Insurers recognise the risk to business-as-usual that water challenges present. There are hundreds of instances where insurers have paid out after floods or droughts have destroyed crops or damaged goods, property or infrastructure. With insurance premiums increased to reflect the risk and contracts renewed annually, can water really be a risk for an insurer? But what happens when the premium becomes too high? The insurable market might shrink and competition increase. Governments might exert pressure on insurers to adapt their business models to continue to provide cover to those in high risk areas.
Insurers are active in thinking ahead – of all industries they understand and price for the risks ahead – and are now sharing their expertise to help business. Find out more at: Disaster Risk Management: Investment Strategies: UNISDR and PwC: R!SE Initiative.
Bankers are lending to and investing in businesses across all sectors every day, helping them grow revenue streams, expand into new markets, or acquire other businesses. At all points a full understanding of the risk associated with the underlying business is needed but water is often overlooked or not quantified rigorously enough – future access to supply, planning across a water basin, impact of climate change, and supply chain water stewardship could all impact company performance and returns negatively. When quantified, it would be useful to identify if and where exposure to water risks is concentrated, and what impact this would have in terms of losses and write-offs.
Many Private Equity houses conduct reviews into ESG (Environmental, Social and Governance) issues to uncover any red flags that might deter them from investing in an opportunity and to explore opportunities to add value. Here, the approach taken isn’t consistent across the industry – some focus on Health & Safety issues, others major on Governance – and only a minority perform thorough due diligence around water issues. Again, future access to supply, planning across a water basin, impact of climate change, and supply chain water stewardship could impact company performance and returns negatively.
Wanting to bridge the gap, working together with the United Nations-supported Principles for Responsible Investment (PRI), WWF and a steering committee composed of leading investment firms, PwC created a quantitative score card approach to understand companies’ water risk in agricultural supply chains for the members of the PRI.
Energy, Utilities, & Mining
Energy & Utilities
Energy production uses a lot more water than you might first think. All sources of energy require water at some point in their production whether it’s in the extraction of raw materials eg. oil and coal, for cooling in thermal processes eg. nuclear, for irrigation in the cultivation of crops for biofuels, and powering turbines for hydro power.As the demand for energy increases, the UN predicts an 85% increase in water consumption by the energy sectors resulting in a 40% short fall between supply and demand by 2030. Energy and water are inseparably linked.
For water utility companies, investing in infrastructure for water is costly but fundamental for business for both business and society to thrive. The OECD estimates that by 2025 water will make up the lion’s share of global infrastructure investment. For just the OECD countries, and Russia, China, India and Brazil, water spending will top £1trillion, nearly triple the amounts needed for investments in electricity or transport. The way water is valued doesn’t help – rarely is it priced to reflect all costs associated with extracting, transporting, chemically treating and distributing it. So while prices are kept low a) it’s taken for granted and consumption patterns are difficult to change as there is little incentive, and b) it’s harder to invest in expensive new technology that might introduce cost efficiencies over the longer term,
Mining and extractive industries have a close relationship with water and put in place innovative processes to reuse and recycle the water they use. On one hand, their operations need water for mineral processing and metal recovery and to control dust. On the other, to avoid tensions with other water users, they need to ensure they are not depleting or polluting the water resources on which other businesses and local communities also rely. Effective water management is central to the viability and acceptance of a modern mining operation and to securing water extraction and other necessary licenses. Regulations are often tight and water quality is monitored closely to avoid issues.
Retail & Consumer
The retail and consumer (R&C) industries use water in many ways – to heat, cool, clean and as an ingredient, and many are reliant on irrigation for agricultural commodities in their value chain as well. The OECD predicts that water demand from manufacturing will increase by 400% by 2050.
R&C companies therefore not only need to be proficient water stewards and work well with their neighbours in the water basin they share, but also supportive of the needs of their value chain. Many companies outsource their factories to countries where costs are lower. And we’ve noted that countries important to a company’s growth often happen to be areas that also suffer water stress or have greater unpredictability in their weather patterns. Maintaining supply may mean a revision in the business model or investment in water management technologies etc for industries in their value chain.
There’s also water usage to consider at the point of use of the product itself. Many companies are calculating the water footprint of their product not just in terms of production but across the lifecycle. Using this information, they’re then identifying ways to reduce water usage at the point of use eg. developing products that require less water to achieve the same result.
Automotive and Industrial Processes
These industries are using water to heat, cool and clean. Quality and consistency of supply is important. Many companies have extensive supply chains so the challenge of water and its impact along it is far reaching. Again, these companies need to be proficient water stewards and work well with their neighbours in the water basin they share, but also supportive of the needs of their value chain.
As with Retail and Consumer, many companies have located their operations or supplier in countries where costs are lower. We’ve noted that countries important to a company’s growth often happen to be areas that also suffer water stress or have greater unpredictability in their weather patterns. Maintaining supply may mean a revision in the business model or investment in water management technologies etc for themselves and their value chain.
Pharmaceuticals & Healthcare
The Pharma industry faces water challenges from several angles. Water is both a critical ingredient in the production and in the taking of many medicines so the quality of the water supply at the operational level and for patients is critical. In addition, the industry faces unique challenges in removing their product from water post-production, post-consumer usage and post-disposal to avoid the build-up of chemicals in the water network. This latter point may become a reputation issue for the Pharma industry as they consider the full life cycle of their product and safe disposal.
At the heart of good Healthcare is access to clean water - suitable water supplies and sanitation services are an essential ingredient for good health. People need clean water to cook their food, wash and to drink. When they don’t have access to clean water sources this creates the need for significant healthcare investments and interventions.
Capital Projects and Infrastructure
Investing in infrastructure for water is costly. The OECD estimates that by 2025, water will make up the lion’s share of global infrastructure investment to meet the demands of a rising population and urbanisation and it will run into £trillions. But the infrastructure that is so in demand to clean and transport water to the tap needs to be resilient to reduce or avoid repairs or rebuild – for example, it needs to survive natural disasters and be built with consideration for water patterns (eg. flood plains and a rise in sea level).
A further thought lies in the mainstay product used for construction. Cement has long been noted for its contribution to climate change, accounting for 5% of global carbon dioxide emissions. But it also requires water across its various extraction and production processes, and water management at discharge (managing any increase in temperature, acidity or suspended solids).