Assessing water risk : a practical approach for financial institutions

It is understood that water is essential to life on earth. It is also an essential ingredient in any production process, be it agricultural or industrial. Today, there is an increased awareness of the diverse ways in which water use can pose substantial threats to businesses in certain regions and sectors. Business risk stemming from a company’s relationship to water can be broken into three broad, inter-related categories: physical – as a result of too little, too much or polluted water; regulatory – with dwindling availability and increased pollution, the regulation of water is bound to become stricter; and reputational – public and media awareness of water and how companies are handling this resource is on the rise. All of these risks can cause disruption of supply and, in worst cases, termination of business operations. As a result, financial institutions are advised to assess the exposure of their investments and credit portfolios, and learn how these risks affect their own clients and profitability. The awareness with regard to water risk is growing in the investor community, but concrete actions and practical approaches for clients are still lacking. [authors abstract]