The cost of water risks to business could be over five times greater than the cost of taking action now to address those risks, according to a new report by CDP.

The report, A Wave of Change, finds that the companies disclosing through CDP’s water security questionnaire in 2020 risk losing up to a combined US$301 billion in business value if they do not address water risks. It’s also estimated that the total cost of addressing these risks is US$55 billion—less than one fifth of the amount.

“Water shortages are affecting more than three billion people worldwide, with the amount of freshwater available per person having plunged by a fifth over two decades,” said Cate Lamb, global director of water security at CDP. “The water crisis must be approached with the same urgency and innovation as the COVID-19 crisis—and the business case for action is clearer than ever.”

“Some of the world’s thirstiest companies are already innovating by reusing water in creative ways, developing water-smart products, and remodelling their strategies to adapt to the water crisis,” added Lamb. “We can turn this situation around, but we need much more transformative action. As investors pay closer attention to companies’ management of water risks, CDP is calling for all companies to develop ambitious targets to reduce water withdrawals and eliminate water pollution, including net-zero water targets. Companies must take bold action now to transform their business models.”

In the last year, companies have made progress on water use, with nearly two thirds of companies reducing or maintaining water withdrawals thanks to the implementation of measures to reuse and save water.

However, it is not just the volume of water available that matters. The cleanliness of that water is vital too. The analysis finds overall business action on water pollution is severely lacking, with just 4.4 per cent of companies making progress against pollution reduction targets.

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While more action is needed, some companies are integrating water stewardship into their business strategy and taking bold action to address water risks.

According to CDP, examples of business leadership on water security include:

  • Zero water withdrawals and decoupling:Nissan’s rainwater harvesting and wastewater recycling allows its India site to be independent of external water sources for 130 days; L’Oréal’s “waterloop factories”; Ford Motor aiming to eliminate water withdrawals from manufacturing processes; AstraZeneca to maintain water withdrawals at 2015 levels, while improving water quality, despite doubling revenue over the next five years.
  • Aiming for elimination of pollution:PVH and Kering aiming to eliminate hazardous chemicals from their production processes. PepsiCo is investing in reverse osmosis to improve the quality of wastewater, with 99 per cent of wastewater meeting its internal standards that are more stringent than local regulations.
  • Developing new green products:Unilever’s “dry” personal care products for water stressed areas; BASF’s new chemical products that reduce pollution during the product use phase such as a biodegradable de-icer.
  • Combining climate action and water action:Mars’ introduction of wet-dry irrigation for rice cultivation is expected to reduce water consumption by 30 per cent, increase farmers’ incomes by 30 per cent, and reduce carbon emissions; Samsung is reducing the water and carbon footprint of semi-conductors.

“Water security is an increasingly important issue throughout the globe and L’Oréal has been committed for years to optimizing the water cycle at each step of the value chain, from sourcing, manufacturing to product consumption,” said Antoine Vanlaeys, chief operations officer at L’Oréal. “In this context, the development of our ‘waterloop factories’ represents a crucial milestone in our operations’ efforts to ensure sustainable water management.”

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“Water scarcity is a key focus of the Nissan Green Program, Nissan’s midterm environmental plan,” added Joji Tagawa, senior vice president and chief sustainability officer at Nissan Motor Co., Ltd. “We are committed to improving water management as we believe it is important to reduce water use to be a sustainable company.”

“As just one example, our manufacturing plant in India has three harvesting ponds and 70 per cent of wastewater is re-used,” noted Tagawa. “In Japan, Nissan has signed agreements with dozens of local governments to collaborate during times of natural disaster. Under one of the agreements, Nissan will provide electric vehicles free-of-charge to evacuation centers to supply electricity and carry drinking water from a local brewery to residents. Through these agreements, Nissan is contributing to the safety and security of local communities.”

Investors are urging greater transparency and action from companies on water risks. Over 590 investors with over US$110 trillion in assets are requesting companies to disclose on water security impacts, risks, and actions through CDP’s platform in 2021.

“Responsible investment is a key priority for the Norwegian Government Pension Fund Global […] as it supports the long-term economic performance of our investments and reduces financial risk,” said Carine Smith Ihenacho, chief governance and compliance officer at Norges Bank Investment Management. “Water scarcity and pollution can pose business risks, and the way water is managed by companies can influence their profits—and even affect the profits of other companies we invest in that are dependent on the same sources of water.”

“Every year we assess companies’ water management efforts across indicators of governance, strategy, risk management, and disclosure of metrics and targets,” added Ihenacho. “CDP’s analysis shows that the cost of mitigating water risks for companies is usually much lower than their potential financial impact. This illustrates a strong business case for taking action now, to improve financial performance later. Companies should heed this advice, transparently report on their water risks, and take effective action to manage them.”

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Investors are also increasingly concerned about the loss of nature and biodiversity, which includes water as a vital element to all ecosystems. Many financial institutions have recently signed up to the new Task Force on Nature-related Financial Disclosures (TNFD) and other initiatives like Finance for Biodiversity. As this becomes mainstream, the pressure on companies to disclose and take action on water is expected to increase.

The top water risks faced by companies are increased water scarcity, flooding, drought, severe weather events, and declining water quality. The most common responses by companies across sectors and regions are adopting water efficiency, reuse, recycling or conservation measures, and developing flood emergency plans. While those are most common, most of the money is being spent on capital expenditure, infrastructure, pollution control, new technological solutions and complying with local regulatory requirements.

The report is based on data from 2,934 companies that disclosed through CDP’s water security questionnaire in 2020, at the request of 515+ investors with US$106 trillion in assets. This represents a 20 per cent increase in disclosure compared to 2019, despite the challenges posed to companies by COVID-19. Over 9,600 companies in total disclosed environmental data through CDP in 2020, including climate change, forests and water data.

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