The corporate benefit of linking water risk to strategy

The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.

Water is local and even companies with international operations understand how critical managing local water risks is to their success. But our recent report shows good water management comes from how sophisticated water risk evaluations are and how companies integrate local insight into their strategies to protect the water resources they depend on.

Ceres’ latest biennial report on corporate water stewardship shows that more companies are using multiple layers of local water risk data to build a more complete picture instead of relying on fixed metrics from a single facility.

This includes mapping where climate risks and demand from water users can impact local water supplies and pairing that with facility water data to pinpoint where company operations are vulnerable to water risks in specific regions. More companies are also using these insights to uncover previously unidentified water risk hotspots in regions where they source commodities or industrial products.

The benchmark shows 39 percent of the 71 companies assessed (up from 35 percent of companies two years ago) are zooming in on conditions in watersheds — the land area where water channels to a common source — in which operations or suppliers are located. The companies use that information to set targets to reduce water use at those facilities or sourcing areas. 

By linking the local conditions of water resources in the areas where they are operating to risk management strategy, companies can decide where to make investments, how to better plan for unexpected weather events and what kind of programs they need to put in place with suppliers and communities in areas where they face the most water challenges.

For example, food and beverage company Danone identified 77 facilities across 58 watersheds at risk of water stress, including a key South African site affected by severe drought. To address the persistent and growing risk at this site, the company reused water for equipment cooling, recycled water from steam back into boilers, and treated wastewater for reuse.The company also implemented programs to help suppliers adopt practices like using buffer zones or natural barriers to protect soil and water from agricultural runoff and managing irrigation to use less water. 

A cost-benefit analysis showed that implementing these agricultural practices across supply chains most exposed to water risk could reduce projected costs tied to water use by nearly 90 percent.

Harnessing technology

Using advanced analytics, companies are integrating local data that is collected by satellites, climate projections and local water risk analysis to assess how changing climate conditions, weather extremes and growing demand may impact water availability and quality over time. 

Artificial intelligence is beginning to play a complementary role by integrating data from different sources, including hydrological records, mapping of land-use changes, supplier disclosures and policy developments, to detect patterns that signal potential water risks. These tools can flag when local operations and supply chains are facing fluctuating water supply or where demand for water is intensifying. 

Microsoft, for instance, is working with the International Water Management Institute, a global research organization focused on sustainable use of water in developing countries, to develop an AI Copilot tool to help tackle water management challenges. They kicked off the program in southern Africa’s Limpopo River Basin, a critical water system facing water overuse, pollution and drought challenges that spans four countries and serves 18 million people. The tool combines multiple data sources — from regulatory documents and scientific research to real-time sensors and satellite insights — to deliver local insights for sustainable water use. 

Gaps and opportunities

Even as companies expand the use of these tools, many are not capturing the full range of water risks tied to local water conditions in their assessments or folding them into core business strategy. This is concerning to investors who want to better understand and reduce water risks within their portfolios. 

Few of the companies we assessed are applying the same rigor to understanding risks linked to water quality and protecting clean water for communities. For example, although 83 percent of the assessed companies have goals to reduce water use, only 41 percent  have targets to reduce pollution and just 6 percent set those targets with local considerations in mind. Expanding the use of data and analytics to better understand water quality challenges where companies operate and source from is a clear opportunity to strengthen their water strategies.

Levi Strauss & Co.’s focus on local water use, for example, allows the company to identify where its supply chain places the greatest strain on water resources so it can direct its water stewardship efforts most effectively. Using the Science Based Targets Network framework and global mapping tools, the company identified environmental hotspots across key sourcing and cotton-growing regions, pinpointing 11 basins where it could have the biggest positive impact. The company has set a target for its suppliers that produce denim fabric and finished products to reduce water use by 15 percent by 2030.

While our report finds that corporate governance is improving — 73 percent of the assessed companies now have board oversight of water risks — water-related risks and opportunities are still not being fully factored into core business planning. Senior executives and boards can play an active role to ensure companies are both improving analysis of local water risk and factoring those insights into capital planning, purchasing decisions, and other aspects of business strategy. This shift is essential to meeting evolving regulatory requirements and shareholder expectations, while proactively managing future water risks. 

Even as companies strengthen their understanding and modeling of local water risks, water stewardship cannot happen in silos. Local conditions must be considered with all water users and future scenarios in mind. Watersheds are shared, and risks — from scarcity and pollution to tightening regulatory pressure — are shaped by the water demand and the cumulative impacts of many users.