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Article | Managing Risk

How can food and drink businesses identify and mitigate water risk?

By Lisa Lipuma and Torolf Hamm | March 21, 2023

To sustain production and growth, the food and drink sector must urgently uncover, quantify and address risks related to water scarcity.
Risk & Analytics|Risk Management Consulting
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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 United Nations (UN) predicts a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change.1 Barclays, meanwhile, estimates a $200 billion impact to the consumer staples sector alone.2

Below, we examine water scarcity risks and how food and drink business can identify, quantify and manage them.

Defining water scarcity

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.3

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.

Is water risk on your food and drink business’ radar?

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.

How can you include water in risk management?

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:

  • Is water supply included in your risk register and if so, how? If water-related risk is defined too broadly, or too specifically, for example, linked to a specific event, this could lead to the true risk being inadequately monitored and measured.
  • Is your risk committee engaged with managing water risk? If there is current executive disinterest, translating water risk impacts into consequences for the organization’s financial priorities can facilitate quick and meaningful engagement.
  • Is water risk integrated into your decision-making culture around production and setting targets? Let’s say demand for your product is growing. It could make immediate financial sense to simply increase production in your existing site. But what happens when you consider the move beyond today’s efficiencies and in the context of long-term water supply? Overdependence on a single location could create shortfalls between production targets and what you can feasibly produce due to local water constraints.
  • Is your organization considering climate-related risks, including water supply, over sufficiently long time horizons? Longer-term shifts in climate patterns, such as sustained higher temperatures that cause chronic heat waves and droughts, play out over tens of years. Effectively managing water risk could mean an organizational mindset shift away from the annual cycle of buying insurance and focusing only on what’s needed to sustain production today, to thinking about managing risk over generations. This is already happening. We’ve seen some food and drink businesses ending relationships with farms on the basis of water expected to be short supply consistently over the next 10-20-years.
  • Are you considering the impact of water contingencies across your supply chain? These evaluations are more typical in sectors such as pharmaceuticals, but food and drink could benefit from these assessments. How would water shortages impact your packaging or glass bottle supplier, for example?
  • Is your organization considering the potential reputational risks around water? In water-stressed scenarios, could your product lines become the focus of shareholder activism or negative media attention? What can you do to neutralize these possibilities?

Responding to water shortfalls: Risk impact scales

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:

  • Where a water risk category puts organic growth or production targets in peril, scenario planning can help the business think more practically on the impact of climate scenarios and define trigger points for mitigating actions.
  • Where shortages would affect your ability to make major investments and ability to borrow capital, the water risk impact scale can set the parameters for business continuity and disaster recovery plans.
  • The most extreme water risks could prompt downgrades in your investment rating which might be matched on the risk impact scale with actions around crisis management readiness and recovery.

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.

Next steps for food and drink companies on managing water risk

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 organisations 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, get in in touch.

Footnotes

1 United Nations: Water action decade

2 Water scarcity: A growing risk for companies and investors

3 United Nations: Water scarcity

Disclosure

WTW offers insurance-related services through its appropriately licensed and authorised companies in each country in WTW operates. For further authorisation and regulatory details about our WTW legal entities, operating in your country, please refer to our WTW website. It is a regulatory requirement for us to consider our local licensing requirements.

Authors

Director, Risk and Analytics

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.


Senior Director
Physical Risks, Climate Practice
Risk & Analytics

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