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Sustainability

Changing Tides: The Future of Water-Risk Disclosure Requirements

Over the past decade, the primary focus of many ESG disclosure requirements has been centered around greenhouse gas emissions. While this is undoubtedly a critical metric to report, greenhouse gas emissions are not the only sustainability risk companies need to manage in today’s changing environment. Another risk has been quietly bubbling beneath the ESG reporting landscape, one that poses the same severity as greenhouse gas emissions and is also deeply interlinked with the climate crisis: water risk. In this article, we define water risk, explain the importance for companies to disclose, and discuss how Schneider Electric can support your future water-related reporting efforts. 

Defining Water Risk 

According to the United Nations CEO Water Mandate, water risk is defined as “the possibility of an entity experiencing a water-related challenge (e.g., water scarcity, water stress, flooding, infrastructure decay, drought)” and is categorized into three types: physical, regulatory, and reputational. 

  • Physical risk reflects a river basin’s level of scarcity, flooding, water quality, and accessibility 

  • Regulatory risk reflects how water is managed in a particular area and the stability and effectiveness of that area’s regulatory environment 

  • Reputational risk reflects stakeholders’ perceptions of a company with respect to its interaction with local water resources 

Each type of water risk can be further categorized by source, either operational or basin. 

  • Operational risk is a source of water risk from a company’s operations, products, or services 

  • Basin risk is a source of water risk associated with the basin conditions in which a company’s sites are located 

According to an analysis by Ceres, more than 50% of companies listed on the S&P 500, Russell 3000, MSCI World, and MSCI EM indices are exposed to medium to high water risks. 

The Water Disclosure “Seascape” 

Water is a critical business input with highly localized effects. Unlike reductions in greenhouse gas emissions that provide relatively the same benefit anywhere in the world, reductions in water consumption or improvements in water quality more directly impact a specific river basin. With so many companies now facing alarmingly high levels of water risk exposure, reporting is becoming more important than ever. Reporting on water risk, as well as having a robust, comprehensive water stewardship strategy in place not only provides investors with the transparency needed to make more informed decisions, but also enables companies to measure and manage this increasingly limited resource, which can boost revenue, cut costs, and enhance reputation. 

Despite the benefits that water risk disclosure offers, there are still very few mandatory reporting requirements on water. As of June 2022, just two G20 members, the EU, and the U.K., are beginning to mandate disclosure on water-related topics. In the U.S., the only mandatory water disclosure requirement is the SEC climate ruling. The SEC mandates that companies must disclose the percentage and location of their assets in "flood hazard areas" and the percentage, book value, and location of assets in regions with high or extremely high water stress. Additionally, companies must disclose their total water usage in regions with high or extremely high water stress, including the amount of water withdrawn. The Asia-Pacific region is also beginning to set its own water disclosure mandates. India, for example, requires the top 1,000 listed companies (by market capitalization) to report on a defined set of water usage and intensity metrics while China requires companies with high levels of pollution to report control and management-related data.  

Why Disclose Water Risk? 

While the mandatory disclosure “seascape” for water may be fragmented, companies are beginning to voluntarily disclose on this issue, primarily through CDP. According to CDP, over the last five years, there has been a 20% yearly average increase rate in water disclosures. One of the main drivers behind voluntary water disclosures is investor pressure. In 2021 alone, the TCFD-aligned CDP water questionnaire was distributed to more than 6,000 companies on behalf of 680 financial institutions that collectively manage USD $130 trillion in assets. While CDP is currently the main platform for voluntary water risk disclosure, new frameworks and guidance are being developed to supplement existing questionnaires. One of the most recently drafted set of recommendations was created by the Task Force on Nature-Related Financial Disclosures (TNFD). Released in 2023, part of the TNFD’s framework recommends companies disclose physical water risk and site locations in areas facing high water stress or where water is culturally important. To streamline data collection and reporting processes, the TNFD has aligned their framework with existing, more widely accepted frameworks including the Task Force on Climate-Related Disclosures (TCFD) and the International Sustainability Standards Board (ISSB). So far, more than 1,200 businesses have joined the TNFD Forum and nearly 75% of Forum members plan to provide TNFD-aligned disclosures by 2025. 

