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Why Water Access Should Be Part of Your Risk Metrics

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In the current tally of key risks and mitigants it’s easy to feel that the risk side of the equation is having a banner era; with business leaders being forced to manage through challenges that previous generations could have never anticipated or experienced. Climate change, populism, pandemics, high inflation, interest rate risk, economic migration, and the list goes on. Yet there is another risk that many businesses have not incorporated into their five- and 10-year strategies, and that is water risk.

While it may not appear that North America has a water shortage, a recent report by the BMO Climate Institute notes, “Holding more than 20% of the world’s freshwater reserves, North America boasts rich and diverse freshwater resources, but it is also home to some of the highest per-capita water consumption globally.”

Predictability of certain events is a key element for making informed business decisions, but there’s nothing predictable about water access. Whether it’s drought conditions causing water scarcity or increased flooding inundating regions with unusable water, access to water is more imbalanced and unreliable than ever. It’s safe to say that in the next five to 10 years, your access to water will have changed compared to what it is today.

The importance of water access is obvious for some industries, such as agriculture and food and beverage. But they’re hardly the only ones. Semiconductor manufacturing, for example, is heavily dependent on access to clean water. The recent microchip shortage was due in part to a drought in Taiwan, the global impacts of which are still being felt.

“Climate change means that access to water is no longer predictable or reliable,” says Nelson Switzer, managing partner at Climate Innovation Capital, a growth equity fund focused on climate tech startups. “The cost and availability of water are having material impacts on the ability of businesses to process, procure and produce.”

Whether you’re considering regional expansion or concerned about the viability of a business model altogether, access to water should be a part of your company’s key risk metrics.

Assessing and Adjusting Your Usage and Risks

As we are seeing with ESG-related issues more broadly, for any investment horizon of more than a few years, water access will have implications on longer-term business viability. That’s why you’ll need to consider how your ability to source and access water could change in that timeframe.

Undertaking a strategic pivot starts with understanding your current water usage patterns and how that relates to the long-term water usage prognosis within your operating region. The French wine industry, for example, has had to adapt to the impact that hotter summers have had on grape production. Within 10 years, production from the Bordeaux region may not be suitable to the types of grapes they currently grow.

That’s why French winemakers are experimenting with different grape varietals that can adapt to the new conditions. It’s also why we’re seeing more winemakers expand into other Northern European countries, as well as Eastern Europe, South America and even Canada—places previously considered too cold for fine wine production—where they’ll be able to grow grape varieties that will enable them to succeed over the long term.

Another example is almond milk manufacturing. Almond trees take several years to become cash flow positive. But most North American almond production takes place in areas of California where farmers increasingly have to fallow the land—leaving it uncultivated for at least one season to allow the land to become more fertile again—because they don't have enough water to make the crops pay out.

In this case, it’s a matter of determining where you can plant almond trees that can have a useful life over the next 25 years. The solution could include considering innovations in irrigation, or it could involve adjusting your five-year plan to acquire land in a region with better access to water.

But as the availability of water is changing across North America, some tactical adjustments come with other risks. Water is crucial for the industrial and manufacturing hubs in northern Mexico, for example, but that region is currently suffering from a severe drought.

North American maps comparing drought conditions under moderate and high warming today and in 2050

Read the full analysis from the BMO Climate Institute

You could move your operations to the more water-rich southern regions of Mexico, but that could lead to other implications. For example, would you have the supply chain infrastructure in place to handle your needs, including labor and the extra distance between your operations and your customers? That’s a question beer companies in northern Mexico are currently facing. Also, would the additional industrial demand lead to shortages down the road?

Even as we look at ways to get smarter about our own investments, vertical farming represents a significant opportunity do address many of these issues, especially in the production of leafy greens in Canada.  The work being done by companies like Vision Greens in Southern Ontario demonstrates how this process can address the seasonal availability while limiting the need to ship truckloads of lettuce from California that require a significant amount of water from the Colorado river.

Capitalizing on Your Conservation Efforts 

Ultimately, business owners and investors can begin to address water access by focusing on three key areas:

1. Water access should be a primary risk metric, whether you're buying, expanding or investing in a company.  

2. You should understand your current reliance on water access and how that reliance will affect your future operations and profitability. 

3. The time is now to determine whether you need to adjust your strategy to prepare for a potentially changing environment.

After in-depth conversations with many industry experts, including the water consultants at WaterSmart Solutions in Alberta and Water Foundry, we felt the time was now to raise these important issues with our peers.

As a business leader, it’s more important than ever to be aware of your access to water as part of your long-term plan, as well as how you position your business to potential investors. As an investor, you’ll need that information to evaluate potential opportunities. Because in the end, you can't assume that the access you have today will still be there in a few years. 

“There’s not a lot we can do without water, but there’s plenty we can do with less water,” says David Henderson, Managing Partner, XPV Water Partners, a Toronto-based water investment fund. “The technology companies in our portfolio are innovators whose solutions focus on improving operational efficiencies so that end users can increasingly do more with less, meet emissions targets, and improve the quality of the water that industry returns to sustain limited freshwater supplies. A water-secure future depends on thinking differently about how we manage the water we have.”

Your workforce can be a valuable resource for tackling this issue. This is a subject that greatly concerns Generation Z, a demographic that is expected to account for 30% of the workforce by 2030. In fact, it was one of our summer interns who helped us understand the full breadth and complexity of the issue.

The risks to water access will continue to be a challenge. While the downside implications can be severe, proper planning and foresight can help you mitigate those risks.

“Access to clean and fresh water suitable for sanitation and hygiene is a fundamental human right,” Switzer says. “All people and businesses seem to agree on that. However, we must also ensure that businesses can access the quality and quantity of water they require to operate in order to ensure a stable and prosperous economy and society.”

Read more
Alex Baniczky Head, BMO Capital Partners


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