How firms can build compliance, resilience for water and climate risk

Addressing water-related climate risks can enhance resilience and support sustainable business practices amid increasing regulatory demands.

In brief

• Companies should enhance transparency in risk assessments to comply with evolving regulations on water-related climate risks and opportunities.
• Understanding the impacts of climate change on water availability and quality is crucial for developing resilience strategies and management systems.
• Proactive scenario analysis and supplier engagement can help organizations navigate risks and capitalize on emerging opportunities in a changing landscape.

Climate risk is at the top of the regulatory agenda

From California’s climate-related financial risk disclosure law (SB-261) to the Corporate Sustainability Reporting Directive (CSRD), regulators are increasingly requiring disclosure of material climate-related risks and opportunities scenario analysis and actions that companies are taking to responsibly identify, assess, monitor and manage risks. This presents a challenge for companies to enhance the transparency and rigor of their risk assessment methods, but it also creates an opportunity to highlight existing management systems that support climate resilience.

As companies navigate this new regulatory landscape, considering the impact of climate change on water can be a strategic starting point for measuring, monitoring and managing climate-related risk and opportunity. Water availability, water quality and the policies that govern how water is used integrate social and climate factors, incorporating both physical and transition risk elements that comprise the core of the climate risk reporting taxonomy. Recent catastrophes, such as the 2025 Los Angeles fires influenced by erratic rainfall patterns¹ and the 2024 Valencia floods triggered by extreme rainfall,² show the salience of water issues in financial risk considerations. These water-related disasters topped national historic losses for fire in the United States ($164B)³ and flood damages in Spain ($4B).⁴

Water stress is identified as one of the highest potential risk factors for many industries, including sectors like semiconductor manufacturing that are critical to the low carbon transition. On the other hand, too much water poses a different risk to companies, especially in regions without adequate infrastructure and systems to manage it. This can include publicly managed large-scale stormwater infrastructure as well as site-level building gutters and drainage systems. Flooding and storms can cause costly repairs and reduced revenue from operational downtime, both at facilities and within an increasingly intricate supply chain reliant on functioning roads, ports, railways and other infrastructure systems. 

Organizations face multiple complex risks related to the availability and quality of water — and these impacts are only expected to increase under future climate change.

Understanding future water risk is key to building resilience in the face of climate change

Disclosures of private sector water data grew 85% from 2017 to 2022, with a 23% increase of companies (4,815) disclosing water-related data through the CDP in 2023.⁸ In the public sector, states in the western US are managing water risk as different land users compete for access to limited water resources. In California, agriculture is key to sustaining local livelihoods and supporting economic growth – and is also the state’s biggest water user.⁹ Balancing agriculture water use with competing priorities from other companies and residents is an increasing challenge for local governments. The US government’s 2024 intervention to support responsible water management along the Colorado River highlights the significance of the water-related risks facing the public sector.¹⁰

While many companies are reporting water data, these disclosures are largely focused on the current state of water-related impacts. Water may be front-of-mind, but many companies have not considered how this material risk could evolve over time. For example, in 2024 a large semiconductor manufacturer announced a new plant in Phoenix that is expected to require nearly 3% of the city water budget to operate.¹¹ While Phoenix has enough water to meet the plant’s demand now, climate-related deterioration of water supply in the future could complicate the plant’s operations.

Future shifts in the global climate are expected to impact water systems – and the way that companies interact with them. Understanding potential future impacts on water can help companies prepare to manage them responsibly.

Four actions companies can take to enhance water-related resilience

What companies can do

Measuring, monitoring and mitigating water-related risks are important for understanding the broader risks and opportunities that impact a company’s infrastructure, investment planning and enterprise risk management. Climate risk assessments and scenario analysis, Taskforce on Nature-related Financial Disclosures assessments and sustainability strategy services can help companies integrate water risk into their broader strategy. For example, a corporation reliant on seasonal sales, well aware of the risk of supply chain disruptions at critical time periods, can additionally forecast the risk of changing weather patterns to mitigate future losses.

Companies generally need reliable data on future water stress to make informed decisions and develop effective water management plans. Physical climate risk assessments can provide valuable site-level insights, helping organizations with risk monitoring and mitigation. These insights, along with visualizations, enable proactive strategies across functions and throughout the business lifecycle.

Quantifying transition risks related to water, from growing regulatory requirements to shifting consumer demand for water-efficient products, can inform product development, compliance and other components of a company’s strategy.

Conclusion 

Future shifts in the global water system are expected to contribute to physical and transition risks that may impact companies in a variety of ways.

To enhance resilience and support responsible water risk management, organizations can consider a scenario analysis to understand future water stress under different climate pathways within their own operations. They can then assess upstream water stress to shape supplier engagement strategies and identify areas of greatest potential risk. Informing ongoing innovation efforts is crucial for developing resource-efficient products that address current and future demand for efficient and climate-friendly solutions. Lastly, considering reputational and regulatory perspectives can guide the development of a future-focused water strategy.

As expectations for climate risk disclosure grow, addressing water risk serves as a strategic starting point that can help companies build resilience and meet regulatory requirements.