These 5 ways water scarcity affects businesses might surprise you

Water is a crucial driver of the global economy. Yet unlike sought-after commodities like oil, we often take its abundance for granted. Now, water scarcity is driving home the point.

Long underappreciated and undervalued, water is an integral part of many industrial processes, as well as playing a key role in global trade. The potential impact of water scarcity on some industries may seem obvious – but that can blind us to the true scale of potential consequences.

For instance, with a water-intensive industry like agriculture, we can readily imagine how shortages might affect the price and availability of meat, rice or bread. In other words, the impact on producers and consumers.

In reality, the water footprint of many companies or industries has implications at many levels: from local communities to national or even global partners. The ripple-effect of shortages can echo around the world, affecting businesses, consumers, workers and residents in ways you might not expect.

What really happens when businesses run dry

According to management consulting firm McKinsey, two-thirds of businesses face substantial water risk, in direct operations or in their value chain.

The fall-out from this extends beyond stalled processes and production, causing disruption up and down supply lines and, in turn, impacting creditworthiness. Here are five less obvious ways that water risk can affect businesses.

1. Mounting running costs

Even industries that aren’t seen as particularly water-intensive face increased running costs. For example, the 2015 drought in Brazil hit General Motors with $8m in additional local costs, including $2.1m in higher utility charges.

In 2020, businesses across Sydney, Australia, were urged to apply for permits allowing the use of drinking water in operations – or face fines. The restrictions were applied on the back of droughts across New South Wales.

2. Complex supply chains

According to the US water treatment giant Ecolab, nearly 80% of companies’ water use comes from their supply chains, amplifying the effects of scarcity.

Consider microchip manufacturing, which uses ultrapure water to remove impurities. Disruption here could affect smartphone manufacturers, which in turn impacts on retailers further down the line.

In order to mitigate this risk, Apple supplier TMSC is building a water treatment plant at its Tainan facility in Taiwan. This will process 67,000 tons of water a day for re-use in the chipmaking process.

3.  Parched waterways 

Falling water levels can disrupt transportation, stranding cargo en route. For example, a 2018 heatwave left cargo ships unable to navigate the River Rhine, one of the world’s busiest inland waterways.

According to economist Holger Schmieding, when shipping had to be stopped, production of chemicals and pharmaceuticals in Germany fell by 10% between September and November, translating to a direct hit to the national economy.  

In the United States, the 2012 Great Plains drought closed the Mississippi River to cargo traffic at least three times, costing an estimated USD300 million per day of closure

4. Government intervention

In any given region, industry, agriculture and domestic usage create competing demand for water. During times of scarcity, state intervention can radically transform business practices.

In August 2021, farmers in one of the United States most important agricultural regions in California were instructed to stop drawing water from major local rivers and streams. This emergency move by the government, designed to protect the drinking water supply of 25 million people, overruled farmers’ legal rights, resulting in an unforeseen financial burden in a year already blighted by drought.

Water stress can also lead to restrictions on companies’ rights to discharge wastewater, which in the worst cases means halting production.

5. Water risk and credit ratings

Another ‘hidden’ way in which water stress can affect a company’s bottom line is its bearing on credit ratings. While some sectors, such as agriculture, are particularly exposed, credit rating agency S&P Global Ratings says there are impacts on businesses throughout the value chain.  

In Brazil, for example, sugarcane processor Coruripe was downgraded in 2018 when drought caused a lack of crops for processing, increasing idle capacity at its facilities.

S&P also builds water risk into their analysis of Australian rail freight business Pacific National. The company handles transport for much of the country’s grain, and could therefore be heavily impacted by crop shortages caused by severe water scarcity.

The case for action now

Our most significant water basins are already highly stressed, say McKinsey. And more cities edge closer to running out of water for residents and industry.

According to CDP, the cost to businesses from water risks is $301bn – yet the expense of addressing these is $55bn, less than one fifth that amount.

Measuring and reporting usage is the first step in better water stewardship. Businesses are looking inward to measure impact and create change, and their success is as visible on shop shelves as on the factory floor. But wholesale changes mean encouraging suppliers, partners and consumers to join the journey.

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