Water security: Accounting for water

Economic growth is a thirsty business.

Water is essential to grow food, build businesses and boost GDP. However, questions are being asked about how best to account for this increasingly scarce resource.

Each year, more than 4 trillion cubic litres of water are extracted from the planet’s water basins. Of that, 70 per cent goes to agriculture, 19 per cent to industry and 11 per cent to households.

Water security has become a serious concern for about two-thirds of businesses across the globe, either directly or in their value chains.

In a 2022 consultation paper, the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) Foundation lays bare some of the reasons why.

“Freshwater consumption worldwide has risen exponentially in recent decades. Declining water quality is also an acute problem around the world due to agricultural run-off, industrial wastewater, improper disposal of human waste, and many other issues.

“Meanwhile, climate change is affecting the hydrologic cycle, leading to more frequent extreme weather events, such as droughts and floods. In water-stressed regions, increasing competition for resources between businesses and their local communities can exacerbate risk exposures.”

For all its critical importance, there is no shared definition of what “water security” actually means, says Will Fargher, director of water consultancy Aither.

“We’re not just talking about having sufficient quantities of water – but about its quality, affordability and access,” he says. Because the concept of water security is “ill-defined and poorly understood”, the job of decision-making, planning and investment around water is made more challenging.

Fargher believes that improved accounting is fundamental to the stewardship of water resources.

“By accurately measuring and valuing water use for different purposes, we can help ensure water is allocated and used efficiently, equitably and sustainably,” says Fargher.

“The question is, how do we balance these competing demands and trade-offs? How do we reach rational decisions that appreciate the value of water in its different uses and for different users? And then how do we use this knowledge to improve water management by governments and business?”

In 2004 in Australia, the National Water Initiative (NWI) established a blueprint for national water accounting standardisation reform. Its purpose was to ensure all jurisdictions had adequate measuring, monitoring and reporting systems in place.

It also aimed to support public and investor confidence in the amount of water being extracted, recovered, traded and managed.

One outcome of the NWI was the development of Australian Water Accounting Standards (AWAS). The AWAS guide the preparation of water accounting reports and set out the requirements for the recognition, quantification, presentation and disclosure of water usage.

Professor Jayne Godfrey FCPA, from the Australian National University’s College of Business and Economics, says the AWAS cover not just water rights and entitlements, but water quality as well.

“It's information you need to improve stakeholders’ confidence in evaluating and making informed decisions about how to allocate and manage water resources,” she explains.

The AWAS aim to provide a global baseline of sustainability disclosures, enabling companies to better assess and manage related financial risks.

Australia's blue economy

Demand management strategies are a factor in the growing monetisation of water. Brokers and hedge funds have taken a firm footing in Australia’s “blue economy”, which has an estimated market value of A$68 billion, according to CSIRO.

The market is backed by federal and state governments. They argue that the water market allows farmers the flexibility to decide what crops to grow and provides risk management against climate change.

This means state water authorities can take water hundreds of kilometres away, to be extracted by the purchaser at the point where, in theory, it is needed most.

Water markets are controversial, however. Many are questioning whether a critical resource like water should be bought and sold like any other agricultural commodity.

 

"We continue to focus on the cost of action, when the cost of inaction is far greater. We have to overcome this bias, because as we continue to experience the effects of climate change and water insecurity, ‘down the track’ seems increasingly close."

 

Maryanne Slattery, director with water consultancy Slattery & Johnson and former director of the Murray-Darling Basin Authority, questions the very principle underlying the water market.

“Water does not move to its highest value use for the community, the economy or even the country,” she says. “It moves to whomever is prepared to pay the most.

“If a dairy farmer or rice grower, for example, cannot make the same dollars per megalitre as an almond or cotton grower, they are condemned as less efficient, of less value. ‘Highest value use’ is therefore better described as ‘greatest ability to pay’,” says Slattery.

