By Claire West

According to a new study by WWF and German development bank DEG, the shortage of freshwater is not only becoming more and more of an ecological risk, but it also is rapidly becoming a major business growth risk — one that investors need to take into account.

Assessing Water Risk: A Practical Approach for Financial Institutions, states that climate change, population growth and increasing living standards are contributing to the rising pressure on existing and already scarce water resources, particularly in developing countries. In Southeast Asia and Africa, for example, water shortages constitute a threat to entire ecosystems and to the living standards of the population.

“The availability of water also is becoming a development bottleneck for companies. With the water risk filter we have now developed a new tool to identify such risks to companies and to offer support in water management,” said Dr Peter Thimme, head of DEG’s department for Sustainable Development/Environment.

Access to a sufficient quantity of water of adequate quality, he added, is therefore of considerable economic significance.

“Our intention is to provide the conscientious investor with the knowledge to work with clients toward more sustainable water management, with the aim of mitigating both business and environmental risks,” according to the study.

“Business risk stemming from a company’s relationship to water can be broken into three broad, inter-related categories: physical — as a result of too little, too much or polluted water; regulatory — with dwindling availability and increased pollution, the regulation of water is bound to become stricter; and reputational — public and media awareness of water and how companies are handling this resource is on the rise.

The report goes on to state that “all of these risks can cause disruption of supply and, in worst cases, termination of business operations.”

According to DEG and WWF, 191 out of over 300 companies studied as part of the report showed high potential business risks related to freshwater. Concrete support measures to mitigate these water risks will now have to be initiated, according to the report.

David Tickner, Head of Freshwater Programmes at WWF-UK, said: “We all live at the water's edge. But many businesses are failing to understand the increasing impacts on supply chains from water risks. These businesses pose a high risk to investors.

“This joint report outlines a ground-breaking but simple approach to understanding investment risk from water scarcity and pollution. In working with DEG to develop this method, WWF's intention is show how financial institutions can, out of enlightened self-interest, help client companies to transform red risks into green lights for sustainable investment. In doing so, they can help to tackle one of the great environmental challenges of the 21st Century.”

In particular, the report shows that the agribusiness’ are at a particular risk since they sector accounts for 70 percent of global water consumption. If countermeasures are not taken now, water-intensive agricultural produce may become scarce in the future and the companies concerned may face economic risks, according to the report.

The newly developed water risk filter system in the report is intended to identify water-related risks at an early point in time so they can be considered in investment decisions.

The tool also outlines possible courses for action for companies from different industries and regions, which may be threatened by water shortage or pollution, either directly or in their supply chain.

DEG is planning to support the implementation of individual business approaches to improve the situation in a follow-up project financed by funds for technical assistance from the bank. The development finance institution in turn hopes this will cushion the ecological and economic impacts of the ongoing water crisis.

Additionally, the project produced more than 80 detailed and comprehensive country fact sheets on individual water situations and mappings.