Water, Water!!!

Almost every transformation process that is required for production also needs more or less water - from the growth of raw materials, to the production of materials and components, to the distribution of products to the customers. Without water, many of those processes would not be possible. Thus, scarcity of water can be a risk for supply chains.

The PRI Association (http://www.unpri.org/), in collaboration with World Wildlife Fund (WWF), PwC Germany and the PRI investor steering committee on water risks, has published recent findings on water risks in agricultural supply chains.

Figure 1: Distribution of the world’s water (source: PRI: PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document, p. 7.)

The researchers state, that only less than 1 % of the world's water reserves are both suitable and accessible to humans. At the same time, the demand for water has dramatically increased. In 2050, 40 % of the global population will be living in areas, where severe water scarcity occurs, so the estimates of the experts.

However, the reports focuses on water-related risks in supply chains. To identify the risks for certain companies in supply chains, the researchers followed a certain methodology. First, they identifed on a global level crops and river basins facing the most significant water risks, which were then further aggregated. This led to a list of 25 key crop/country combinations with high water risks. Then, appropriate companies were identified for the concrete assessment of water risks. A so-called 'ESCHER approach' (an extended input/output model) was applied to estimate the water consumption in water stressed regions. Although the report mentions that there were some limitations of the model and the data, it also highlights that the value of this approach is to actually provide a first quantitative estimate of water consumption and water risks in certain supply chains. Figure 2 shows two examples of supply chains in different sectors and the water-related risks.

Figure 2: Water consumption of example sectors across supply chain tiers (source: PRI: PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document, p. 9.)

Beside those quantitative results, there are further conclusions from the output of the calculations:

• There is, unsurprisingly, a strong association between water usage and revenue.
• There is some significant exposure to certain crop/country combinations, e.g. for Indian wheat.
• The biggest water consumers are companies in the agricultural sector, in food retail, in packaged foods and meats as well as soft drinks companies. 
• A relatively low consumption in water scare regions had been calcluated for apparel, luxury goods, brewers as well as distillers and vintners.

The researchers list a variety of questions, that can be addressed to bridge research to application, and even more important to support a water risk management. The focus on:

• Awareness and relevance, for example asking where in the value chain the company is placed or if it is facing end-customers. Another question is how the company would rate the current and future importance of water risk for the continuity and pricing of its key commodity supplies.
• Water risk assessment, e.g. asking at what level and at what geographic scale the company undertakes water risk assessments.
• Impact, for example asking what percentage of key commodity spend is exposed to substantive water risk.
• Response, e.g. asking what proportion of key suppliers the company requires to report on their water use, risks and management?
• Disclosure, for example asking if the company discloses its water risk and management response?

Finally, the report proposes to apply a water risk management framework, developed by WWF. This framework consists of 5 steps:

1. Water awareness,
2. Knowledge of impact,
3. Internal action (engagement with employees, buyers, and suppliers),
4. Collective action (engagement with other organizations), and
5. Influence government.

The full report "PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document" can be found on the PRI's website: http://www.unpri.org/publications/#WATER-RISKS.

Thanks to Christian Kalley for pointing me to the report.

-----

You might also be interested in a report by WWF about water-related risks in Germany. A summary of the report can be found on RiskNet's website (http://www.risknet.de/topics/risknews/das-unterschaetzte-risiko/f12c9f4bfbd07ffec7c5000f86fbc614/, in German). The report can be downloaded on the website of WWF Germany: http://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/WWF_Studie_Wasserrisiko_Deutschland.pdf.