Treading the waters – a look at the risks that will shape the future

A new report from AXA has shone a light on the water risks that many industries and businesses are facing, especially as the world adapts to the challenges of climate change. The report outlines not only the risks involved, but their grouping according to the damages that they can cause, and which industries are most likely to be affected by them.

The insurer said that the report aims to improve its clients’ understanding of water-related risks and how they can affect their operations. The weight of these negative effects, in turn, can hopefully be a deterrent to combat them and improve water security across the world.

AXA categorizes water risks based on the effects that they can cause: physical, reputational, or regulatory. Regardless of its category, all these risks have varying levels of impact that they can cause to various businesses and industries.

Determining the physical risks

Physical risks vary, but they can be summed up as having too much water (floods) or too little of it (drought, unclean water). Below are the physical risks outlined by the report:

• Water scarcity – a risk that heavily affects the industries and sectors with the highest water usage. The food and beverage industry, agriculture, apparel and textiles, utilities, and manufacturing are all shown to be at risk from the insufficiency of water.
• Climate change and threats to ecosystems – besides the general uncertainty caused by the constantly changing climate, its damage to ecosystems through more disastrous weather events cannot be overstated. Industries that will suffer from water scarcity are also exposed to the risks posed by climate change, in addition to transport and logistics, which will be affected by disruptions to their distribution operations.
• Poor water and pollution of water resources – scarcity is not the only risk that targets the world’s water security, as the lack of access to clean water is also a major hindrance. Food and drink production, as well as agriculture, are all at risk when there’s little clean water to go around. Pharmaceuticals and tech sectors are also vulnerable to poor water quality.
• Flooding – with the New Zealand property insurance sector expected to take a major hit due to recent extreme weather events, flooding has proven itself to be a risk that will be taken more and more seriously as the world goes through the effects of climate change. All industries can be affected by flooding, but it’s the transport sector that is possibly the most exposed due to its disruption of roads and other means of transportation.
• Poor management of water resources – a risk that’s highly relevant for water companies. Poor management of water resources can directly lead to shortages.

A hit to reputation

While the effects of physical water risks cannot be overstated, some economic costs can eventually be covered. What’s harder to manage in the aftermath is the potential for a water risk to damage a company’s reputation. As a critical corporate asset that can be difficult to manage and quantify, managing water risks becomes doubly essential to keep a firm’s standing from being sucked into the depths.

The AXA report listed the following as major reputational risks involving water:

• Negative media coverage and public scrutiny – in the social media age where a single tweet can cause significant changes to a company, the reputational risk of being scrutinized by the media and the public should be a deterrent for companies to tread lightly around water risks. All industries are vulnerable to this, and the report highlights an event in the UK that was covered by the media leading to litigation over raw sewage discharged into public waterways.
• Changes in consumer loyalty – consumer-facing sectors such as food, beverage, and clothing are the most vulnerable to shifting consumer loyalties. The report notes that in recent years, several notable clothing brands were subject to boycotts due to bad environmental and social practices.
• Loss of market share due to litigation – the report said that most sectors today are not at significant risk of loss to market share due to litigation. However, it’s in the future companies that are set to pay the price, as they will possibly be more exposed to risks that come with failing to demonstrate good environmental practices.
• Damage to brand – with ESG set to become a more important aspect for a company’s reputation, poor environmental management can cause significant brand damage that will forever haunt the company. Conversely, good water practices help shape the perception of a good brand value that’s compliant with ESG practices.

Affecting future regulations

The risks associated with water extend far beyond that of the physical and the reputational. Regulations involving water use may become more prevalent in the future, resulting in increased operational costs for businesses that are vulnerable to water risks.

AXA listed the following as the regulatory water risks to watch out for:

• Higher water prices – the food, beverage, and agriculture industry stand to be very affected once regulations start to increase the price of water. Apparel and textiles, utilities, and the manufacturing sectors will also start to feel the heat.
• Regulation of effluent quantity and quality – a particular risk at hand for pharmaceuticals, regulations changing the amount of discharged water and its quality will result in higher costs for these companies. Restrictions passed by these regulations can also affect operations.
• Statutory water withdrawal limits – a risk that can be closely attached to water scarcity, poor water security can lead to water withdrawal limits that will severely impact operations and supply chains around the world. The food, beverage, and agriculture industries will be the most affected due to their heavier reliance on the quantity of water.
• Regulatory uncertainty – poorly implemented or inconsistent water-related regulations can cause issues, especially in sectors such as utilities, apparel and textiles, and manufacturing. Short-term regulations that aim to solve a current water issue may end up hindering companies in the future.

AXA XL global sustainability director Suzanne Scatliffe said in a news release that water security requires properly managed and protected water resources. This makes it essential to keep water at the forefront of corporate climate strategies.

“AXA XL is committed to helping organisations to improve their understanding of water-related risks and how they impact business operations. This new report aims to support businesses of all sizes to understand different types of sector-specific water risks and catalyse action with a series of recommended solutions and tools,” Scatliffe said.

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