WORKING TOGETHER

TO HELP PROTECT THE

WORLD’S FRESHWATER
RESOURCES

Conservation Climate Change Sustainability

WWF WATER SECURITY SERIES 4
UNDERSTANDING WATER RISKS
A PRIMER ON THE CONSEQUENCES OF
WATER SCARCITY FOR GOVERNMENT AND BUSINESS
 Acknowledgements

WWF’s Water Security Series sets out key concepts The authors would like to thank the following for editorial
in water management in the context of the need for input and advice; Claire Falcon, Chris Williams, Joerg
environmental sustainability. The series builds on lessons Hartmann, John Matthews, Philip Leonard, Tom
from WWF’s work around the globe, and on state-of- LeQuesne, and Kevin Ogorzalek.
the-art thinking from external experts. Each primer in
External reviewers included Brian Richter from the
the Water Security Series will address specific aspects
Nature Conservancy and Jason Morrison from the
of water management, with an initial focus on the
Pacific Institute.
inter-related issues of water scarcity, climate change,
infrastructure and risk. The authors would like to acknowledge the series
editors: Dave Tickner, Tom Le Quesne and Mica Ruiz.

Understanding Water Security

As an international network, WWF addresses global

threats to people and nature such as climate change,
the peril to endangered species and habitats, and
the unsustainable consumption of the world’s natural
resources. We do this by influencing how governments,
businesses and people think, learn and act in relation
to the world around us, and by working with local
communities to improve their livelihoods and the
environment upon which we all depend.

Alongside climate change, the existing and projected

scarcity of clean water is likely to be one of the key
challenges facing the world in the 21st Century. This
is not just WWF’s view: many world leaders, including
successive UN Secretaries General, have said as much
in recent years. Influential voices in the global economy
are increasingly talking about water-related risk as an
emerging threat to businesses.

If we manage water badly, nature also suffers from

a lack of water security. Indeed, the evidence is that
freshwater biodiversity is already suffering acutely
from over-abstraction of water, from pollution of rivers,
lakes and groundwater and from poorly-planned water
infrastructure. WWF’s Living Planet Report shows that
declines in freshwater biodiversity are probably the
steepest amongst all habitat types.

As the global population grows and demand for food and

energy increases, the pressure on freshwater ecosystems
will intensify. To add to this, the main effects of climate
change are likely to be felt through changes to the
hydrological cycle.

WWF has been working for many years in many parts of

the world to improve water management. Ensuring water
security remains one of our key priorities.

March 2009

Stuart Orr, Anton Cartwright & Dave Tickner

CONTENTS

04 SUMMARY

06 INTRODUCTION
07 PART A

09 Water scarcity at the global scale
10 Risk to whom and risk of what?
12 Ecosystem risk and climate change

14 PART B
Risk to Government
16 Poverty and inequality
18 Economic growth, food security and trade
20 Health
21 Conflict
22 Risks arising from water management
responses

25 PART C
Risk to Business
27 Physical risk
29 Financial risk
31 Regulatory risk
32 Reputational risk

33 PART D
Shared Risk

36 FURTHER READING

3
 Summary:

Water scarcity is one of the key challenges facing the 1. Water scarcity risks can be classified in terms of
world in the 21st century. The continuing availability of insufficent water to meet basic needs and in terms
water underpins action on food security, energy security, of the consequences which arise from this situation
poverty reduction, economic growth, conflict reduction, such as political and business instability or lost
climate change adaptation and biodiversity loss. But economic opportunities. There are also risks that
increasing global exploitation of water resources across arise from poor policy responses to water scarcity.
the world has led to significant degradation of ecosystems
2. Water scarcity normally arises due to a complex
and the goods and services they provide. In many places,
interaction of social, economic and environmental
the result has been rivers that no longer reach the sea,
factors. It is seldom the product solely of a lack of
lakes that are a fraction of their natural size and aquifers
precipitation. Similarly, responses to water scarcity
whose levels have fallen drastically.
require intervention by a range of stakeholders at the
As well as being an issue of concern to environmentalists local, national and international scales if problems are
and communities, over-exploitation of water has economic to be resolved for the long-term.
impacts on businesses and can adversely affect the ability
3. Tackling water scarcity in such a way that reduces
of governments to meet a broad set of policy goals. The
long-term risks to a range of stakeholders can
concept of risk can be used to describe the impacts and
have multiple pay-offs in relation to a range of
highlight potential responses.
government policy priorities on poverty reduction,
Experience from WWF freshwater programmes around economic growth, food security and trade, health
the world and from a long history of engagement with and conflict reduction.
the private sector suggests the following key propositions
4. As businesses seek to secure long-term prosperity,
about water scarcity risk:
to maintain competitive advantage and brand
differentiation, and to secure stability and choice in
supply chains, increasing water scarcity presents
physical, financial, regulatory and reputational risks.
The type of business will determine the level and
exposure to risk and the appropriate response.
Heavily water-dependent businesses with the best
known brands will encounter the greatest reputational
challenges. But many other businesses will face
challenges and uncertainty due to the increasing
scarcity of water.

4
Summary

5. Companies will come under greater pressure to 8. Healthy ecosystems underpin sustainable water
reduce water use and increase efficiency. Where use. But the combination of climate change and
such actions are not be enough to guarantee a social other human pressures threatens the continuing
license to operate – for example where a company’s viability of many ecosystems and increase risk.
operations rely on a poorly managed water resource Engineering solutions will always be important but
– the company may need to become involved in management responses to water scarcity that focus
supporting better water policy for all users. Ultimately, on single uses of water often increase risk to a range
if and when companies start to suffer from absolute of stakeholders. Poorly planned responses to the
water shortages, and may not be able to influence or hydrological uncertainty arising from climate change
bring about better water management, businesses scenarios could increase risks to ecosystems and the
may face closure or relocation due to environmental service they provide.
rather than purely financial constraints.
9. A key step in reducing water scarcity risks is to
6. Risk from water scarcity is often shared between understand freshwater ecosystems better and to seek
government and business. Likewise, there are to optimise the range of goods and services these
common principles for effective management and ecosystems provide to a broad range of stakeholders.
mitigation of water scarcity risks that apply to both Ultimately this means ensuring that the basic water
governments and businesses: a focus on long- needs of people and ecosystems are met first and
term sustainability; prioritisation of water allocation foremost; and then ensuring that remaining water is
for those least able to cope from scarcity; flexibility allocated for economic use on a rational, equitable
of response in the light of changing hydrological and transparent basis.
reality; and the need for better public policy, stronger
institutions and broad stakeholder engagement.

7. Businesses and governments both rely on better

water management to address water scarcity and its
impacts. But out-of-date or poorly enforced public
policy and weak water management institutions
increase risk for everyone. Ultimately government
is always responsible for putting better water
management in place but businesses have a key role
to play in helping to implement better management.

