods are increasingly impacting businesses across various sectors, leading to financial losses from crop failures to disruptions in critical supply chains, such as the semiconductor industry. These climate-driven water challenges represent a substantial financial risk to investment portfolios, business operations, and the long-term stability of global markets. Projections indicate that by 2050, water scarcity and related issues could potentially reduce the GDP of certain countries by a staggering 15%, underscoring the urgent need for action.
Addressing this impending crisis requires a concerted effort from both companies and investors. Initiatives like the Valuing Water Finance Initiative are crucial in promoting responsible water management practices within large corporations. By collaborating with investors, companies are working to integrate water stewardship into their business strategies, thereby safeguarding their long-term financial health and protecting shareholder value. Adopting key principles of responsible water use, including protecting water quantity and quality and ensuring sufficient freshwater resources for ecosystems and communities, is paramount in mitigating the financial risks associated with growing water scarcity and pollution. However, significant gaps remain in translating these principles into tangible action.
One major challenge lies in tackling water risk within complex supply chains. For many industries, the majority of water usage occurs within their supply chains, often beyond their direct control. Companies must identify the specific points within their supply chains where water risks pose the greatest threat to their business. This understanding allows for the implementation of targeted solutions, such as sourcing ingredients and raw materials from suppliers who employ sustainable water management practices. Active engagement with suppliers through education, technical support, and incentives for water efficiency and pollution reduction is essential for driving progress in addressing water risks throughout the supply chain. While some companies are beginning to disclose water risks within their supply chains, much work remains. Current corporate disclosures and water stewardship targets predominantly focus on direct operations, neglecting the broader supply chain impacts.
Another critical area requiring attention is the reduction of water pollution. Industries reliant on clean water for production, such as food, energy, and manufacturing, have a disproportionately large impact on water quality. Companies that pollute water bodies not only risk depleting the clean water resources they need for their operations but also face potential fines, penalties, cleanup costs, and reputational damage. Despite these risks, many companies overlook water quality when setting targets for addressing water risk. Progress in this area necessitates conducting thorough risk assessments to identify watersheds vulnerable to poor water quality and subsequently setting targets to reduce pollution impacts in both direct operations and supply chains. Leading companies are also taking steps to prevent the release of harmful pollutants, including pesticides, fertilizers, heavy metals, and chemicals like PFAs and BPA, into water supplies.
The interconnectedness of water and freshwater ecosystems is crucial for economic stability and ecological health. Freshwater ecosystems provide services valued at trillions of dollars annually, representing a significant portion of global GDP. These ecosystems play a critical role in filtering and storing water, supporting the growth of essential agricultural commodities like rice, grains, and cotton, and enabling the manufacturing of key components like semiconductors used in data centers and artificial intelligence. However, freshwater ecosystems are facing increasing threats, and insufficient corporate action is being taken to address this crisis. Companies demonstrating leadership are evaluating their risks associated with ecosystem impacts and dependencies and setting targets for ecosystem protection and restoration.
The urgency of addressing water risks cannot be overstated. As the potential for water stress to disrupt business and economic stability becomes increasingly apparent, regular benchmarking of corporate water practices is essential. Future assessments will track the progress of companies in implementing and expanding solutions, adopting industry best practices, collaborating with stakeholders, and ensuring board and senior management engagement in building a more water-resilient economy. This ongoing evaluation will be critical in driving accountability and accelerating the transition to a sustainable future where water resources are managed responsibly and protected for the benefit of all.
