For many companies, water issues have recently migrated from corporations’ social responsibility departments to finance and risk management departments. Companies have been reporting a growing exposure to water-related risks like flooding and pollution, and many have already started to experience water-related business impacts.
This trend prompted WRI’s Markets and Enterprise Program to build a tool to help companies and investors identify water-related risks across their operations or portfolios. The tool, named the Aqueduct Water Risk Atlas, is based on an indicator framework that quantifies and maps different drivers of water risk, otherwise known as the Water Risk Framework. After testing this framework in various regions, WRI recently released its revised version. This updated framework will eventually be used to assess water risks in every part of the world.
The New Framework
During the past year, the Aqueduct team tested its original Water Risk Framework in four very different and complex river basins around the world, including the Yellow, Orange-Senqu, Colorado, and Murray-Darling river basins. Using lessons learned through these river basin tests, WRI revised and streamlined the Water Risk Framework, achieving greater coverage and clarity and allowing for even wider use of the tool. Unlike the first Framework, which included nine indicators grouped into three categories, the revised Water Risk Framework (Figure 2) includes 14 indicators grouped into three categories of business-related water risks:
- Physical risk related to quantity: measures potential risks driven by having limited access to water (scarcity) or being threatened by too much water (floods);
- Physical risk related to quality: measures potential risks driven by water that is unfit for use due to pollution; and
- Regulatory and reputational risk: measures potential risks driven by unstable regulatory environments and social tensions and conflicts around water.
The revised Water Risk Framework
The maps Aqueduct creates using its Water Risk Framework help businesses anticipate water-related risks and develop tailored responses and mitigation plans. The framework identifies which water issues could affect a company’s performance and collects key data points that offer insight into those issues. Indicators in the framework include water stress, variability in supply, storage capacity, pollution, and public tension around water.
Water Risk: A Growing Problem
The demand for these kinds of tools and methodologies that help companies measure and map drivers of water risk is growing rapidly. Two years after Aqueduct was conceptualized, the private sector is witnessing ever-greater financial impacts driven by water issues. Recent floods in Southeast Asia forced Toyota Motor Corp. to stop production in Thailand, driving the company to produce 30 percent fewer vehicles than it had planned at its Japanese plants. In 2011, the Texas drought led to $5.2 billion in agricultural losses, making it the most costly drought on record and driving Gap clothing company to cut its profit forecast by 22 percent because of higher cotton costs. An increasing number of industry leaders like Honda, Kraft, Nestle, and MillerCoors are suffering financial impacts from water shortages and floods.
The development of Aqueduct’s Water Risk Framework and the methodology to calculate and map risks continue to be an iterative and dynamic process. Aqueduct’s new framework and methodology are now being peer-reviewed by a Design Working Group with more than 20 leading experts from NGOs, academia, government, and the private sector. The external expert consultation period will end May 31 2012, and we welcome any feedback before then. The results of the peer review and a detailed methodology document will be available on our website later this summer.
The Aqueduct team is increasingly confident that the improved framework can be applied globally. The effort to calculate and map all of our water risk indicators across the world will commence in June and is projected to be completed by December 2012. Once finished, Aqueduct’s comprehensive set of global maps will provide companies and governments with the information needed to evaluate water risks anywhere in the world.