Pressure on fresh water is at an all-time high, and climate risks are intensifying these challenges. This year, many industries across the economy experienced negative financial impacts due to extreme droughts and flooding—from higher crop prices to disruptions in the global supply chain for microchips.
These risks pose financial threats to investment portfolios, business operations, and the long-term stability of markets. By 2050, climate-driven water challenges and surging demand for water could slash GDP by 15% in some countries, according to a recent report by the Global Commission on the Economics of Water.
But companies and investors can help avert these looming threats by acting with ambition and urgency.
For the past two years, investors have been supporting large companies to more responsibly manage water through the Valuing Water Finance Initiative, a global effort where investors are working with companies in their efforts to adopt and strengthen water management practices that safeguard the long-term health of their business and protect shareholder value.
By aligning their business strategies with key principles for responsible water use—including protecting water quantity and quality and fresh water for ecosystems and communities—companies can accelerate their progress toward minimizing financial risks in the face of growing water scarcity and pollution. But to do this, they need to bridge significant gaps, including the following:
Tackling water risk in supply chains
For many sectors, supply chains account for the vast majority of the water companies use.
Companies that understand where water risks in their supply chains have the most impact on their business can get to work on solutions. These can include policies to buy ingredients and raw materials from suppliers that use more sustainable water management practices. Engaging with suppliers—providing education, technical support, and incentives to use water more efficiently and reduce pollution—get companies closer to making progress on addressing water risk.
While some companies are disclosing water risks in their supply chains, Ceres’ first benchmark of corporate water practices—developed using public disclosures—revealed most companies’ disclosures and water stewardship targets focus on their direct operations.
But investors are working with companies on expanding action to assess and tackle water risk in their supply chains. Consider that Domino’s Pizza—the largest pizza chain in the world—is now assessing water risk in its supply chain and disclosing how it will use the information to prioritize solutions. Another example is McDonald’s Corp, which this spring said it would lay out a timeline for developing a strategy addressing its impact on water scarcity in water stressed areas.
Cutting water pollution
Industry, which needs clean water to produce food, energy, and manufactured goods, has an outsized impact on clean water supplies. In addition to running the risk of not having enough clean water to operate, companies that pollute water risk fines, penalties, clean-up costs, and reputational damage.
Yet, as our benchmark found, many companies are largely overlooking water quality when setting goals for addressing water risk. To close this gap, some companies are conducting and using risk assessments to see which watersheds are threatened by poor water quality and setting targets to reduce their water quality impacts in these areas of their direct operations and supply chains.
Companies leading the way are also reporting how they are preventing release of industry “pollutants of concern” or contaminants such as pesticides and fertilizers, dyes and pigments, heavy metals, and chemicals including PFAs and BPA—into water supplies.
Protecting freshwater ecosystems
The economic value of water and freshwater ecosystems is immense: about $58 trillion annually, equivalent to 60% of global GDP. Water and ecosystems are inextricably linked. Ecosystems that need water to thrive also help filter and store water supplies that companies and communities need.
Ecosystems help provide water to grow commodities like rice, grains, and cotton, as well as the water needed to manufacture key components, such as semiconductors, to power data centers that support artificial intelligence.
But freshwater ecosystems are in a downward spiral, and our benchmark showed that not enough companies are acting on this crisis. Companies making progress are—again— evaluating their risks due to impacts and dependencies on ecosystems and setting ecosystem protection or restoration targets.
With each passing year, the potential for water stress to disrupt business and economic stability grows clearer. Our next benchmark slated for release next fall will see how companies are evolving and expanding solutions—taking advantage of leading industry practices, working with peers and stakeholders, and ensuring boards and senior management are involved in these efforts toward a more water-resilient economy.