5
 Introduction:

Water scarcity is likely to be one of the key challenges largely fail to value and govern their freshwater resources
facing the world in the 21st century. In the next 40 years, adequately. Thus, despite significant strides in legislation
global population is likely to increase by three billion and water-efficiency technology in recent years, water
people; there is likely to be a near doubling of water for scarcity continues to be an all too common occurrence.
irrigation to feed these extra mouths; more dams will be
Water scarcity has impacts on many stakeholders
built to generate new hydropower as economies develop;
including governments and businesses. Often there is
competition from the water needs of bio-energy crops will
a surprising degree of overlap in thier interests with regard
intensify and pollution of water resources will continue.
to reducing shared water scarcity risks. Consequently
Freshwater biodiversity is also declining faster than that
there is value in identifying common incentives that could
in other habitats. The implications are clear: meeting the
motivate stakeholders to act collaboratively to reduce
needs of society and the environment in the future will be
water scarcity risk. Leading private sector interests,
heavily constrained by the scarcity of freshwater.
national governments and other stakeholders are now
The United Nations (2003) describes water scarcity as using concepts and terminology derived from risk
“The point at which the aggregate impact of all users assessment to describe water scarcity and the range
impinges upon the supply or quality of water under of responses to it.
prevailing institutional arrangements to the extent that the
Many WWF freshwater programmes around the world
demand by all sectors, including the environment, cannot
are focused on protecting basic ecosystem functioning
be satisfied fully.” This seemingly physical phenomenon
through the maintenance of minimum environmental flows.
is in fact normally a product of the interaction between
These programmes are increasingly being implemented
complex social, economic and environmental systems.
in partnership with governments, businesses and other
In practice, water scarcity, is more often caused by
stakeholders. This primer aims to set out an analysis of
the nature of demand and the inappropriate allocation
water scarcity using the concepts and terminology of risk
of water, rather than by total availability of the natural
with which these partners are familiar. Although risk to
resource. Addressing water scarcity risk therefore requires
stakeholders can arise from poor water quality as well as
better water management, stronger water governance
scarcity, this primer’s emphasis is on the risks associated
and smarter financial investment. Water scarcity is a
with insufficent water as opposed to quality of water,
“governance crisis, not a [water] resource crisis” (Rogers,
although the link between the two is acknoweldged.
2004). Indeed, at a global scale there is probably enough
water to provide for present and future generations
providing water management improves. To date, the track
record on managing water effectively – almost anywhere
in the world – is poor. For most governments water
management is not, in practice, a priority, and societies

6
Part A:
What do we
mean by water
scarcity risk?

7
 PART A:

What do we mean
by water scarcity risk?

• T
 ackling water scarcity is one of the key challenges facing the world in the 21st century.
It underpins the challenges of food security, energy security, poverty reduction, economic
growth, conflict reduction, climate change adaptation and biodiversity loss.
• A
 griculture is, and will continue to be, the major water user at the global scale. As global
population increases and as food consumption patterns change (for instance, as people
eat more meat), risks from water scarcity will increase unless water management improves.
• W
 ater scarcity risks can be classified in terms of insufficent water to meet basic needs
and the consequence which arise from this situation, such as political and business
instability, or lost economic opportunities, and the risks that arise from poor policy
responses to water scarcity.
• W
 ater scarcity normally arises due to a complex interaction of social, economic and
environmental factors. It is seldom the product solely of a lack of precipitation. Similarly,
responses to water scarcity require intervention by a range of stakeholders at the local,
national and international scales if problems are to be resolved for the long-term.
• H
 ealthy ecosystems underpin sustainable water use. But the combination of climate change
and other human pressures threatens the continuing viability of many ecosystems. Poorly
planned responses to the hydrological uncertainty arising from climate change scenarios
could increase risks to ecosystems and the service they provide.

8
PART A:

Water scarcity
at the global scale

Whilst water scarcity is widely acknowledged as being an additional five billion litres of water required annually
a problem, defining and measuring the phenomenon to feed the world’s population. Moreover, many of the
can be complicated. On reviewing a number of water projected shortages will occur in regions that are poorly
scarcity scenarios, Rijsbermann (2005) suggests that equipped to deal with additional environmental pressures.
it is “surprisingly difficult to determine whether water is
truly scarce in the physical sense at the global scale, or A global issue that needs local solutions
whether it is available but should be better used”.
Although water scarcity risks primarily manifest themselves
While there is potential to reconfigure societies and at the river basin or local scale, the origins of water
economies to make them more water efficient, current scarcity, and its impacts, can be seen in the interaction of
trends suggest that the opposite is happening: natural biophysical cycles, and the actions and decisions
of people in a variety of sectors at local, national and
• By 2025, there is likely to be, on aggregate, a 13%
international levels. While almost everyone in these sectors
increase in water consumption (Rosegrant et al, 2003)
recognises water scarcity to be a ‘public bad’, the manner
• More than 2.8 billion people in 48 countries will face in which water scarcity impacts government and business
water stress or scarcity conditions by 2025 (UNEP, through complex social and ecological systems is less well
2002) understood. But ultimately, better water management has
• By the middle of this century, 7 billion people in 60 to take place at the river basin or local scale if benefits are
countries could be facing water scarcity (UN, 2003) to be felt across different sectors.

In parts of the world there is rapid growth in the amount It is important to note that absolute water scarcity is a
of water used for domestic purposes (currently 8% of poor indicator of water scarcity risk and the oft-seen maps
total water withdrawals) and in industry (currently 18%). depicting scarcity at the national scale tell us little about
But globally, agriculture is the dominant water user (74%). risks and their causes. How does one go about identifying
Different types of agriculture exert different pressures the regions and stakeholders that are most likely to be
on water resources. Producing meat, sugar, oils and affected by shortages? How too does one begin to
vegetables requires more water and a different style understand the problems that water scarce regions and
of water management than the producing cereals. On their people are likely to confront? The problem can only
average producing one calorie of food requires a litre of be understood, and action can only be effectively tailored,
water, but a kilo of grain uses only between 500 and 4,000 by focusing on the local level. Global and national scale
litres compared with industrially produced meat which macro assessments are useful for raising awareness,
requires around 10,000 litres. Unless the hydrological but do not reveal the dynamics, components and the
efficiency of food production can be improved, the impact biases within the water scarcity phenomenon. Risks are
of an additional three billion people by 2050 and their inevitably peculiar to specific regions and sometimes,
changing diets (from cereals to more meat) will mean specific seasons.
9
 PART A:

Risk to whom
and risk of what?

Whilst increasing water scarcity is a global certainty, Discussions of risks imposed by water scarcity must
predicting the scale, nature and location of future water involve those who are responsible for, and those who
scarcity risks is challenging. As Marcel Beurger of the are affected by, the problems of water scarcity. Yet there
global insurance firm Swiss Re points out, “Emerging are major difficulties in applying risk to a broad set of
risks are not even being called risks. They are more like conditions. Water is a public,2 a private and a social
uncertainties that you have to search for. Nevertheless good, and a water scarcity event will have both private
Swiss Re has identified one big [emerging] risk: the global impacts and public repercussions, affecting stakeholders
unavailability of water.”1 differently3. Accordingly it is necessary in any risk
analysis involving water to establish who is at risk, with
The risks associated with water scarcity can be classified
the understanding that the risk to an individual might be
as follows:
very different than risk for a society or business, and that
• Risk from insufficient water resources to meet the certain groups will be more vulnerable to water risk than
basic needs of people, the environment and business, others. Moreover, risks of different stakeholders overlap.
which in turn leads to…
It is also necessary to ask, “risk of what?” with the
• Risk from the consequences of insufficient water understanding that water scarcity is a subjective concept.
resources, such as higher energy prices, loss of For a farmer, the danger may be back-to-back years
competitive advantage, political and economic of below average rainfall. For a business such as a
instability, population migration, or lost economic processing plant, the risk might be a temporary, sudden
opportunities to name a few; and as a result, cessation of stream-flow during peak operation time.
• Risk from poor water management decisions For a government, risks might include the increasing
taken in reaction to water scarcity, with negative costs of accessing water for utilities and the implications
consequences for some or all users. Such decisions of higher energy costs, or failing to deliver on economic
may be a result of political or economic expediency, growth and development pathways because of poor
short-term thinking, lack of knowledge or capacity water management.
or simply desperation and lack of choice.

1 Reinsurance Magazine, 12/16/2002

2 Water supply is a public good because in most instances the supplying of water to one person does not prevent delivery of water to another. Similarly the ecological goods
and services provided by water can be consumed jointly. In cases of water scarcity such allocation issues do become critical and the opportunity cost of increasing the water
supply imposes direct costs and benefits on individuals and companies. In these instances water is a private good. The economic definition of a public good should not be
confused with public or private ownership of goods. A private good can be publicly owned.
3 Le Quesne T., et al. 2007. Allocating scarce water: A primer on water allocation, water rights and water markets. WWF-UK, Godalming, UK.

