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September 12, 2007

Businesses and Water Shortages: A Drought of Risk Management
    by Anne Moore Odell

The Marsh Center for Risk Insights' new survey reports that although most businesses are aware of the risks of water shortages, most businesses don't have a risk management plan in place. -- "It's raining it's pouring, the old man is snoring . . . " goes the old nursery rhyme. However, the "old man" in this case is the business community that is asleep over the consequences of not considering long-term water issues. A report from the newly launched Marsh Center for Risk Insights states that less than 20% of Fortune 1000 companies surveyed are prepared for a water shortage crisis.

SRI Mutual Funds GuideThe Marsh Center for Risk Insights was created by Marsh Inc., a large US insurance broker and risk advisor with 395 offices in 85 countries. The Marsh Center was developed as a think tank to analyze important global business risks. Their new survey polled senior officials from over 100 Fortune 1000 companies. Public Opinion Strategies, headquartered in Alexandria, VA, conducted the telephone survey.

The founding advisors for the Marsh Center are heavily politically conservative, but with profound experiences in a number of different governmental, academic and business backgrounds. They include Dean Alexander, Philip Armstrong, Carol Browner, Dr. Sheikh Faisal F.J. Althani, Dr. Rohan Gunaratna, Dr. Howard Kunreuther, Harvey Pitt, and Andrew Winston.

Water shortage was singled as one of the most looming threats for companies in the near future. Forty percent of those surveyed believed that a water shortage would be severe or catastrophic for their business operations. Companies across industrial sectors could be affected by water shortage issues directly and indirectly through their supply chains, with even non-water intensive companies realizing higher costs as suppliers deliver higher costs. The Marsh Center reports that water-related costs are rising with manufacturers paying to treat both source water and wastewater.

"Climate change will most likely exacerbate this trend, so that intense, longer droughts like those we've experienced in the American West and in southern Europe will become more common," said Neal McGarity, Senior Vice President Corporate Communications for Marsh. "Meanwhile, the global demand for water is increasing. The point is that companies need to plan now for the impact of water shortages on their business operations."

Although nearly half of businesses surveyed replied that water was important for daily operations, only 6% responded that in the next five to ten years there would be significantly less access to water. This belief that the water will be available for companies in the short term is not necessarily based on risk management analysis.

In August, the World Business Council for Sustainable Development (WBCSD) held a "World Water Week" conference in Stockholm, Sweden. Some of the conclusions from the meetings are that businesses need to include shareholders, local residents, governments, and other stakeholders in discussions about water. Furthermore, businesses need to seriously study their assumptions around water usage. WBCSD also points out the need for more accurate and complete water data to enable companies to better focus their water management efforts.

"For most companies, water does not appear on the bottom line yet. But for many it may be the biggest risk in the future," said Jürg Gerber, Chief Operating Officer for WBCSD. "Water has always been seen as 'free from nature' and has not been given its correct value. Water is also a very complex issue, meaning what seems to be a simple value, like water use at a site, is actually not so straightforward," he added.

WBCSD has recently launched the Global Water Tool to help companies map out their water use and assess their risks globally. WBCSD also hopes that it encourages more companies to put water risk management in place. WBCSD suggests businesses need to put plans into place now to mitigate the risk of water shortages. Such plans include increasing efficiency, working with communities and potential global markets, and understanding life cycle of water used in their products and services.

The Marsh Center survey also asked companies about seven other potential risk situations besides water shortage, including natural disasters, terrorist attacks, oil price spikes, global climate change, housing market collapse, risks associated with nanotechnology, and pandemics. Although the Marsh Center results state there are a "growing number of threats" to businesses, 44% of those surveyed said that one of the major reasons they weren't prepared for a crisis is because the risks didn't seem relevant to their businesses.

"The fact that a large segment of senior executives felt in June (when the survey was conducted) that the housing market did not pose a significant risk--but, as we know from today's headlines here in September, the risks associated with the housing market is now causing great concern globally--especially the subprime aspect of mortgage lending," McGarity told

The Marsh Center disagrees with this short-term view of business operations. Dr. Howard Kunreuther, Marsh Center founding advisor and Co-director of the Risk Management and Decision Processes Center at the Wharton School, said, "A number of business leaders today are taking a short term view of risk and operating under the false assumption that even though these risks are on the horizon, they don't need to act on them promptly. While these decisions may not affect them in their term of office, it could have dire effects on their successors and those connected to their companies years later."

Given the nature of the risks related to water, astute investors and analysts will need to be careful readers of corporate reports to understand if and how companies consider risk preparations, the Marsh Center notes.

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