Feb 24, 2015

Risky Water: Lessons from Student-Initiated Water Workshops

What do casinos and beverage companies have in common? Or airlines and clothing manufacturers? At a glance, you might say very little. Casinos facilitate gambling and beverage companies supply beer, soda, and so forth. However, to efficiently provide their products or services while making a profit, each of these companies assesses and mitigates risk. Casinos weight their games to the house such that the expected value of a given game is positive. Airlines make bets on fuel and travel patterns in an effort to minimize risk and maximize profit.

Until recently, water was only part of the risk matrix in the most forward thinking firms that depend on agriculture or highly water intensive production techniques. It was the domain of the aforementioned beverage manufacturers, extractive companies, and other agricultural products companies. Today, global leaders of all stripes recognize water as the single greatest ten-year risk to business.

But what is water risk and why should we care?

Water risk is the notion that water is elemental in supply chains and operations for a great many companies, and that disruption in availability or quality due to climate change, competition, or the local social and political environment can materially impact a company. As the beverage companies and clothing manufacturers have largely learned, water is as important an input as anything in their supply chain. It is required to grow the crops that become the raw inputs, to process the products, and in the downstream for continued use of the products.  And unlike when casinos manipulate odds to account for risk, water risk cannot be assuaged by fiat. Taken to the extreme, how do you cultivate rubber trees, extract petroleum, or distill vodka if there is no water?

Susannah Harris and I come from different water backgrounds, she from water efficiency standards and I from large-scale water resources management, but we both view water stewardship and risk mitigation as a business imperative. Through the CBEY Student Pitch Competition, open to any student with a good idea and a willingness to sell it, we convinced a jury of our peers that a program around corporate water stewardship and water risk was an important new resource for the business and environment community at Yale.

Working with CBEY, we turned this pitch into three workshops last fall for which students could get credit. The workshops allowed us to bring in experts in the field to explore these questions and to provide a basic framework for thinking about water risk in business. Paul Reig and Matt McFall of WRI and WWF, respectively, spoke about water risk tools, Will Sarni of Deloitte spoke about water strategy, and Cate Lamb of CDP spoke about investor relations and disclosure. The macro takeaway is that the method of determining risk, addressing risk, and communicating risk will necessarily vary by company and by industry, but the lever to induce action will nearly always be the same.

Very few leaders will make a decision based on the qualitative notion of water risk or make capital investments without a quantitative reason. What will grab any CEO or CFO’s attention is attaching financial consequences to the possibility of physical, regulatory, and reputational water risks. These costs might be lost sales due to an inability to produce or a major reputational hit, the loss of physical capital in flood or drought events, or a political decision that raises the cost of doing business, such as more stringent effluent water quality standards. Taken together, the potential financial impacts are often large enough to spur investments, changes in operations, and modifications to supply chains.

Interested in learning more? Take a look at the CBEY Workshops and some of the resources linked throughout the blog. For students interested in delving into other ideas, make sure to check out the CBEY Student Pitch Competition when it's announced this spring!

A few key types of risk

Physical Risk:

Relates to water quantity (scarcity and flooding) and water quality that is unfit for use (pollution). Physical risk may mean that a company might not have sufficient amounts of good quality water for their business operations and supply chains

Regulatory Risk:

Relates to the impact on a company’s brand and can influence customer purchasing decisions. Reputational risk manifests through tensions and conflict around access to water or the degradation of local water resources

Reputational Risk:

Relates to the imposition of restrictions on water use by government and the capacity of government to manage water effectively and sustainability. This may include the pricing of water supply and waste discharge, licenses to operate, water rights, quality standards, infrastructure development, water allocation, etc.