Water Risk Assessment: What is it and why is it important to supply chain risk management?

THE RESILIENT ENTERPRISE | THE RISKMETHODS BLOG

Extreme weather events related to water cover both ends of the spectrum. Heat and drought burn crops and ignite wildfires. Heavy rain and tropical storms can set off devastating floods. Such natural hazard risks are joined by man-made water pollution. No wonder water-related risks are among the top five in the 2022 World Economic Forum Global Risks Report. 

1. Water Risks: Examples and Consequences

Topping the WEF Global Risks Report list of perceived economic and societal threats are:  (1) climate action failure, (2) extreme weather, and (3) biodiversity loss. Close behind in the top 10 are (7) human environmental damage and (8) natural resource crisis. These threats all relate to consequences arising from water disaster or water crisis. 

Who is at risk of what? 

Water is essential for life, yet water risk also presents an economic threat. Industries such as metals and chemicals rely heavily on water for manufacturing processes. Additionally, rivers and waterways are key for generating electricity and as shipping routes. Consider some recent water disasters and their consequences: 

Water risk assessment

  • Drought: A severe drought and low water levels in the Yangtze river crippled hydropower production. This forced factories in China's Sichuan province to shut down for nearly a week. 
  • Flood: Yangon, Myanmar, was hit by heavy rainfall and flooding, which affected infrastructures. The city is an important supplier of electronics and LEDs. 
  • Flash flood: Heavy rain in Seoul, South Korea, submerged vehicles and flooded subway lines. 
  • River flood: Communities continue to rebuild following 2021’s historic flash floods in Europe when the River Ahr and tributaries of the Mosel overflowed. 

Additionally, people and animals suffer from the man-made risk of water pollution. Witness hundreds of tons of fish poisoned along the Oder river in Poland and Germany in mid-2022. And the toxins flow into the Baltic Sea, carrying the threat farther.  

2. What is a water risk assessment?

Frequently, business continuity planning includes water risk assessment, not only in a crisis. Major water risk can be divided into four categories: too much, not enough, too polluted, and disruption of freshwater systems. Lack of access to water supply, and sanitation are also considered.

A water risk assessment (WRA) identifies and evaluates the enterprise’s exposure to water-related risk. It serves as a basis for managing water risk in the enterprise and in the supply chain. These go beyond the immediate natural hazard risk. At an operational level, water risk assessment evaluates water quantity and quantity, and the related risks, including:

  • Climate change consequences (rain, storms, lack of or low precipitation)
  • Impacts on ecosystems (freshwater and fish)
  • Water legislation and regulation (environmental laws)
  • Water rights or conflict (drinking or industrial use)

Most enterprises that are highly dependent on water regularly assess water risk. Agriculture and power generation account for 90% of direct water withdrawals. Textiles and paper are also thirsty industries. Yet all types of businesses benefit from developing water risk management strategies. Such strategies protect their operations and supply chains from water scarcity or water stress. 

International laws, such as the UN Global Compact CEO Water Mandate also drive enterprises to initiate water stewardship initiatives across supply chains. Water stewardship involves practices and policies to ensure sustainable use of freshwater resources. 

3. How should you start a water risk assessment for your business?

First, quantify your company-specific dependence on water resources, along with your water footprint. This is the amount of water that your critical processes consume and pollute. Free, online tools include Ecolab’s Water Risk Monetizer, Water Resources Institute’s Aqueduct Water Risk Atlas, and WWF’s Water Risk Filter. Here are some possible next steps. 

  1. Compile data at the relevant facility. Water risk depends highly on location, so determine where risk is most critical. 
  2. Set the scope of your assessment. Evaluate the volume and source of water needed per facility, per production process, or goods produced.
  3. Establish goals. These include efficient water use, reducing risk, and mitigating impact

Investing in water security ensures sustainable growth and development. As an environmental, social, and governance (ESG) criteria, a water risk rating identifies how much you depend on or impact freshwater resources. This can be an important metric for investors interested in sustainable growth.  

4. What does a framework of water risk assessment cover?

According to a water risk assessment framework by the UN CEO Global Mandate, the risks to businesses stem primarily from environmental conditions. And risk from businesses arise through inefficient or polluting operations. A water risk assessment framework includes a two-way evaluation: 

  • Location or physical risk. Issues include the likelihood of water-related natural hazards. Physical risk also refers to available water quantity and quality. The primary evaluation metric is the baseline water stress, in other words, water supply versus how much water is withdrawn.  
  • Regulatory risk. To manage corporate water use, local and national governments increasingly monitor water stress. Prices and allocation regulate withdrawal of water, as well as treatment of waste water.
  • Reputational risk. Here primary risks include waste water and pollution of local waterways. This can damage a company’s reputation, and result in severe penalties.

5. Water risk management and disaster risk reduction

water risk assessment

Ideally, water risk assessment contributes to the disaster risk reduction strategy of a company. This includes identifying water risk in your supply network. Steps you can take to reduce your water risk in your supply chain include: 

  • Evaluate the risk of suppliers, and whether their geographical location is prone to water crisis or disaster.
  • Mitigate business-related water risks. Make sure waste water and disposal adhere to local water quality standards.
  • Include your sub-tiers in your evaluation. For example, metals and rare-earth minerals are essential for electronics. Mining is very water-intensive, and thus vulnerable.
  • Consider transport routes and hubs, which may be regularly hit by natural hazard events.
  • Implement real-time risk monitoring to keep you up to date on risk all along your supply chain.

The AI-powered threat detection in The riskmethods SolutionTM includes water-related natural hazard risks of flash floods, river floods, storm surges, and tsunamis, as well as hailstorms, extratropical storms, tropical cyclones, and tornados.  

Real-time monitoring also alerts you to cyber, geopolitical, financial, man-made, and reputational risk. With holistic supply chain risk management, you gain a total view of risk. This enables you to be risk aware, react faster, and be proactive. 

Understand and assess water risk

Learn how to identify, monitor, assess, and mitigate risk in your supply chain. Request a free demo to watch The riskmethods Solution in action. 

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