Understanding water risk

Original Content: AXA XL

Water risk is one of the most immediate and drastic effects of climate change and yet many companies have not fully understood the impact that water risks could have on their business or on wider society. Suzanne Scatliffe, Global Sustainability Director at AXA XL, outlines the role that insurance companies can play in developing understanding of this risk and ways that it can be mitigated.

We all rely on water for our very survival. And according to research by McKinsey, water is as valuable to the world’s economy as oil or data. But despite the very real risk of water shortages, as well as other threats, many companies have not fully understood the challenges that water risk poses to them in the near to medium term, and few have taken active steps to mitigate the risks.

The World Economic Forum’s Global Risk Report has for several years highlighted water risk as a major – and growing – concern. At AXA XL we have been working with clients and stakeholders across industry and society to understand the risks posed by water scarcity – as well as flooding and other water-and-climate related threats. This work falls under our Valuing Water Initiative which aims to highlight both the economic and social value of water for our clients and wider communities.

A recent academic study that we commissioned as part of our Valuing Water Initiative illustrated that concerns about water risk are interlinked and, in many cases, interdependent. The study showed that the major water risk concerns were uncertainty about the future – an inability to plan; climate change and its effects such as flood, drought and changes in coastal conditions; water conflict arising from water and food insecurity; demographic changes and changes in demand for water, ageing infrastructure, changing industrial processes and pollution risk; contaminants affecting the quality of water; the destruction of ecosystems; water scarcity; and poor planning and governance.

All of these factors – which we refer to as the ‘water wheel’ – play into how companies, as well as society and governmental bodies plan for the future. The report highlights that when multiple risks overlay one another, the impact of these concurrent events can cause significant interruptions to business operations and day-to-day life.

If the water runs out

By 2030, global demand for water will outstrip supply by 40%. Water scarcity affects every continent, according to the United Nations. Research by the UN has shown that more than 3 billion people around the world are already affected by water shortages, and this is expected to worsen severely in the medium term. For industries of all types, the risk of water shortages – as well as other water-related risks such as flood and storm surge – are potentially severe and set to become even more of a concern.

Agriculture is one of the most immediately affected industry sectors; rainfed agriculture accounts for more than 60% of global crop production, while more than 60% of irrigated cropland is also “highly stressed,” according to the UN.

And almost every other industry sector faces direct risks from water scarcity too. For food and beverage companies water is a vital ingredient in products, while technology companies and their suppliers rely on ultrapure water for manufacturing processes – as does the automotive sector. Apparel companies are dependent on water not only for growing raw materials but also for dyeing and washing their products. And the list goes on.

According to research by McKinsey, two-thirds of all businesses face substantial water risk to their direct operations or within their value chain. There is a knock-on effect on the insurance industry here, with the very real potential for increased claims for property damage and business interruption stemming from water risk.

The insurance sector has serious business – as well as moral - motivation, therefore, to try to find ways to help companies plan for and manage these risks. And as an industry we are uniquely placed to help our clients to understand these risks and the way they can be assessed, managed, mitigated and transferred.

At AXA XL, we have a long history of being involved with projects directly linked to water risk and the oceans and our aim is to create a way to share best practice and to improve the management of water risks that our clients across all sectors, and round the world, are facing now and will face in the not-too-distant future.

Water risk management tools

When I was asked to illustrate how we create and sustain partnerships with our clients, two examples immediately came to mind.

A study by CDP (formerly known as the Carbon Disclosure Project) found that - for the majority of companies- the cost of mitigating their water risk is far less than the financial impact that water risk could have on their businesses. But despite this, relatively few companies have incorporated water-related losses into their financial planning.

As part of AXA XL’s Valuing Water Initiative, our sustainability team has been developing an interactive tool, informed by the expertise and guidance of our clients, nonprofit and academic partners to help increase the understanding of future water challenges that may pose a risk to the continuing business operations of companies around the world.

The water security tool is designed to be used both by corporate clients and wider society and is expected to launch at the end of 2022.

The tool is part of our three-pronged approach aimed at identifying the most significant water risks, assessing the impact of those risks, and suggesting actions that will help to reduce those impacts. We believe that the insurance industry, with its deep experience of understanding risk and finding ways it can be managed and transferred, has a vital role to play here and we are keen to play our part.

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