10
PART A:
Risk to whom and risk of what?

Most stakeholders have some means – formal or informal For instance, scarcity and consequent reduction in river
– of coping with water scarcity, including increased flows can increase the risk to subsistence and commercial
dependence on remittances and alternative forms of fisherman; and reduction in groundwater levels can cause
agriculture. Whilst water scarcity tends to impose costs forest dieback putting the livelihoods and businesses of
on those who can least afford them, in some instances it another set of stakeholders at risk.
can provide the catalyst for effective adaptation to a less
The impacts of water scarcity can be insidious, such as
risky state. In reality, judicious water use might reduce risk
the disappearance of the Ogallala aquifer in the western
as people become more affluent, better able to adapt,
United States, or the Edwards aquifer for the city of San
and adopt water saving technologies, but thresholds
Antonio, Texas. In most countries, groundwater is not
exist beyond which hazards overwhelm societies or
well monitored, so understanding of when crisis levels are
ecosystems, and water scarcity risk increases suddenly
being reached is often elusive. As a consequence, the risk
and unpredictably. These thresholds depend on location,
of water scarcity is often perceived as being in the future
value and activity (Parry et al., 1996) and are difficult to
or manageable only by those people who can engage
predict. Incorrect threshold projections (including those of
politically. Awareness of water scarcity could be increased
Malthus to food security, the Ehrlichs’ to biodiversity in the
through more effective communication of its real effects.
1980s and UNEP to desertification in the 1970s) underpin
many of the incorrect assessments of environmental risk.

A failure to consider indirect risks further distorts the

timescale of water scarcity events. Inadequate access
to water (for people and business) is the obvious, but
by no means the only, risk arising from water scarcity.
Water scarcity imposes risks on markets and social
stability. In addition, the manner in which people respond
to water scarcity (using groundwater more intensely,
the opportunistic breaching of legislation, violation of
environmental flow requirements, pursuing unilateral
strategies of self-protection, and becoming embroiled
in conflict) involve additional risks, many of which are not
attributed directly to water scarcity. Analyses of such
issues tend to under-represent the problem by ignoring
the feedback loops that often compound water scarcity
risks. It is also important to note that risks arise from water
scarcity which are not directly related to the use of water.

11
 PART A:

Ecosystem risk
and climate change

Equally important is risk to the ecosystems and they Significant changes to the hydrological cycle are
biodiversity they contain. WWF’s Living Planet Index anticipated as a result of climate change. But predicting
(2007), shows that the Freshwater Species Population precipitation changes is one of the hardest aspects of
Index (which comprises populations of 195 species climate change modelling so climate change adds new
of birds, mammals, reptiles, amphibians, and fish uncertainty to water scarcity scenarios. Projections
from lakes, rivers, and wetland ecosystems) fell 29% suggest that, in the tropics, it may get either wetter
between 1970 and 2003. This is not a separate issue or drier depending on location. The sub-tropics are
to economic growth and social stability. Rather it is a expected, on average, to become drier. In many places,
crucial consideration in delivering clean water and other uncertainty over the frequency of extreme weather events
ecosystem services to an increasingly thirsty world. (such as severe drought) will be an unfortunate result of
Functional freshwater ecosystems afford the “provisioning previously predictable weather patterns being disrupted.
services” (products such as freshwater, fish and transport Summer dry spells in some areas will be drier and for
routes), “regulating” or “ecosystem services” (such as longer periods of time. Changes in mountain snow-pack
water purification, stream flow mediation and options for are a huge source of water insecurity in many temperate
adaptation to changes such as those caused by warmer regions (Italy, California, France, etc.) and present some
climates) and “cultural services” (such as aesthetic beauty, areas with changes in the timing, as well as the volume,
spiritual significance and heritage value) on which society of meltwater flows.
depends. Some of these services are difficult to cost and
It is important to note that the combination of climatic
are therefore under-emphasised in cost-benefit analyses,
variability and other human activities causes the greatest
risk assessments and other decision-support processes.
impact on ecosystems and the greatest risks to water
But healthy hydrological systems in themselves mitigate
users. For example the economic, environmental and
risk. Put simply, clean, flowing rivers and healthy aquifers
political risks currently being experienced in the Murray-
are a reliable source of good quality water.
Darling Basin in Australia are the result of a combination
Disruption to these dynamic fresh water ecosystems of below-average rainfall over a ten-year period, some of
exposes people and the environment to a range of risks which may be related to the interaction of El Niño with
that are inevitable if difficult to predict (Baron et al., 2002). globally warmer climates. The impact of this climate
Realising this, governments are increasingly basing phenomenon has been exacerbated by deforestation,
water management legislation and policy on the need increasing urban demand and a farming industry that
to safeguard ecosystem goods and services4. Similarly, abstracts very significant volumes of water.
some companies are beginning to invest in ecosystem
protection not just as an act of philanthropy but because
healthy ecosystem can be a key tool to help ensure
sustainable flows of clean water.

12
PART A:
Ecosystem risk and climate change

Perhaps more importantly, inappropriate water risks are complex and unpredictable nonetheless.
management responses to climate change can increase Efforts aimed at enhancing resilience to a wide range of
risk. Many traditional water supply management solutions possible hydrological scenarios tend to be more effective
(typically engineering solutions based on historical than “resisting water scarcity” or “predict and provide”
hydrological patterns whose relevance is increasingly measures of adaptation that focus on engineering
uncertain) simply displace and/or compound risks5. or specific events and responses.6 Water demand
Creating the capacity for flexible responses to water management has the potential to circumvent a number
scarcity is one way in which risk can be reduced in the of water scarcity risks.
face of changing hydrological patterns; but hydrological

© J MATTHEWS / WWF

Ghambiri River, India. Diversions for agricultural expansion have halted flows on the river for 5 years with massive impacts on
downstream communities and livelihoods.

4 See for instance the South African Water Law (1998) and the EU Water Framework Directive (2000)
5 For a more considered assessment of best practice in climate change management and water management, see Adapting Water Management (WWF, 2009)
6 Resilience only provides a framework within which to act: without engineering you cannot get water to users. For an interactive list of technical “coping” responses that are
perceived to be working, select “drought/aridity” on the following site http://maindb.unfccc.int/public/adaptation/.

13
 Part B:
Risk to government

14
 PART B:

Risk to government
• T
 he concepts and terminology of risk have not traditionally been used in the context
of government responsibility, but can be useful when dealing with a resource as complex
as water.
• T
 ackling water scarcity in such a way that reduces long-term risks to a range of stakeholders
can have multiple pay-offs in relation to government policy priorities on poverty reduction,
economic growth, food security and trade, health and conflict reduction.
• E
 ngineering solutions will always be important but poorly-planned management responses
to water scarcity, especially those that focus on single uses of water, often increase risk to a
range of stakeholders.

Standard government response to water scarcity This requires sufficient understanding of the range
of potential remedies and broad support from a range
The management of water, for ensuring the delivery of
of stakeholders for a more considered approach.
basic services to citizens, for economic growth, and for
maintaining healthy water environments, is ultimately
The cost of water scarcity
the responsibility of governments. Yet, low prioritisation
of water management and poor co-ordination within California’s current water crisis management will cost
government ministries often mean that too many water tax-payers an estimated US$1.6 billion per year by 2020
resources are over-committed and undervalued. As a (Jenkins et al., 2003). Australia’s emergency overhaul
consequence, communities and economies around the of its water supply regime, necessitated by 10 years of
world suffer from water shortages, poor water quality over-abstraction but precipitated by the 2007 drought,
and degraded environments. is expected to cost US$10 billion. China’s scheme to
channel billions of cubic metres of water from the Yangtze
The initial response to water scarcity usually involves
River in support of farmers along the dwindling Yellow
pressure to implement some form of “quick fix”. The need
River involves untold costs, while Libya’s need since 1991
to address sudden water shortages becomes a high
to pump 730 million cubic metres of water a year from
profile, short-term priority that diverts public resources
underneath the Sahara costs that country US$25 billion
from other initiatives. Governments can fall into such traps
a year (UNESCO, 2002). Given the critical shortages in
in an institutional manner, rarely entertaining ideas of
these instances, the costly interventions often seem the
long-term stability, if the handling of each environmental
best solution; but in most instances the costs might have
pitfall is left to chance. Typical measures include the
been avoided if timely water governance had prevented
construction of water supply infrastructure, inter-basin
water scarcity in the first place.
transfers, water trucks, or desalinisation schemes.
Because such measures can be expensive and seldom
generate sufficient revenue to cover their cost, the The concept of risk has not typically been used to
fiscal burden for such interventions inevitably falls on describe government’s role in water services and
taxpayers, undermining support for government and management. However, for the purposes of improving and
adding pressure to overstretched public budgets. They supporting better public policy for water management,
can also lock countries into patterns of development that risk is an effective way to frame the issue. Government
rely on ever-increasing water supply. It would be better risk must be seen in the context of government mandate
for governments to plan and institutionalise competent and policy priorities. Water scarcity presents a range of
responses to scarcity, such as long-term healthy water risks to government that may affect policy agendas on
supply, with robust demand management, a sound poverty and inequality, economic growth, food security
regulatory system and efficient and flexible infrastructure. and trade, health, and conflict reduction.

