Lloyd’s ‘360 Report’ Examines Water Scarcity Threats to Business

April 26, 2010

A new report in Lloyd’s “360” series examines the threats posed to business as a result of the increasing scarcity of water. According to the report, Global water scarcity: risks and challenges for business, prepared in cooperation with the conservation organization the World Wildlife Fund (WWF), both continued population growth and climate change are the principle causes.

The report concludes that “businesses will have to address and manage the risk of water scarcity in the future, highlighting that all goods require water at some point in their production, as well as it being the most important human resource. As water resources become scarce, even companies that hold a water license – which entitles them to use a set amount of water – may face risks as governments seek to re-allocate water to priority users.”

The risks aren’t limited to areas where water is scarce. Due to globalization a company’s “partners are also affected as the risk spreads through supply chains and imported products requiring water in their production.”

Lloyd’s CEO Richard Ward pointed out that managing water is no longer simply a CSR (corporate social responsibility) issue, but is now a core business issue. “Water scarcity is already a reality for some businesses and as this trend increases all risk managers will need to consider their organization’s exposure,” he stated.

“The most simple risk management response is to reduce your own water use, or that of your suppliers. However, businesses cannot manage this risk alone and will need to work with the wider community to improve water management and protect this critical resource.”

Lloyd’s cited some statistics which highlight the fact that “there is a finite amount of fresh water on our planet – only three per cent of the total water in the world is fresh water and less than one percent is readily accessible to humans.” This poses a potential risk to a company’s reputation, as it “could be accused of over-using scarce water at the expense of the environment or householders.”

WWF Head of Freshwater Programs, Dr. David Tickner, explained: “Put simply, this report shows that we all live at the water’s edge. Water is of critical importance to us all in our everyday lives. But the evidence is increasingly clear that freshwater ecosystems – the rivers, aquifers and wetlands from which we obtain much of our water – are in rapid decline globally because of over-use, pollution and the proliferation of poorly-planned dams.

“Businesses, other water users and ecosystems share many of the same water-related risks. Moreover, getting water management right underpins our ability to tackle many of the great challenges of the 21st Century: economic growth, food security, energy security, reducing poverty and adapting to a changing climate. WWF believes that businesses should be as much a part of the solution as governments and NGOs.”

The report identifies two strategies for companies to manage water risk:
— The three M’s – Producers should: measure their water risk; mitigate it; and market themselves as leaders in managing water use in the sector.

— The three I’s – Businesses in the service sector can: consider water risk profiles when identifying suppliers; influence suppliers to mitigate water use or meet set standards; and consider water risk to businesses and supply chains when making investment decisions.

As water scarcity increases, so will the need for increased insurance coverage. Lloyd’s notes that some products – “business interruption, property, liability or reputational insurance” – are already available. “But as awareness of the risk increases, insurers will explore the potential for tailored products.”

There are also potential political risks in conflicts over water use. A previous Lloyd’s 360 Risk Insight report on climate change and security found that “water also presents a security risk to business in some parts of the world where it could become a source of inter-state conflict, such as India and Pakistan competing over access to the diminishing supply of water from the Indus river basin.

The full report is available on the Lloyd’s web site, at: www.lloyds.com under the 360 section.

Source: Lloyd’s of London

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