In 2011, monsoon season flooding devastated large parts of Thailand, killing more than 800 people and causing nearly $50 billion in economic losses. Disruptions to Thailand’s manufacturing sector temporarily broke a key link in multiple supply chains, including those in the automotive and electronics industries. Toyota Motor, for example, reported an 18.5% drop in profits in the second quarter of 2011 after being forced to curtail production in sites around the world.

Seven years later, following a prolonged drought throughout Europe, the Rhine River fell to record-low water levels, halting shipping for weeks. Companies with operations in the Rhine’s water basin ran out of crucial inputs, compelling them to slow production, or even halt it entirely, which adversely affected the supply of key goods worldwide.

Whether a matter of too much or too little water, too polluted or too salty—water crises take place within geographic limits defined by specific watersheds. And yet in our globalized economy—which is driven by highly complex, tightly interconnected, and time-sensitive supply chains—there is no such thing as a locally isolated water crisis. Every major crisis sends ripples around the world, affecting suppliers and customers alike.

Managing water properly is no easy task. Water is a dynamic resource, the amount of which changes daily. Because it is renewable, it must be managed so that its quality remains high. And because it is shared, ensuring its protection requires aligning sometimes competing interests.

In this context, a water management regime is effective only if it protects local resources and far-reaching supply chains. The question is how to develop such a regime.

WHAT’S AT STAKE?

Water-related risks are very real—for companies, industries, and the economy at large. In its 2020 Global Risk Report, the World Economic Forum ranks water crises higher than terrorism, financial crises, and energy price shocks.

Yet by and large, companies don’t see the whole picture. Most consider water a given—clean, inexpensive, and abundantly available when needed. According to CDP, which provides investors with information on companies’ environmental risk reporting, even forward-looking organizations view water risk primarily in terms of how their use or misuse of water may threaten the environment and local communities. Among CDP’s corporate responders, less than half publicly cite water as a risk to their own operations, supply chains, or business results.

That’s a grave mistake. The global value at stake in water crises is enormous—and growing. Natural disasters resulted in almost $3 trillion in losses from 2010 to 2019, making it the costliest decade ever. And according to some estimates, flooding alone led to average annual losses of $40 billion between 2010 and 2018. BCG’s own analysis suggests that if profits at every company in the most water-reliant industries declined by just 10% to 15% as a result of worsening water crises—a conservative assumption—annual losses would total between $250 billion and $380 billion.

RISKY BUSINESS

In collaboration with the WWF, our longstanding partner, we recommend that companies reduce the considerable risk posed by water crises by adopting a three-pronged assess-and-mitigate approach. First, carefully map your supply chains entirely to identify how critical each supplier and transport provider is to the continuity of your business.

Second, for the most-critical locations, analyze the following risk types:

• Basin-Related Risk. Assess the physical, reputational, and regulatory risks of the basin in which each supplier site is located.
• Operational Risk. Determine how dependent each location is on a sufficient, uninterrupted supply of clean fresh water.

Finally, focus immediate mitigation efforts on those locations that pose high levels of risk and that are also critically important to the supply chain. These efforts should be broken down into four steps:

• Measure the water footprint. How much water does the facility use? How clean is it? How do seasonal changes affect its availability? It’s essential for companies to keep these questions in mind in anticipation of risk.
• Mitigate the potential impact. Develop plans to reduce the most-likely effects of a water crisis on operations. Minimize water usage with cascading and circular water systems. Reduce water pollution through wastewater treatment.
• Initiate collective action. Water risks can’t be mitigated by individual actions. Work with all stakeholders within the basin to align efforts to conserve and protect the water.
• Shape governance. Engage with NGOs and policymakers, both in individual basins and across all basins.

THE COMMON GOOD

Global warming is likely to make natural disasters, such as the 2011 Thailand floods and the 2018 drought along the Rhine, more common. Therefore, it is more important than ever for companies to responsibly manage the local water they use and to ensure that global supply chain partners and other stakeholders implement risk management strategies of their own. All players must be held accountable for taking the necessary steps—not just for their own good, but also because we all share a common interest in preserving the world’s freshwater resources.