15
 PART B:

Poverty and inequality

The poor pay more (in proportional terms) for their water scarcity – drive losses in quality of life. As such, water
than the affluent, and receive water of lower quality scarcity both initiates and perpetuates vicious circles
(Castro, 2004). This situation can be linked to the poor of poverty, degradation and inequality.
performance of water delivery services, but these poorer
customers also tend to live where water scarcity is The Millennium Development Goals
greatest. “From rural communities in Angola, to the shanty
The Millennium Development Goals (MDGs) represent
towns of Port-au-Prince in Haiti, it is not unusual for the
the official international targets for ending poverty and
poor to pay as much as 100 times more than those with
the associated risks of exclusion, conflict and terrorism.
regular water connections” (UNICEF, 1998).
Injudicious use of existing water resources is expected
Water scarcity aggravates existing social problems, most to increase the improbability of achieving the MDGs, and
notably poverty, and further entrenches their causes: will certainly increase the cost of reaching these goals
gender discrimination, urban biases and vested interests. (Southern African Millennium Ecosystem Assessment,
Within poor households, women tend to bear greater 2004; UNICEF, 2002). Table 1 illustrates the MDGs and
losses than men from the degradation of water resources. the associated role of water management.
Within communities the poor are first to suffer when
Achieving the water components of MDG 7 (ensure
water tables drop. When water ran out in the informal
environmental sustainability) is anticipated to provide
settlement of Cochabamba, Bolivia, only those residents
a 7.5 fold return on investment as a result of time
with sufficient funds were able to buy water from privately
savings, improved productivity and improved school
operated water trucks for their drinking, washing and
attendance. Unfortunately, the current trend toward ever
vegetable gardens (Wutich, 2007). In southern India,
greater scarcity makes this return improbable. Dow and
only those households that can afford to sink deeper
Downing (2006) estimate that projected changes in water
boreholes and pay for irrigation that can cope with the
availability will result in 1% to a minus 10% change in
declining water table and less reliable rainfall. Accordingly
cereal production by 2030 in much of sub-Saharan Africa
affluent farmers cultivate water-intensive crops like rice
and Southern Europe, and an 8-9% decrease in cereal
and sugarcane, while their small, poorer neighbours plant
production in the Asian sub-continent. Significantly for
lower value ‘dry’ crops like sorghum, cotton and millet
development, 25% or more of the children dependent
(Mollinga & Van Straaten, 1996).
on such production in both Sub-Saharan Africa and
Water scarcity is often the precursor to decisions and the Sub-Continent are already moderately or severely
events that hinder the alleviation of poverty. High costs, malnourished.
loss of biodiversity, degradation of the multitude of
benefits from ecosystems, and an increasing prevalence
of environmental hazards such as salinisation, land
erosion and drought – all of which are the results of water
16
PART B:
Poverty and inequality

Table 1 The Millennium Development Goals (MDGs) and water

MDG Role of water management

Goal 1- Eradicate extreme Increase agricultural production and productivity to keep up with rising demand
poverty and hunger
Protect freshwater ecosystems to deliver food and livelihoods

Increase water access and water allocation for poorest users

Deliver water infrastructure for health and sanitation

Goal 2 – Achieve universal Reducing water-related diseases which cost millions of school days each year
primary education

Goal 3 – Promote gender Enhancing equitable access to water and thus the ability to produce food
equality and empower women and improve health.

Eliminating lost time for water collection, a burden on women and young girls
Goal 4 – Reduce child mortality Reducing water-related diseases which kill millions of people each year

Provisioning of clean water that contribute to better hygiene and diets

Goal 5 – Improve maternal
Provide clean and adequate supplies of water for basic needs
health
Goal 6 – Combat HIV/AIDS,
malaria, and other diseases

Goal 7 – Ensure environmental Plan and implement all aspects of water management in a manner that integrates
sustainability environmental flows for lake and river systems and draws on groundwater
systems within natural limits of recharge

Halving the people without sustainable access to safe drinking water and
sanitation by 2015
Goal 8 – Develop a global Involve a diverse range of practitioners, researchers, water users and decision
partnership for development makers when planning water management projects

Source: Adapted from IWMI, 2007

17
 PART B:

Economic growth,
food security and trade

Water is essential for sustained economic growth the local sugarcane industry to respond to opportunities
(Cosgrove, 2004; DFID, 2008), and politicians run the created by the reform of the EU sugar regime in 2005
risk of being held accountable where water scarcity was due to insufficient water and became the source
undermines economic growth and where trade is of simmering political tension (Cartwright & Lorentzen,
adversely affected. Most forecasts project a relatively 2006). In the US, water shortages are reported to have
modest water scarcity impact on economic growth at cost the agricultural sector GBP 2.6 billion over a two year
the global level, due to the fact that the bulk of value timescale (The Carnegie Institution at Stanford, 2007).7
addition in the global economy occurs in sectors that are,
Water availability is also a determinant, often hidden, of
at present, relatively insensitive to water scarcity (Dumas
international trade. Countries with more water are able to
& Ha-Dong, 2004). But at the national and local levels,
trade water-intensive goods for export. Water embedded
the availability of easily accessible freshwater has proven
in traded crops has been termed ‘virtual water’. Virtual
a key determinant in development (Sachs, 2006), and
water trade has been suggested as a way to alleviate
water scarcity continues to frustrate economic growth at
water shortages. While this offers the potential to help
these levels. Those countries which, 25 years ago, had
mitigate water scarcity risks, it should be recognised
low incomes (below US $750 per year per person) yet
that most trade is not based on rational determinations
had access to adequate safe water and sanitation, had an
of comparative advantage based on water, but rather on
average of 3.7 % growth in GDP per year, while countries
broader political and economic factors.
with the same per person income but limited access to
water grew at only 0.1 % per year over the same period
(WHO, 2006). Access to fresh water can therefore not be
factored out of economic growth.

The availability of water enables economic development

and energetic responses to emerging agricultural
opportunities. The ongoing drought in Australia was
expected to shave 1% off that country’s GDP in 2006/7
and possibly helped usher an end to the Howard
government. Interestingly, the argument in Australia is
changing. Some now feel that this is no longer a drought,
but a new climate regime. Politicians will still, however,
need to find timely and flexible approaches to dealing with
scarcity and rapid change. In South Africa, the inability of

7 It is not clear that the static calculation of these figures represents a particularly good way of quantifying the phenomenon, but it would seem apparent that water shortages
have had at least the same impact.

18
 © E PARKER / WWF-Canon
Irrigation has delivered impressive gains for agricultural yields but future expansion will need to consider the risks to other users and
uses of water within river catchments if it is to deliver long-term benefits.