Moving water around is like “robbing Peter to pay Paul” – someone, somewhere is always going to lose out, says Patrick Viljoen CPA, senior manager – ESG with CPA Australia.

“If water is concentrated in a particular jurisdiction or country, it becomes an asset for them. But it also lends itself to price gouging, hoarding or, at the most extreme, water wars, where countries could go to war because of famine,” Viljoen says.

Water scarcity poses challenges not just for global stability, but also for agriculture and industry, particularly where water is critical to the production process.

The potential for water shortages must be factored into the accounting assumptions used by organisations, says Viljoen.

“A lot of money has been invested in establishing their infrastructure. They can’t simply shut up a factory and move elsewhere. In a drought, it can mean trucking or pumping water in, raising the overall cost of production, which is usually passed onto consumers.”

Water shortages can also affect where a business sources its workforce.

“If you have operations in areas exposed to drought, the livelihoods of people in those regions are impacted. You can reach a situation where certain places become depopulated because there is no available water,” says Viljoen.

Businesses in large metropolitan areas, accustomed to having water available around the clock, are often under-prepared for water insecurity, says Quentin Grafton, professor of economics and director of the Centre for Water Economics, Environment and Policy at the Australian National University.

“As water insecurity gets worse, what are the implications for food prices, immigration and national security? As a business, you might say, ‘These aren’t my problems’, but they are. The farmers get it – they are seeing the impact in diminished revenues – but in the big cities, businesses don’t think about it much.”

Understanding water politics

In 2023, the UN Water Conference brought together governments, not-for-profits and businesses to find innovative ideas and seek commitments to combat water scarcity, pollution and the effects of climate change on the global water supply.

Charles Iceland, from the World Resources Institute, has praised the conference’s scope and ambition. However, he says that “many commitments lacked proper finance, quantifiable targets and cross-border action needed to overcome water challenges. Still others failed to consider climate change or address industry and agriculture, some of the biggest water consumers.”

Getting nations to collaborate on water management is rare due to conflicting geopolitical, economic and social values of countries across affected watersheds, says Iceland. “Yet water is inherently a cross-boundary, cross-sectoral issue, given its many users.”

Another reason why governments can no longer take a siloed approach to water security is climate change.

“It’s time decision-makers realise that reducing emissions and undertaking adaptation projects is water management.

Likewise, fixing leaky pipes, restoring mangroves and expanding access to sanitation and other water services is building climate resilience. These two agendas need to come together to create a water- and climate resilient future,” says Iceland.

Fargher sees parallels in arguments over water security and the climate debate. The cost of reform can seem high, political will is found wanting and strategy rarely translates into action, he says.

Inaction on water security could represent regional GDP losses of as much as 6 per cent by 2050, according to the World Bank.

However, Fargher says cost is often seen as coming further down the track and not requiring an immediate response.

“We continue to focus on the cost of action, when the cost of inaction is far greater. We have to overcome this bias, because as we continue to experience the effects of climate change and water insecurity, ‘down the track’ seems increasingly close.”

Water risk and stranded assets

Water risk is already stranding assets across major sectors of the global economy, according to a CDP report commissioned by the Swiss Federal Office for the Environment.

Assets worth US$15.5 billion (A$24.3 billion) have been stranded or are at risk in the coal, electric utilities, metals and mining, and oil and gas sectors.

“Water security is no longer a small, plant-level operational issue for companies, but has become a strategic question for senior management,” says the report.

The CDP analysis shows how the top 20 financial firms have provided US$2.5 trillion (A$4 trillion) in bond, loan and equity financing to some of the world’s most water impactful companies over the past decade. The financial sector’s exposure to “water-stranded” assets can prompt knock-on events, according to the report.

These include “non-delivery of product to offtake partners and hedging mismatches – an open liability; make-good and clean-up liabilities and fines; shareholder class actions; and changes to loan funding and wider financial relationships, including banking and insurance”.