Does Your Supply Chain Risk Management Strategy Hold Water?

Companies have come a long way in their ability to manage supply chain risk, but they urgently need to step up their efforts in one key area: the threats posed by water scarcity.

The Carbon Disclosure Project’s (CDP) 2016 Annual Report of Corporate Water Disclosure, published in November 2016, provides a wake-up call. A total of 607 of the world’s largest global companies submitted data about their efforts to manage and govern freshwater resources — the largest response in the report’s seven-year history.

Disclosing companies reported $14 billion in water-related impacts this year, a fivefold increase from 2015. Impacts include financial obligations to address groundwater pollution, capital costs to build power plants to replace declining sources of hydropower, and water conservation efforts in the face of drought. More than one-fourth of the companies have experienced detrimental impacts from water this year, and they expect more than half of the 4,416 water risks identified to materialize over the next six years.

Yet the report’s year-on-year disclosures show that companies are not moving fast enough to responsibly manage water, says the CDP. Performance has not improved since last year on key metrics such as tracking water usage and assessing related risks. These failings will surely become more glaring as climate change and increasing demand for this precious resource create more shortages and quality issues.

The humanitarian implications are paramount. However, from a corporate viewpoint, increasingly stressed water resources represent a major threat to the integrity of global supply chains. Mitigating or eliminating these risks will require action on multiple fronts. Organizations need to change public perceptions of water usage, start measuring what matters, and expect rising water prices.

The Need for a New Mindset

Materials such as platinum are perceived as highly valuable, subject to price volatility, and worthy of careful management. The same isn’t true of water — but it should be. Water’s deceptive abundance and low cost in many countries does not promote responsible management within companies.

It’s true that many companies have dedicated substantial resources to improving the management of water resources. Some address the challenge from an external perspective, because they identify most water use as occurring outside of their immediate operations. In the beer industry, for example, water consumption is concentrated in the agricultural supply chain.