Buying land, Buying water

Recent examples of ‘land grabbing’ that have appeared In North China, 30 cubic kilometres more water is being
in the press (New Scientist, Dec 4, 2008) show that pumped from groundwater to the surface each year
some governments and investors, mainly the Gulf by farmers than is replaced by rain. As groundwater is
States, are buying or leasing land in other countries to used to produce 40% of the country’s grain, experts
support food security. While there are competing and warn that water shortages could eventually make the
undetermined benefits or risks in such activities, the country dependent on grain imports. Gleick et al., (2002)
press has largely ignored the fact that these actions are have called for the inclusion of water under the General
fundamentally about water. Saudi Arabia has chosen Agreement on Tariffs and Trade (GATT) regulations,
to de-subsidize water use by its citizens and instead and Falkenmark (1997) estimates that by 2025, 55%
use the water of Pakistan embedded in food grown of the world’s population will depend on food imports
specifically for Saudi Arabian consumption, as costs as a result of insufficient domestic water, necessitating
to pump and desalinate the huge amounts needed to a major reconfiguration of international trade. Such a
achieve food security at home reach into the billions of reconfiguration would almost certainly have political
dollars. Yet the risks associated with those displaced, ramifications, especially for those countries that lose
or those whose water has been diverted to the highest market share. High oil and transportation costs could
bidder, have been largely ignored by those governments compound matters.
more interested in receiving cash from willing investors.

19
 PART B:

Health

Health risks associated with water are generally more Swiss Re8 foresees human health-related lawsuits arising
to do with quality rather than quantity; however the in situations of water scarcity that expose people to higher
two are directly related. The World Health Organisation concentrations of water-borne pollution. This pollution
(WHO) estimates that eight litres of freshwater is required includes pesticides, petrol additives, antibiotics and
to dilute every litre of grey (polluted) water in order to microbes that have developed resistance to antibiotics
prevent harmful contamination. When over-abstraction and have been released through sewage systems. No
compromises this ratio, incidences of inadequate such case has yet been presented, but as legislation,
sanitation, drainage and excessive pollution increase. monitoring and the science of water-borne diseases
Treatable diarrhoea kills 2 million people every year, improve, proof of culpability will become easier to obtain
1.6 million of whom are children under the age of five
(WHO, 2006, Castro, 2004). The combination of HIV WHO’s Disability Adjusted Life Year
and diarrhoea blurs the reporting of both afflictions, but
The WHO applies the Disability Adjusted Life Year (DALY)
it is certainly having an increasingly devastating impact
indicator, a combination of life expectancy and the health
in Africa. Vulnerability to water-borne diseases, and
quality of a year lived, to establish equivalent years of
particularly diarrhoea, would be greatly reduced if water
‘healthy’ life lost by virtue of being in states of poor health
was more abundant and river flows better protected
or disability. One DALY can be thought of as one lost year
especially in growing urban areas. Improvements in
of ‘healthy’ life (WHO, 2008). Water deficits (including
access to water and the delivery of water utility services
poor sanitation and effluent disposal) account for nearly
will lead to better health.
40% of all DALYs lost, and the impact of water scarcity
Over the last twenty years, many residents of Bangladesh and poor water management on DALY is most acute in
have become dependent on groundwater extraction for developing countries: China suffers an annual loss of 7
dry-season rice production and domestic use. Of the four million DALYs; India, 22.5 million; and Sub-Saharan Africa,
million hectares of land under irrigation in Bangladesh, 31.8 million (Murray & Lopez, 1996; Lvovsky, 2001). By not
about 2.4 million hectares are now being irrigated from pursuing the type of water governance that could break
shallow tube-wells, known to contain dangerous levels of the relationship between water quantity and disease, Fox-
arsenic. With an estimated 1,000 tonnes of arsenic being Rushby & Hanson (2001) estimate that countries across
added to arable soils annually, dependence on well-water the world will forego 330 million DALYs by 2015. The loss
has exposed poorer residents (who cannot afford to drill of water-related DALYs in Sub-Saharan countries (10% of
as deep or to test their water quality) to higher risks of all DALYs) relative to developed countries (1% of all DALYs)
arsenic poisoning. highlights the role of “coping capacity” in the relationship
between water shortages and poverty.

8 Reinsurance Magazine, December 16, 2002

20
PART B:

Conflict

The threat of water wars was evoked throughout the Similarly, civil actions against business operations are a
1980s and the 1990s by the United Nations,9 the World risk to those businesses’ reputations, but they also reflect
Bank10 and various academics (Westing, 1986; Wolf, societal struggles over water access and water use.
1998; Butts 1997). In recent years the United Nations
Water-related conflicts are caused more by the way in
has pulled back from this position, but this did not
which water use is governed than by water scarcity.
prevent Margaret Beckett, the then UK Foreign Secretary,
The outcome of local conflicts tends to reflect societal
spoke in 2007 about the Darfur crisis in Sudan being
problems. Those who are marginalized in society tend to
intimately related to climate change and water scarcity.11
lose most in water conflicts, for example the rural poor in
Transboundary basins now cover 45% of the earth’s
Chile and Mozambique, and the urban poor in Mexico and
surface (Ravnborg, 2004) and water scarcity, particularly
South Africa. It is also important to distinguish between
when it is caused by unilateral water development projects
disputes over water resources where rivers happen to run
(e.g. dams), undoubtedly contributes to tensions between
across boundaries, and disputes over national boundaries
nations. New national boundaries have emerged from the
where rivers happen to form those boundaries.
post-Soviet era with an additional 47 transboundary water
basins coming into effect in the past 25 years.

The evidence that countries engage in wars specifically

over water is not clear but there is little doubt that water
conflicts are common at the inter-sector, inter-community,
inter-farm, inter- (and intra-) household level. The contests
that arise may not register on military radars, but they
can have a profoundly frustrating effect on development
efforts, further entrenching social problems such as
gender discrimination, and destabilising local governance.
The ‘water riots’ against the Bechtel Scheme in Bolivia in
1999 and the ongoing tensions between landowners and
poorer peasants in the Chittoor District, India, over the
lowering of the water table, are typical of an increasing
number of local conflicts (Wolf et al., 2003).

9 Boutros Boutras-Ghali (1985) “The next war in the Middle East will be fought over water not politics”: Kofi Annan (2002) “Fierce competition for fresh water may well become
a source of conflict and war in the future.”
10 In 1995 the World Bank Vice-President Ismail Serageldin claimed that ‘many of the wars of this century were about oil, but wars of the next century will be about water’
(New York Times, August 10, 1995).
11 See “The Case for Climate Security”, Lecture by the Foreign Secretary, the Rt Hon Margarett Beckett MP to the Royal United Services Institute, 10th May 2007.

21
 PART B:

Risk arising from water

management responses

Water storage infrastructure

Responses to water scarcity by governments and others from dams constructed to generate hydroelectricity on
can, if not thought through properly, undermine longer- the Zambezi River is destroying sea grass beds and
term policy objectives and reduce flexibility to mitigate a preventing shrimp larva migration into the delta. This has
variety of unforeseen risks. For example, the construction contributed to the destruction of a highly valuable and
of large dams often locks regional economies into water- much needed seafood industry in Mozambique.
intensive primary economic activities. The number of
large dams increased from 5,000 to 45,000 during the Groundwater extraction
second half of the 20th century, when dam construction
The extraction of groundwater is often the first resort
was the standard response to water shortages (World
of rural water users confronted by scarcity, and now
Commission on Dams, 2000). Dams and other storage
represents 50% of all drinking water (UNEP, 2005). Taking
infrastructure such as weirs and barriers now affect 70%
groundwater at rates faster than nature can return it is
of the world’s rivers (Bergkamp et al., 2000). The need
often portrayed as a “sin against sustainability” (Llamas
to recoup public finances invested in large dams and
& Martinez-Santos, 2004), exposing future generations
irrigation schemes requires that water stored and diverted
to risk by allowing salt water intrusions (e.g. Pakistan,
by these projects is allocated to sectors and enterprises
Madagascar), subsidence, loss of soil moisture and
that can pay the highest price. Typically this precludes
exposure to heavy metals. Under certain circumstances,
allocations to the rural poor with obvious implications for
groundwater use can have fewer environmental impacts
economic equality.
than surface water use. Where groundwater alleviates
Dams transfer water scarcity risk from people onto the shortages and provides the catalyst for socio-economic
environment, a strategy that often simply delays facing development it may actually reduce social vulnerability
the problem of scarcity and often intensifies it. Dams have and ecological risks. Yet, unforeseen and irreversible
stabilised and increased the provision of water for people, consequences of water abstraction are greatest when
but their benefits should be gauged against the risks that using poorly-monitored and ‘invisible’ groundwater
they impose. Dams interrupt natural river flow and cause resources.
a range of environmental impacts including the loss of
The Ogallala aquifer, which stretches from Texas to South
flooding regimes, methane gas release, habitat loss, alien
Dakota, is being lowered at 90-150 cm per year. This
vegetation encroachment, restricted fish migration, and
depletion rate, if sustained, will threaten the continuing
disrupted nutrient and sediment flows.
viability of one third of irrigated agriculture in the United
Some of the risks, particularly the biodiversity risks, States within the next 40 years. Yet this issue is largely
imposed by existing dams could be reduced through ignored in the US media despite profound and potentially
better design and more effective management: off-stream devastating economic repercussions of the aquifer being
storage, flood simulation, and judicious releases and exhausted. More immediate effects from excessive
fish ladders. The poor management of the flow regime water use will occur in the agriculturally important area of
22
PART B:
Risk arising from water management responses

