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Managing Water Risk in the Private Sector June 13, 2011

It is becoming increaDroughtsingly clear that lack of access to potable water will lead to one of the next major crises that we will face as a global community.  We are already witnessing the impacts of water scarcity in pockets around the world today, and this dilemma will only worsen with time.  While much of the focus surrounding water favors social and environmental issues, water is important to all sectors of modern society.  To remain competitive, businesses will need to assess the impact of water risk on investments.

Water risk is a lack of water that arises from water scarcity, water pollution, and water competition.  In the private sector, this risk can cause financial disruptions, increase costs, lead to revenue losses, and compromise growth.  Sectors most vulnerable to water risk include the food and beverage industry, the power industry, mining, and some manufacturing.  Water risk poses such a significant threat to business that last year the U.S. Securities and Exchange Commission (SEC) identified water as a potential material use that public companies should disclose to investors.

In line with the SEC’s sentiment, in 2010, the Coalition for Environmentally Responsible Economies (CERES) released a report studying corporate disclosure of water risk (view the full report).  The study looked at the water risk reporting of 100 publicly traded companies across eight of the most water-vulnerable sectors.  The report’s intention is for investors and companies to learn from the reporting practices of these 100 case studies and promote a better understanding of how water risk impacts a company’s operations, supply chains, and products.  But CERES was surprised to find that even in sectors most threatened by water risk, reporting on risk and corporate water performance is weak.  As water quality and scarcity becomes an even more severe issue, companies will be forced to take water risk more seriously.

Recognizing water’s relationship to future prosperity, the World Resources Institute (WRI), in partnership with Goldman Sachs’ Center for Environmental Markets and General Electric, is developing a Water Index to chart water risk across regions and sectors.  The Water Index will help investors understand and forecast water’s impact on businesses and investments.

The Water Index will rely on publicly available data provide information on water quality and water scarcity indicators.  This data will be presented spatially on interactive map overlays that allow users to compare and combine risk scenarios.  Because water is a local issue, risks will vary by region and sector.  Although some groups have attempted to calculate companies’ water footprints, this is one of the first attempts at quantifying water’s impact on companies.

The pilot project will focus on the water risks of thermal power generation in China.  WRI and its partners hope to highlight potentials for reducing water risk in this sector by providing recommendations for making the sector less vulnerable.  This pilot is just the start of what may prove to be an instrumental tool for aiding corporate water risk reporting and for businesses to ensure future growth and success.


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