(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers).
When we talk about natural resource constraints on business -- such as shortages in water or increases in the cost of energy or agricultural products -- we tend to forget how deeply intertwined these commodities are. In the business community, just as in a natural ecosystem, an individual organism (in this case a company) is vulnerable to changes in the availability of these systemic inputs.
The risks are greater than we realize because the availability of any of these key resources deeply affects the availability of the others. For example, it takes 95 liters of water to produce one kilowatt-hour (kWh) of electricity; and each year, the U.S. uses 520 billion kilowatt hours -- or roughly 13 percent of all electricity consumed -- to move, treat, and heat water. With agriculture accounting for roughly 70 percent of water use, you can imagine how complicated it can become to maintain a steady supply of all three to industry, citizens, and municipalities.
This interdependent nexus is now evolving in a way that will threaten the well-being of billions. In 2050, to meet demand from a rising and increasingly carnivorous population, we will need to grow and process 70 percent more food. This technological and logistical challenge is made all the harder by the fact that by 2030, we'll be confronting a water supply shortage of approximately 40 percent due to a toxic combination of rising demand and climate-change-driven shifts in water supply. Facing these clear resource constraints, businesses will need to adapt, and soon.
At the World Economic Forum in Davos last week, a new brand of resource realism will begin to take hold in the business community with the launch of the Water Resources Group, which recognizes these constraints and the need for adaptation. This public-private collaboration includes the International Finance Corporation and food and beverage giants such as Coca-Cola, Nestle, and SABMiller. Together, these diverse players will help governments, companies and communities work together to manage the nexus. Rather than well-meaning but one-sided solutions, these business leaders hope to harness the private sector's comprehensive, value-chain viewpoint to solve these multifaceted problems.
That comprehensive viewpoint is critical, as a supply shock in any of these resources can cause ripple effects elsewhere. The energy industry has witnessed its resource co-dependencies first hand in Texas, where the state's worst ever single year drought has threatened to stall plans for new power production and distribution projects.
Companies will need to measure and prepare for potential resource shortages and price increases, which will deeply affect their business operations, supply chains, and customers. These issues create collective risks that cannot be managed in silos. Companies will need to look along and beyond their own value chains to become agents of change. They'll bring together communities, governments and NGOs to address the challenge holistically.
All sectors -- not just agriculture -- must recognize how their actions are interlinked with all the people who use and depend on these resources. Consider, for example, how any facility needing water must work to ensure that all agricultural players in the community are adopting clean, non-polluting practices in local watersheds. If a community runs out of water, it affects everyone in the area, even companies that were good stewards of the resource. The collective nature of these resources means that everyone shares both the responsibilities for their protection and the risks of their scarcity.
For businesses, understanding the implications of this nexus begins with assessing how a lack of water can impact the bottom line. For example, a business dependent on food can only fully understand its vulnerability if it assesses the availability of water to feed the crops it needs upstream.
In recent years, multi-national food and beverage companies with a clear stake in how the nexus plays out have begun to assess their "water footprint." This exercise allows them to identify risks and opportunities in their own supply chains, and discover how they can create more value while consuming less.
Forward-looking companies must assess the risks of mismanaging this resource nexus, learn to partner outside their comfort zone, and integrate resource-saving initiatives into their long-term business plans. It's the only way we can ensure the long-term security and supply of the resources that our economy and society depend on.
(This post first appeared at Harvard Business Online.)