Souss-Massa in Morocco, where the major water source years. While seen as solutions, they are instead enormous
for the region is from two aquifers, Souss-Massa and and dramatic responses to a failed management problem
Chtouka. The over-pumping of these aquifers, through
more than 13,000 wells (some of them illegal), has Crisis in Cyprus
resulted in declines in water levels from 0.5 to 2.5 metres
Recently, water reserves in Cyprus reached their
per year during the past three decades. In the Souss-
lowest levels. As an emergency measure, the Cypriot
Massa Basin, even under the best planning conditions,
government agreed with the Greek government the
the current rate of water usage is not sustainable. If water-
immediate supply of eight million cubic meters of fresh
saving measures are not taken rapidly, the groundwater
water from Greece. The transportation of the water from
deficit will reach a catastrophic level. Beyond 2020, even
Greece to Cyprus cost $70m. Under the agreement with
if the demand for water for irrigation were kept constant,
Greece, two water- tankers will leave Athens for Cyprus
the groundwater deficit would be irreversible (WWF, 2008).
every day for six months (Reuters, June 26, 2008).

Water transfers

Water transfers involve the movement of water within or, The governments of Australia, China and India have thus
more often, across river basins, but can also include using far been unsuccessful in handling the reduction in rainfall
ships to transport water between different countries. Like where they have typically relied on it. Their responses
dams, inter-basin transfers provide a means of alleviating to the risks that have arisen in their countries provide
water shortages, but represent an expedient transfer of a spectrum of examples which suggest how we might
risk from people to the environment. The pumping and address and adapt to rapid climate changes and shifting
piping of water from one basin to another reconfigures water regimes. When more water is taken from a river
hydrological systems and the biodiversity that has co- catchment than what is hydrologically available, supply
evolved with these systems. The Chinese government side solutions override any alternative or more necessary
is constructing the South-North Water Transfer project considerations to reduce on the demand side. This leads
designed to bring huge quantities of water from the upper to situations where river basins, such as in the region of
reaches of the Yangtze River to the upper reaches of the Murcia in Spain, heavily over-exploit their own surface
Yellow River. Many cubic kilometres will be moved from and ground water and still ask for more water from
the (wetter) south every year. This project will increase neighbouring basins, rather than restricting expansion
the environmental risks (loss of soil moisture and fertility, or banning inefficient and wasteful water use “at home”
salinisation, land erosion and species migration) that are (WWF, 2008).
common to inter-basin transfers. India has similar plans
to move water across the sub-continent, and Spain has
debated the issue of diverting the Ebro River for many

23
 PART B:
Risk arising from water management responses

Desalination The rain in Spain?

The construction of desalination plants is an increasingly The new Spanish government made a political point of
popular response to water scarcity, especially in southern abolishing the planned inter-basin (Ebro River) transfer
Europe where irrigation, urbanisation and increasing plans and has instead decided to build several dozen
demands from tourism have combined to create water desalination plants to provide water to the south coastal
scarcity. Desalination has a role to play but a reflexive region. This programme is likely to impose environmental
preference for such supply-side solutions to water and political risks of its own. Spain’s real problems lie in a
scarcity can, however, exacerbate scarcity impacts by lack of effective development controls in high growth but
creating new dependencies and unforeseen risks, and dry areas, and inefficiently controlled water use generally.
often leads to a cycle of increased costs, environmental The country is perhaps the leading developed-world
impact and energy dependence. Large desalination plants example of how a long history of investments in water
have been described as the “new dams” (WWF, 2007), supply infrastructure has failed to provide water security
and may divert effort from alternatives – such as water (WWF, 2007).
conservation, water use efficiency improvements
and water recycling – which be more sustainable and
reduce risk. In the Middle East, water continues to be heavily
subsidised for the majority of users for economic and
social reasons, and the proportion of agricultural use is
high in some areas. The capital and energy requirements
of soaring water demand are challenging to the area,
even for nations like Saudi Arabia and Israel. Desalination
plants may be the only option in some areas (e.g. Malta,
UAE), yet yielding to the temptation to view the ocean as
a limitless source of potential freshwater means ignoring
numerous potential risks. These include tying countries’
future water needs to growing energy costs and, in many
cases, energy insecurity, usually while failing to tackle the
very issues that led to dependence on desalination in the
first place.

24
Part C:
Risk to business

25
 PART C:

Risk to business
• E
 ven as businesses seek to secure long-term prosperity, to maintain competitive advantage
and brand differentiation, and to secure stability and choice in supply chains, increasing water
scarcity presents physical, financial, regulatory and reputational risks.
• T
 he type of business will determine the level and type of these risks and the appropriate
response. Heavily water-dependent businesses with the best known brands will encounter the
greatest reputational challenges. But many other businesses will face changes and uncertainty
due to the increasing scarcity of water.
• A
 s climate change takes hold and media and public awareness of water issues increases,
companies will come under greater pressure to reduce water use and increase efficiency. Where
such actions are not be enough to guarantee a social license to operate – for example where
a company’s operations rely on a poorly managed water resource – the company may need to
become involved in supporting better public policy for water management.
• U
 ltimately, if and when companies start to suffer from absolute water shortages, and may not
be able to influence or bring about better water management, businesses may face closure or
relocation due to environmental rather than purely financial constraints.

Why business risk?

Business and government share risks, especially when When water scarcity becomes a crisis, companies
businesses operate in areas where water is scarce, perceived to be intensive users of water are often, rightly
poorly managed or subject to changing regulation. The or wrongly, singled out for criticism. Large, high profile
term ‘business’ is used here somewhat generically, and corporations are particularly vulnerable to exposés and
refers to numerous sectors which are exposed to very consumer boycotts regardless of their actual contribution
different issues depending on the type of operations, to the problem. This factor, along with the continuing and
their location, and the policy environment for example. increasing risk of factories or farms running out of water
In some instances, water scarcity can create business because of poor management of the local water resource,
opportunities. It can be the catalyst for technologies mean that it is in many companies’ interests to support
and economic transitions that reduce risk, and some better water management at international, national
companies have gained market share on the back of and local levels. Many particularly water-dependent
changes made to reduce their hydrological impact. companies are therefore beginning to view the reduction
However, how to minimise risk and maintain not just of water scarcity risk as a key business issue and not
competitiveness for the future, but also their social license simply as a matter of compliance or corporate social
to operate, is an essential question for most businesses. responsibility.
From a water management and policy viewpoint,
There are four basic categories of water scarcity risk
businesses are a key stakeholder given their high demand
to businesses: physical, financial, regulatory and
for water, the role they play in economic growth, the
reputational risk.
impact (positive or negative) that they may have on water
resources, and the influence that they might exert.

