Water scarcity: The next major business risk you can’t ignore

This summer, the UK has unintentionally become a case study for the danger of overlooking the critical need to recognize – and manage – water as an essential business asset. After six consecutive months of below-average rainfall, rivers in the UK are flowing at record lows. Recent months have seen local water companies impose usage bans as they strive to conserve sinking water levels. And water shortages are sending ripples of disruption across sectors, as businesses from agriculture and tourism to energy and mining are waking up to the fact that water is an essential asset, and drought is a profound risk.

As water scarcity becomes an urgent reality, it demands a sharper, more strategic response from today’s risk managers and C-suite leaders. Where water scarcity is relevant for a particular business, it should move from a line item on sustainability reports to an active consideration in risk models, board-level decision-making and governance frameworks alongside other key considerations. Zurich Resilience Solutions specialist risk engineers Nicolien van Zwieten and James Harvey shed light on the changing risk landscape, and how businesses could plan for resilience in a water-scarce world.

A critical blind spot for businesses

Before businesses can manage a risk, they must first recognize it. “Drought isn’t given the attention it requires,” says Harvey, noting the public concern for sudden-onset hazards like floods, which have a more immediately visible impact on residences and businesses. “But when you look at the environmental and social impacts of drought, they’re pretty significant, and economically, they’re massive as well,” he explains. Indeed, businesses across sectors have critical points in production and operation that are exceptionally vulnerable to water shortages and can grind operations to a halt in a drought.

As one of the most water-intensive sectors, agriculture is the most directly hit across operations. Water shortages derail planting schedules, shrink crop yields, and threaten livestock welfare. In energy, especially renewables, hydropower relies on a steady water supply, and interruptions to supply not only affect day-to-day operations, but overarching sustainable energy goals. It also puts these companies’ revenue lines at risk. Manufacturers in industries like automotives face halted production and expensive delays, as high water demand leaves them especially vulnerable. Some estimate that producing a single car guzzles around 39,000 gallons of water. Mining operations, heavily dependent on water for processing, find themselves similarly backed into corners when water levels run low. Not even the food and beverage sector is spared. Just in the UK, a pub or restaurant uses an average of 4,000 liters of water every day. A water shortage threatens operations, with sanitation, product quality, and supply chain stability all at risk.

Both van Zwieten and Harvey note a lower level of preparedness among certain UK businesses, especially those located in regions not historically affected by drought. Van Zwieten highlights the contrast between the UK and other countries with more experience of drought, stating, “From a global point of view, other countries – especially Spain and South Africa – tend to have contingency measures in place to manage the impact of drought, such as additional water storage. That's not as common in the UK,” she observes, citing an institutional reluctance to use limited space and a wariness of waterborne diseases. But these gaps in risk management become hot spots for failure when primary water supplies dwindle.

Compounding the challenge is a lack of crucial internal knowledge. For example, businesses may track their annual water usage but have little visibility into which processes are most water intensive. Missing this layer of insight can lead to overlooked dependencies and underestimated exposure, creating a critical business risk.

The critical role of insurers in adaptation strategies

So what can businesses do? Harvey proposes a four-stage approach: assessing, measuring, reducing and diversifying:

1. Assessing: To protect business processes, managers should first gain a clear understanding of their unique vulnerabilities. To that end, businesses should start with a focused risk assessment to identify which business assets are most exposed to water-related threats, paying particular attention to differences between sites and their unique circumstances.
2. Measuring: After pinpointing the highest-risk locations, managers need to thoroughly measure water usage – both annually and monthly – and determine exactly where and how water is being consumed within each asset or process. Understanding these usage patterns enables more strategic targeting of improvements.
3. Reducing: Next, reducing overall water consumption through repairs, process upgrades, new technologies, and best practices creates direct cost savings.
4. Diversifying: Finally, it’s crucial to diversify water supply sources rather than relying solely on mains water; this might include arrangements with third-party providers, groundwater options, or other contingency plans to protect against supply interruptions.

By tackling these steps – assessment, measurement, reduction and diversification – risk managers can safeguard core operations and reinforce resilience against the rising threat of water scarcity.

Most important, van Zwieten and Harvey agree, is taking the matter of water scarcity seriously. “Failure to address water can lead to higher borrowing costs, reduced investor confidence and greater vulnerability to operational disruptions,” explains van Zwieten. “Companies that do proactively plan for water stress can help to attract long term investment and provide a competitive advantage.”

The road to a water-secure future

Preparing for a water-stressed world is not merely good practice; it’s essential foresight. On its current trajectory, England is expected to face a daily water shortfall of 5 billion liters by 2055, making the risks both urgent and systemic. Research also suggests that water scarcity could cost the UK GBP 25 billion over the next five years, a dizzying number that underscores how water scarcity can send shockwaves through the business landscape, affecting everything from business productivity to social stability. The picture is no better globally. Estimates suggest that half of the world’s population could be living in areas facing water scarcity by as early as 2025, and around 700 million people could be displaced by intense water scarcity by as early as 2030. As Van Zwieten notes, the effects of water shortages will reach individuals and businesses alike, and can result in direct social consequences, damage to ecosystems, significant disruptions in production and reduced profits.

Now is the time for affected businesses and policymakers to move from awareness to action, implementing water risk assessments and investing in sustainable water management practices that build true resilience. Acting at this critical juncture not only safeguards critical assets and protects revenue; it also sets the stage for more secure and sustainable growth in an increasingly water-constrained world.