Continuing population growth coupled with the effects of climate change means the problem of water scarcity will intensify, warns Lloyd's.

The specialist insurance market and conservation group the WWF warn businesses that water shortages are an issue they will inevitably have to face and tackle.

Global water scarcity: risks and challenges for business has been produced jointly by Lloyd's 360 Risk Insight and WWF and points out that all goods require water at some point in their production, as well as it being the most important human resource.

As water resources become scarce, even companies that hold a water licence - which entitles them to use a set amount of water - may face risks as governments seek to re-allocate water to priority users.

The report observes it is not just businesses operating in the areas of water scarcity that need to manage their exposure. Their business partners are also affected as the risk spreads through supply chains and imported products requiring water in their production.

Lloyd's chief, Richard Ward, said managing water is no longer simply a Corporate Social Responsibility issue, but a core business issue: "Water scarcity is already a reality for some businesses and as this trend increases all risk managers will need to consider their organisation's exposure.

"The most simple risk management response is to reduce your own water use, or that of your suppliers. However, businesses cannot manage this risk alone and will need to work with the wider community to improve water management and protect this critical resource."

The authors comment that there is a finite amount of freshwater on our planet - only 3% of the total water in the world is freshwater and less than 1% is readily accessible to humans. Reputational risk is also very real as companies could be accused of over-using scarce water at the expense of the environment or householders.

The report identifies two strategies for companies to manage water risk:
• The three Ms - Producers should: measure their water risk; mitigate it; and market themselves as leaders in managing water use in the sector.
• The three Is - Businesses in the service sector can: consider water risk profiles when identifying suppliers; influence suppliers to mitigate water use or meet set standards; and consider water risk to businesses and supply chains when making investment decisions.

Water presents several dimensions of risk for business some of which may be covered through business interruption, property, liability or reputational insurance products. But as awareness of the risk increases, insurers will explore the potential for tailored products.

A previous Lloyd's 360 Risk Insight report on climate change and security found water also presents a security risk to business in some parts of the world where it could become a source of inter-state conflict, such as India and Pakistan competing over access to the diminishing supply of water from the Indus river basin.

The new report points to several initiatives already underway that can support businesses in their attempts to manage risk. They include developing water footprinting methods, company water stewardship standards and guidelines for engaging with governments to improve public policy on water resources.

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