26
PART C:

Physical risk

Physical risk is directly related to too little water US$24.5 million in subsidies, simply to protect the
(scarcity), too much water (flooding) or water that is supply of clean water to its French bottling plant
unfit for use (pollution), each of which is associated (Perrot-Maitre, 2006).
with the management of a water resource. Risks can
Agriculture is commonly perceived as the most vulnerable
be associated with water resources at the river basin
sector with relation to absolute water shortages. Flower
level, or at the supply level, namely sanitation and
growers on the shores of Lake Naivasha (Kenya) and
other infrastructure systems. Even where water is
vegetable producers in the Lower Guadiana (Spain /
readily available, physical risk can emerge from poor
Portugal) have highly risky futures due, in part, to their
management of the resource.
own exploitation of the water resource on which their
Water is usually an irreplaceable resource so, like other businesses depend. Although 70% of fresh water is
users, businesses suffer when they run out of water. In used in agriculture, industrial uses are also high (Estrela
2002, Swiss Re reported an increase in claims against & Silva, 2006). In California, for example, the electronics
“business interruption cover” as a result of periodic water manufacturing industry used 24% of the available water
shortages, suggesting that the problem had become in 1994/1995 (Faruqui, 2003), with every 30cm of silicon
more severe12. While this may not be the most prevalent computer chip requiring 8,622 litres of de-ionised fresh
or even the most immediate concern for most business water (Figueres et al., 2003). In South Africa, SABMiller,
operations today, there is every reason to believe that this the world’s second largest beer retailer, was forced to
risk will only increase in the future as demand for water halt production at one of its plants in 2007 due to water
from other users increases. The effects of climate change, shortages (IOL news portal, March 2007).
in terms of increasing variability of water resources, will
Another business sector particularly vulnerable to water
only exacerbate this situation.
shortages is mining. Anglo-American is currently unable to
Progressive companies have developed means of mine a rich seam of platinum in the Limpopo Province due
buffering themselves against water shortages, but always to the lack of water, and Chile’s flagship copper industry
at an additional cost, and typically without guarantees. is being threatened by insufficient water to maintain
The purchase of water licenses has been a feature of operations (see Box 1).
asset management plans in Southern England since
the 1980 droughts (SEI, 2006). The declaration of a
drought triggers a series of costly interventions for water
companies, including intensive monitoring, restrictions and
public relations programmes. In 2005, Vittel, the bottled
water company, was forced to purchase US$9 million
worth of land, and had to pay land owners an additional
12 ReInsurance Magazine, 2002

27
 © NELEMAN INITIATIVE / GETTY IMAGES

Copper production in Chile requires vast amounts of water, a resource hard to come by in the mining-intensive Northern region,
next to the Atacama Desert, one of the driest regions in the world.

Water and copper in Chile

“Chilean copper mining companies are likely to face watchdogs, exerting further pressure. Water scarcity
significant risks in securing future water sources and has led mining companies to launch water exploration
rights for water-intensive copper processing operations. programmes in the mining region, seeking to secure
Water is becoming more expensive, significantly supply for future development. Some are implementing
contributing to mining companies’ surging production water management programmes, ranging from design
costs (along with energy), and is also becoming harder development to recovery of water from tailings dams,
to obtain. Today, few or no water rights are available, and and some are looking to build desalination plants.
farmers are pushing regulators to limit the granting of Higher costs will prevail until new technologies become
water sources to the mining industry. Repercussions for economically viable”.
ecosystems are also being monitored by environmental Source: Bloomberg Messaging, 16 April 2006

28
PART C:

Financial risk

Water shortages translate into higher energy prices, higher Water scarcity has not historically been a major source
insurance and credit costs, and lower investor confidence, of insurance claims, but some of the major insurance
all of which further undermine business profitability. More companies view water scarcity and its impacts as a
common than the risk of not having enough water is the significant emerging risk and/or business opportunity.
risk that businesses find their comparative or competitive Water related insurance has most obviously been flood
advantage undermined by cost inflation driven by water or drought insurance, as well as property insurance
scarcity.13 As water becomes more scarce, water tariffs where subsidence is an issue. Currently there is little
and other pricing mechanisms tend to increase, due to technical expertise to gauge water scarcity risks (although
greater competition for water between sectors, higher work on weather derivatives is improving) and inherently
water search costs, the need to drill deeper boreholes, conservative insurance companies tend to price inflated
higher pumping costs and the need to recoup the cost estimates of this risk into premiums.14
of expensive water transport schemes.

Water scarcity also adds to energy costs. For example,

cold water is essential for the cooling of coal-fired and
inland nuclear power plants, and water shortages
leading to higher water prices increase the cost of power
generation from these plants. Switzerland is forecast to
experience a 25% decrease in nuclear power generation
by 2020 due to declining water supplies from glaciers
(OcCC, 2007). This problem became acutely clear in Italy
in May 2007, when power plants in the Po Basin were
forced into outages due to a lack of water. Ongoing water
shortages in Australia, caused by below average rainfall
with excessive water use could disrupt power supplies
from the Snowy Hydro plant responsible for 3.5% of
Australia’s grid energy. Shortages would raise energy
costs and threaten almost half of the energy supplied to
Canberra (Bloomberg Messaging, 10 March 2007).

13 No water scarce countries charge the scarcity value (what economist call the opportunity cost) of water but, in line with the “Dublin Principles”, there is an increasing
tendency to see water as an economic good, to recoup some costs of infrastructure in water charges and to encourage greater efficiency by raising water-use charges or
imposing fines for over-abstraction. This is particularly the case when a water resource or the water supply is privatised which is itself often the result of increasing scarcity.
14 There is some evidence of newer insurance companies taking seeking to profit by taking on greater levels of risk than their traditional rivals (Hultman pers. comm.).

29
 © CHINA PHOTOS / GETTY IMAGES
The Yangtze river has become one of the most polluted rivers in the world, impacting economic growth and increasing numerous
risks to both government and business operations along its banks.

Assessing water scarcity risks

“Global consumption of water will reach new heights. property claims resulting from contaminated or
The quality of water is deteriorating as a result of the inadequate water supplies; business interruption claims
increasing pollution of drinking water reserves by resulting from interruptions in the water supply; product
agriculture, industry, and private households. The liability risks in the food and drinks industry; morbidity/
regionally specific problems concerning the availability mortality resulting from water scarcity and pollution;
and quality of water will be aggravated and accelerated credit risks; agricultural risks; and specific problems
by the effects of climate change, with many areas in mega-cities. The results of this study show that in
experiencing increased drought and flood events. these various areas of insurance we must, in some
We [Munich Re] have examined in depth the extent to cases, expect substantial effects on the risks and their
which Munich Re can be prepared to cope with future accessibility and elevated loss potentials (e.g. credit
developments [arising from water scarcity] and the areas risks, terrorism risks). In this connection, the high-risk
in which we should adapt our insurance products. The potentials in mega-cities are likely to rise even further on
examination concentrated on the effects on various account of the increase concentration in values and the
areas of insurance, e.g. public liability and environmental fragile infrastructure of modern societies”.
liability claims resulting from increasing water pollution; Source: Munich Re (2005)

30
PART C:

Regulatory risk

Most businesses thrive in a stable regulatory regime, and cases, business engagement is shifting to cooperative
change, particularly when unpredictable, can be a serious advocacy for regulation of water allocation and licensing
problem. Regulatory risks arise when a change in law or from water resources and for regulation of water supply,
regulation increases the costs of operating a business, sanitation access, and pricing in urban settings (WWF,
reduces the attractiveness of investment and/or changes 2009). Regulatory risks also arise when those charged
the competitive landscape. Change to the regulatory with water management are incompetent in their job or
regime around water can be one such risk. where that particular water sector is open to corruption.
In both cases, the lack of transparency and consistency
With increased recognition that water and environmental
provides little room for stable laws, and raises the level of
resources are threatened, many companies accept
uncertainty to the long-term viability of business activities
the need for reasonable regulation, as long as it is
and as a disincentive to invest for the future.
coherent, predictable and consistently applied. In some

© UNEP

Untreated effluent flows from the Assalaya sugar factory to the White Nile exposes supply chains to significant risks.

