The Importance of Addressing Water Risks
By Monika Henn, Senior Sustainability Manager, AXA XL
AXA XL, a division of AXA and a prominent player in the commercial insurance and reinsurance sector, joined this year’s World Biodiversity Summit 2023, as Summit Partner. AXA XL is dedicated to addressing intricate risk challenges, and Monika Henn, Senior Sustainability Manager at AXA XL, shared her valuable insights, during the 'Bridging Land and Sea - Water Stewardship's Role in Enhancing Ecological and Economic Prosperity' session at the Summit.
In this article, Monika Henn outlines the importance for companies and societies to understand water-related risks in their efforts to adapt to climate change.
Understanding water-related risks is key to helping businesses and societies to adapt to climate change, but too often these risks are not understood and are under-valued. Creating a water-secure world requires water resources to be protected and properly managed. At AXA XL, we know that sustainability is at the root of a more resilient future, which is why our sustainability strategy includes a focus on valuing and restoring nature and biodiversity across ecosystems.
Monika Henn, Senior Sustainability Manager, AXA XL
CDP, a not-for-profit charity that helps companies and authorities monitor their environmental impact, estimates that the cost to businesses of inaction on water risks is five times higher than the cost of action. But currently too few companies are incorporating water-related issues into their financial and operational planning.
As part of AXA XL’s Valuing Water initiative, we have been working with clients to understand the risks posed by too little, too much, or poor-quality water. In 2023, we published the Water Risk Insights report to help improve understanding of water risk, encourage actions to improve water security, and highlight tools for businesses to start the journey of understanding and addressing their own water risks.
Risks by Industry
As part of our Valuing Water initiative, we have worked in depth with clients and stakeholders to develop an understanding of the risks faced by different business sectors. There are several sectors for which the challenges around water risk are acute, and the lessons learned from working with clients in these sectors, from understanding their risks and developing solutions, can serve a wider purpose in helping companies across all industries better assess, evaluate and manage their own water risks.
In our Water Risk Insights report, we looked at the risks faced by seven sectors that have particular exposure to water risk, namely: food, beverage and agriculture; apparel and textiles; utilities; manufacturing; technology and electronic equipment; healthcare and pharmaceuticals; and transport and logistics. While some of the challenges these sectors face are universal, others are more specific and illustrate the breadth and magnitude of risks posed to businesses by water scarcity, extreme weather events like flooding and the need for clean water, among other things. Water risks by industry sector include:
Food, beverage, and agriculture: This sector consumes about 70% of the world’s freshwater and is, consequently, extremely sensitive to water stress. Many companies in this sector are leaders in water stewardship – some, for example, are aiming for 100% water reuse. But there are still areas of risk that companies need to address, notably vulnerabilities across the agricultural supply chain.
Apparel and textiles: This industry also relies heavily on water for production and is, therefore, vulnerable to scarcity. But it also has the potential to be a major polluter of water supply, right through from the agricultural processes from which it derives raw materials, to the accidental release of chemicals during the dyeing process, to the release of microfibres and microplastics during the wearing, washing and disposal of clothing.
Notable reputational risks for both the food, beverage, and agricultural sectors and the apparel and textiles sectors are negative media coverage and public scrutiny, as well as damage to the brand. Companies are increasingly being held to account for poor water stewardship practices by the public and the media and those seen as having poor water-related policies and practices are likely to suffer a hit to their reputation.
Utilities: This sector, including water, electricity, gas and waste management services, faces challenges caused by a growing global population and increasing urbanisation, and the stress that these factors put on infrastructure. The price of water is also a challenge for this sector. Solutions such as desalination, smart metering and leak detection can be powerful here to help utilities keep on top of water-risk-related costs.
Manufacturing: This sector accounts for about 16% of global water demand as water is used in many processes and systems. Manufacturing facilities are often in water-stressed areas, and the sector is also vulnerable to flood risk, presenting various risk challenges. Disruption in this sector can also create knock-on effects on other sectors that rely on manufactured materials.
