A fifth of companies view supply chain water risks as capable of having a significant impact on their business, according to environmental disclosure organisation CDP.

This puts US$77bn across 623 firms at risk, CDP – formerly the Carbon Disclosure Project – has found in its Global Water Report, published at the end of last month.

Water security is becoming a growing problem as the climate crisis alters the global water cycle, resulting in stronger, more frequent droughts and periods of extreme rainfall.

CDP notes that industries can be exposed to water risks through their supply chains, via either water-intensive sectors or the rivers used to transport goods.

“Water scarcity, pollution and flooding represent a risk to companies: one-off events and long-term management issues alike may impact an individual company’s profits,” says Carine Smith Ihenacho, chief governance and compliance officer for Norges Bank Investment Management, lead sponsor of CDP’s work on water security.

This year, drought and low water levels in the Panama Canal have disrupted trade, with authorities forced to limit the number of ships able to pass through the route, driving up shipping costs. Parts of the river Rhine were also closed to shipping at the end of last year due to heavy rain.

The report says the Mississippi, Amazon and Yangtze are also rivers that are “being squeezed by drought”.

CDP asked 13,356 companies to provide data about water-related disclosures they made in 2023. Of the 4,815 respondents, the report focuses on 3,163 firms that have an annual turnover of at least €250mn or US$250mn and disclosed data in response to a question from an investor.

Most respondents were located in Asia, followed by Europe and North America. The majority of companies were from the manufacturing industry, with the materials and food, beverage and agriculture sectors following closely.

The transport sector revealed “poor supply chain performance”, CDP says, being “the least likely to assess supplier risks, set targets or enforce water-related requirements”, and the “most likely to state that supply chain engagement is unimportant”.

The report also highlights the influence of around US$700bn in agriculture and water subsidies, which it says can “fuel excessive water consumption and other environmentally damaging practices”.

Although determining a supply chain’s impact on water is “more intricate than assessing climate impact”, according to CDP, the task also presents an opportunity for businesses.

“The cost of mitigating supply chain water risk is almost three times cheaper than the cost of impact. Collective action between suppliers and buyers can lead to closer relationships, opening the door to improved products and innovative solutions,” CDP says.

The report calls on companies to identify their water-related risks and how their business activities contribute to water insecurity.

Aspects to consider include supplier impacts on water quality and availability as well as dependence on water and so-called “basin status”, which refers to the robustness of reserves and the level of access workers have to water, sanitation and hygiene services.

It also urges more firms to set targets for improvement, pointing out that just 4% of assessed companies set goals in 2023.

Examples of targets include food manufacturer Mars’ goal of “100% compliance in pollutant management practices” by 2025, which it is aiming to achieve by requesting that farmers comply with good practices in reducing the pollution of water run-off from the use of fertilisers and pesticides.

The report also emphasises the importance of board-level incentives for improving water risk in supply chains, with 443 companies having these in place last year and 118 firms including water targets in remuneration policies for the chief procurement officer.

Other actions CDP recommends include collecting information, mitigating risks and setting targets throughout companies’ supply chains.

A third of companies said their suppliers had to meet water-related requirements – such as reducing total water use and setting water pollution targets – as part of the purchasing process, with just over half including the requirements in supplier contracts.

If suppliers do not comply, most companies retrain and engage with them, but 16% temporarily suspend the relationship and 9% exclude them from the supply chain altogether.

Complete exclusion might be “a quick short-term solution”, but could have “very negative consequences” for suppliers, CDP says, with engagement and support to improve practices a better course of action.

“This is particularly important to ensure that action on water generates opportunities for developing countries, instead of presenting further obstacles for progress towards the just water security transition,” it says.

Financial incentives such as loan support, interest reduction and bonus schemes are also being used by 5% of firms.

Other means of incentivising suppliers include education, innovating to create new ways of reducing the amount of water used, and even advocating for policy or regulatory change.

While most companies did report engaging with suppliers on the matter, 28% said they do not, and have no plans to do so in the next two years.