Having a deep understanding of the water-related risks facing your food and drink business can deliver competitive advantage. Managing water scarcity risks effectively supports sustainable success, ensures growth plans are not compromised by supply issues and protects your ESG credentials and wider reputation.
The prolonged drought periods the U.K. saw in the summer of 2022 indicate what we might expect far more regularly under the so-called ‘hot house world’ climate scenario, where the world heats by four degrees. Areas such as the South and Southeast of the U.K., including London, will likely be more exposed to prolonged drought stress even if global warming is constrained to lower rises in temperature. This could cause correlated regional water scarcity and strains on water supplies, utilities and disrupt other essential infrastructure.
Below, we examine water scarcity risks and how food and drink business can identify, quantify and manage them.
Water is a finite resource. Scarcity of water can be driven by demand exceeding supply, damaged infrastructure, or institutions failing to balance the needs of industry, agriculture and human populations.
While the United Nations (UN) says water scarcity is a relative concept, it also says inadequate water supply is an increasing problem on every continent and the impacts of a changing climate are making water more unpredictable.1
Water is a vital and irreplaceable resource across the food and drink manufacturing chain. The sector is highly water-dependent: from agriculture to production sanitation, water as an ingredient, and in processing operations such as heating, refrigeration and packaging, food and drink relies on water at every stage.
Not all food and drink manufacturers are comprehensively measuring and managing the risks associated with water supply.
WTW recently worked with a large drinks manufacturer to interrogate and quantify its key risks. While the business had recognised the risk to operations of water shortfall in a key territory, it had not quantified this or the associated risks.
In fact, water shortfall posed a serious threat to the organization’s significant growth and target production plans which, as a publicly-traded company, it had shared with stakeholders. The amount of water the organization was permitted to use by local government compared to its needs was projected to generate a significant gap in profits over the next ten years.
The business also faced reputational risk where its water use during water-stressed periods could attract heighted public scrutiny or see production facilities targeted in civil unrest.
The following questions can help your food and drink business interrogate the adequacy of your water risk approach and ensure you incorporate water supply into your overall risk management framework effectively:
Risk impact scales define the consequences of a possible event and determine the level of impact. How might a water risk impact scale articulate the consequences and responses to different levels of water supply issues?
For example:
We recommended this type of framework to the drinks manufacture we mention earlier. In its case, we also worked together to create a taskforce dedicated to liaising with local government to maintain its permitted use of water. The organization also planned water efficiency measures around production and reduced dependence on single sites.
Accelerating senior stakeholder engagement with water-related risk is central to managing the water risks likely to heighten as global temperatures rise. If you aren’t already doing this, articulating water risk through financial performance metrics and evaluating interventions in terms of risk reduction and cost can secure executive buy-in quickly.
Bringing together operations and risk function could also change the game. We’ve worked with organizations where teams on the ground were already dealing with water risks threatening production while those responsible for risk oversight remained largely unaware.
Creating corporate cultures where long-term climate-related risks, including water shortages, are defined and mitigated should be a priority for the usage-intense food and drink sector, remembering the competitive edge managing water risk in line with financial priorities can create.
For expert help identifying and quantifying the water risks your food and drink business faces.
1 United Nations: Water scarcity
Lisa leads WTW’s Enterprise and Transition Risk Consulting practice for North America and has 15 years of experience in risk and insurance. Over the course of her career, she has led large strategic consulting engagements and pioneered the development of WTW web apps including Global Peril Diagnostic, a natural catastrophe and terrorism model, and Collateral Quantified, an actuarial reserving and negotiation tool. Lisa helps organizations navigate, quantify, and make efficient investments to control their strategic and enterprise risks. She is part of WTW’s Global Climate Strategy Task Force and takes a leading role shaping WTW’s Risk & Broking large account strategy.