Technology and electronic equipment: This sector also relies heavily on water in its processes. Items like the semiconductor chips in phones and computers, for example, require billions of liters of ultra-pure water to avoid contamination. The sector is vulnerable to the risks posed by drought; this is a particular issue in Taiwan, one of the industry’s most prominent markets, where regulatory restrictions on water usage are in place. This sector also has to consider pollution risks as its waste products can be highly toxic should they escape.
Pharmaceuticals and healthcare products: Water is critical to manufacturing in this sector, which is also vulnerable both to water scarcity and flood risk. The sector is acutely aware of these risk factors, and some 83% of pharmaceutical companies report that they carry out regular water-risk assessments.
Transport and logistics: This sector too is at risk from extreme weather events like flooding, storm surge and drought, and the pressure that these events put on infrastructure and maintenance costs.
Working towards solutions
While some of the water risks faced by businesses are universal, others are industry or location-specific, but all sectors and companies of all sizes can learn from others about how risks affect them and how they might be mitigated. We believe that engagement with water stewardship is vital. This might be a dedicated business function, or fall across other teams like risk management, sustainability or finance, but companies need to take an active role in understanding, valuing and beginning to mitigate these risks.
To effectively understand and manage the risks associated with water, businesses need first to have ways to begin to evaluate and quantify them. Water foot printing and accounting can help companies see their water consumption – whether that is hidden or indirect.
- Monika Henn, Senior Sustainability Manager, AXA XL
It can illustrate a company’s reliance on blue water, sourced from surface and groundwater, grey water that is diluted with domestic or industrial waste, and green water, rainfall stored in soil.
When companies can evaluate the full cost of water - that is the true costs of consumption, abstraction, treatment and supply – they can not only better model those costs but develop a business case for investment in water-saving strategies and technologies.
Shareholders and stakeholders are increasingly likely to examine the water-risk-based targets set by companies. These targets enable companies to monitor and benchmark their performance and additionally it also enables them – when those targets are scientifically based and well communicated – to have strategies in place to manage reputational risks around water.
Future scenario analysis, taking into account factors like water scarcity, costs and potential regulation, can help companies derive a deeper understanding of how water risks might affect them in the future, depending on various developments and outcomes. This can help in planning and investment decisions too.
Water risks affect all businesses, across all sectors and geographies, whether large or small. The degree to which these risks will manifest in companies’ day-to-day operations will vary, but all companies have an interest and imperative to better understand these risks and prepare for them in the future. Learning from the experiences of others will be invaluable. We hope our Valuing Water initiative will open this dialogue and help us all to better appreciate, understand and manage this important risk area – now and in the future.
We’re proud to partner with the World Biodiversity Summit to raise awareness of water as an important nature-related risk. Valuing nature is one of three focus areas in our Roots of Resilience strategy, to find out more about our strategy goals, please visit: Sustainability at AXA XL.
About AXA XL
AXA XL offers insurance and risk management solutions catering to a broad spectrum of clients, ranging from mid-sized enterprises to large multinational corporations. Additionally, AXA XL Insurance provide reinsurance solutions to insurance companies worldwide. Their comprehensive range of offerings includes property, casualty, professional, financial lines, and specialty insurance solutions, all of which are available to businesses on a global scale. AXA XL & AXA XL Insurance proudly collaborate with those who drive progress and innovation forward.
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About the Author
Monika Henn is a Senior Sustainability Manager at AXA XL, where she leads environmental sustainability initiatives, including the organization’s carbon reduction strategy as well as nature and biodiversity initiatives. Prior to AXA XL, Monika spent over 8 years at the Urban Land Institute’s Greenprint Center for Building Performance, leading research on topics at the intersection of real estate and sustainability, including renewable energy, embodied carbon, and climate policy. She also has extensive experience in ESG data collection and reporting. Monika is a LEED Green Associate and Fitwel Ambassador. She holds a B.S. in Biology from The University of Virginia and an M.S. in Aquatic Resources from Texas State University.