31
 PART C:

Reputational risk

Reputational risk with regard to water scarcity refers to the incidents can translate into serious global brand damage
exposure of companies to censure and a resulting loss of as a result of press attention (exacerbated by the speed
customers due to perceptions around those companies’ of internet communication). PricewaterhouseCoopers
decisions, actions or impacts on water resources, aquatic now advises its clients to take into account environmental
ecosystems and the communities that depend upon them risk as a ‘portfolio issue in the light of public and media
(WWF, 2009). Reputation is one of the most important vigilance’; i.e. when making investment decisions, fund
corporate assets, and also one of the most difficult to managers should consider their exposure to sectors and
protect. Reputational risk is harder to manage than other companies perceived to be at a high risk of losing market
types of risk, largely because of a lack of established tools share due to an exposé or litigation (WWF, 2008). This
and techniques, and confusion about who is responsible challenges companies’ abilities to monitor and influence
for it . their supply chains. The increasing trend for companies
to assess and report their water footprints is helping can
The manner in which companies exploit natural resources
help companies to assess their risks and impacts
continues to be the subject of public scrutiny (Friends
in water-scarce regions. By working with stakeholders
of the Earth, 2005). Where this scrutiny translates into
taking steps to mitigate those risks and impacts,
public ‘outrage’, companies face dramatically amplified
companies may be able to limit reputational risk. If a
risks, especially when they are judged to be profligate
company is able to demonstrate that it has helped to
or irresponsible (JP Morgan, 2008). This risk would
improve water management in a place where it has a
also hold true for the insurers and investors in such
significant water footprint, this could conceivably even
enterprises. Where such crises unfold, there is a tendency
enhance its reputation.
for governments and the media to apportion blame,
sometimes fairly and sometimes opportunistically.
High profile, multinational companies are easy targets
for such blame regardless of their relative contribution
to the problem.

The likelihood of a water usage issue damaging a

company’s reputation is greater where that company uses
water from a catchment that is in danger of drought or
ecological collapse. For example, public perception of the
amount of water used by Coca-Cola in some countries,
the impact of Kenya’s cut-flower industry on local water
resources, and the impact of the Spanish strawberry
industry on that country’s hydrology, have taken on
the dimensions of public campaigns. Seemingly local
32
Part D:
Shared Risk

33
 PART D:

Shared risk

• Individuals, governments and businesses often share water scarcity risks even if they
conceptualise them differently. A common denominator is that out-of-date public policy and
weak water management institutions increase risk for everyone.
• T
 here are common principles for effective management and mitigation of water scarcity risks:
a focus on long-term sustainability; prioritisation of water allocation for those least able to cope
from scarcity; flexibility of response in the light of changing hydrological reality; and the need for
better public policy, stronger institutions and broad stakeholder engagement.

Demands for water from individuals and businesses, and In an ideal situation, water scarcity risks would be avoided
their respective risks from water scarcity, often overlap. by hydrologically-appropriate economic development
Individuals who are most vulnerable to water scarcity and hydrologically rational trade (including the trade of
are often vulnerable to other risks as well, including virtual water). Unsurprisingly, however, the move towards
conflict, climate change, economic downturns and land a less water-intensive economy is normally left until water
expropriation. When their vulnerability is exposed they is already scarce. Risk can become amplified by short-
may engage in short-term strategies that exacerbate term or self-interested responses to water scarcity. Adger
risks unless a strong water governance regime makes et al (2005) point out that the question of “who decides”
sustainable alternatives possible. Most businesses how to respond is critical, with a need for co-ordinated
depend, to a greater or lesser degree, on water either responses led by national governments and supported by
through direct use or through supply chains. Thus companies, environment agencies, provincial and local
business at risk may include retailers, food and beverage governments, and end users, in order to avoid the risks of
companies, agro-industry, energy companies and water scarcity being transferred onto those communities
mining operations. Those with vested interests in such and individuals who are politically marginalized and least
businesses, such as investors and insurers, may also feel equipped to cope with them.
the consequences of water scarcity. The business risks
Public and private sector mandates may diverge over
to water are complex and often have less to do with how
water, with the former focusing on a broad set of social,
much a company uses directly and more to do with how
economic and ecological priorities and the latter focusing
water is managed where they source or operate. Like
on a profit imperative and a company’s long-term
individuals, businesses are therefore mostly exposed to
economic value. But it is important to recognise a number
water risks as a result of poor public policy and faltering
of commonalities in their respective exposure to water-
water governance.
related risk15:
Government risks have traditionally been seen as relating
• The risks to both government and business from
to the failure to deliver water to citizens or to secure water
water scarcity start from the physical, namely
for agricultural and industrial purposes. Governments may
pressure on water resources (quantity and quality)
also be susceptible to the risk of conflict over water, either
and / or the failure of supply systems.
between users within a country, or between countries.
There is therefore a shared risk agenda between • Inadequate availability of or access to water for social
government and business, particularly when business and ecological purposes can result in political (and
operations and supply chains exist in places where the possibly electoral) opposition, which has its parallels in
‘rules of the game’ around water use and cost are subject the reputational risk to which corporates are exposed.
to abrupt change.

15 WWF.2009. Investigating Shared Risk in Water: Corporate Engagement with the Public Policy Progress. WWF-UK, Godalming, UK.

34
• Water stress and supply failures are normally linked
to inadequate public sector management capacity,
which can contribute to incoherent, unpredictable
and inconsistent water policy, which in turn creates
regulatory risk for businesses.

• Poor water management by the public sector may,

by increasing the risk of water scarcity, constrain
economic growth, which is directly related to financial
risks to business.

Water scarcity risks are subjective vary from time to time

and from place to place. Thus there can be no single
response to risk management. However, there are four
key principles that apply to all interests and should be
used to shape effective management and mitigation of
water scarcity risks:

• Interventions that reduce long-term scarcity and risk

(such as protecting environmental flows for rivers)
should be encouraged.

• Water allocations that prioritise water for those people

and ecosystems that are least equipped to cope with
water scarcity will reduce aggregate risk.

• Flexibility to change, including the ability to use water

more productively, can reduce the risk generated by
the physical phenomenon of water scarcity and the
uncertainty caused by climate change.

• Progressive public policy, strong water management

institutions and active involvement of a broad range
of stakeholders is key to optimising allocation and
reducing shared risk.

35
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39
 WWF’s Freshwater Programme in numbers
100%

•
UNDERSTANDING WATER RISKS
RECYCLED

10
WWF is one of 10
organisations which has
established the Alliance
for Water Stewardship to

35%
establish an international
certification programme for
water managers and users
the Freshwater Living
Planet Index (a global
measure of more
than 700 vertebrate
animals) declined by
35% between 1970
and 2007

FRONT cover image: © Wild Wonders of Europe /Juan Carlos Munoz / WWF, back cover image: © Brent Stirton / Getty Images
100 million
12 WWF has helped
establish over 100
million hectares of
our global freshwater freshwater protected
priorities are the rivers and areas in the last 10
lakes in 12 critical places years
Why we are here
across 5 continents
RL To stop the degradation of the planet’s natural environment and
wwf.org.uk/freshwater

to build a future in which humans live in harmony and nature.

WORKING TOGETHER
TO HELP PROTECT THE
WORLD’S FRESHWATER
Why we are here RESOURCES

To stop the degradation of the planet’s natural environment and

gular to build a future in which humans live in harmony with nature. The HSBC Climate Partnership is a 5 year global partnership between HSBC,
The Climate Group, Earthwatch Institute, The Smithsonian Tropical Research
wwf.org.uk
Institute and WWF to reduce the impacts of climate change for people,
forests, water and cities. For more information visit hsbc.com/climatepartnership

WWF-UK, registered charity number 1081247 and registered in Scotland number SC039593. A company
limited by guarantee number 4016725 © 1986 panda symbol and ® “WWF” Registered Trademark of
WWF-World Wide Fund For Nature (formerly World Wildlife Fund), WWF-UK Panda House, WeysidePark,
Godalming, Surrey GU7 1XR, t: +44 (0)1483 426333, e: [email protected], wwf.org.uk