However, another incentive for disclosing water risk is the financial benefits a company stands to gain from increased transparency. A study by McGill University and the consultancy firm, Milani, found that between 2012 and 2016, companies that regularly disclosed their water risk through CDP ranked 19 percentiles higher in their ability to access capital. There are also indirect cost savings associated with water risk disclosure if a company actively works towards mitigating its risk. A 2020 CDP report estimates that the cost of inaction on water risk could be nearly 5x greater than the cost to address it. In 2020 specifically, as cited by the CDP report, the “potential financial impact of reported water risks” was over USD $300 billion, while the cost of mitigation was only USD $55 billion. In reality, the cost of inaction may transcend a dollar figure. As reported by the WWF, 87% of global wetlands have been destroyed, 83% of freshwater biodiversity has experienced a decline, and withdrawals of groundwater sources are far outpacing groundwater replenishment rates. Many of these impacts are irreversible, regardless of attempts to solve this challenge with funding.  

Case Study: Ford Motor Company  

Although water risk disclosure is a relatively new trend in the ESG world, some companies have been tracking, disclosing, and acting on this issue for years, including the Ford Motor Company. Ford is a multinational automobile manufacturer based in the U.S. and has been disclosing water risk to CDP since 2010. Driven by increasing water scarcity, Ford has set a target to have zero water withdrawals in manufacturing by 2050. To achieve this target, the company plans to implement a reverse osmosis system in one of their stamping and assembly plants in Mexico. While these innovations will carry a heavy price tag, the cost to implement this technology is still lower than the potential financial impact of Ford’s anticipated water-related risks, according to CDP’s 2022 Global Water Report. Not only has Ford been tracking and disclosing water used in their direct operations, but they have also worked with their suppliers to set “withdrawal reduction targets” through their supply chain. These efforts have helped Ford’s suppliers save roughly 18 million gallons of water between 2021 and 2023. Overall, the Ford Motor Company’s proactive approach to water risk disclosure not only positions them as a sustainability leader in the automotive industry but also highlights the tangible benefits of such initiatives, both in terms of minimizing potential financial impacts and fostering positive environmental practices throughout their supply chain. 

Schneider Electric’s Role in Water Risk Management and Reporting 

As water-related challenges, such as water scarcity, flooding, and pollution, increase in frequency and intensity, so too will stakeholder pressures and mandatory legal disclosure requirements. No matter your reason for reporting on water risk, Schneider Electric has the technical expertise and management resources to help your organization identify and disclose its material water risks, develop a water stewardship strategy, and establish site-level and company-wide water targets. 

With nearly half of the world’s population expected to face severe water stress by the end of the decade, now is the time to act on water. 

If you are interested in helping your business manage its water risks and develop a holistic, effective water strategy, Schneider Electric’s Sustainability Business is here to help. For more information, start a conversation to engage with our team.

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Sources: 

  1. UN Global Compact (2017),https://ceowatermandate.org/posts/water-scarcity-water-stress-water-risk-actually-mean/ 

  1. Sustainable Brands (2023), https://sustainablebrands.com/read/finance-investment/water-risk-is-a-financial-risk-companies-will-soon-have-the-tools-to-calculate-disclose-and-mitigate-it 

  1. CDP (2022), https://cdn.cdp.net/cdp-production/cms/policy_briefings/documents/000/006/409/original/Setting_the_high_water_mark_for_mandatory_disclosure.pdf?1660576398 

  1. Cooley (2022), https://www.cooley.com/news/insight/2022/2022-04-15-sec-proposes-watershed-climate-related-disclosure-requirements?utm_source=mondaq&utm_medium=syndication&utm_term=CorporateCommercial-Law&utm_content=articleoriginal&utm_campaign=article 

  1. WWF (N.A.), https://www.wwt.org.uk/our-work/threats-to-wetlands 

  1. CDP (2020), https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/577/original/CDP_Water_analysis_report_2020.pdf?1617987510 

  1. UN Global Compact (N.A.), https://university.ceowatermandate.org/university/101-the-basics/lessons/assessing-your-business-water-risks/ 

  1. TNFD (2023), https://tnfd.global/recommendations-of-the-tnfd/#:~:text=Recommendations%20of%20the%20TNFD%201%20Governance%20Disclose%20the,Metrics%20and%20targets%20...%205%20General%20requirements%20 

  1. BloombergNEF (2023), https://about.bnef.com/blog/a-new-era-for-corporate-disclosure-of-nature-related-risks/ 

  1. CDP (2022), https://www.cdp.net/en/research/global-reports/global-water-report-2022