Each year, businesses around the world are feeling growing financial impacts from water insecurity, said a new report released this week. “Thirsty Business: Why Water Is Vital to Climate Action,” is produced by the nonprofit CDP, which creates an annual report tracking how companies manage water resources and plan for the future.

Ample supplies of freshwater resources are crucial for many businesses, but it’s also vital to efforts to decrease greenhouse gas emissions.

Scientific studies have found that climate change will lead to higher risk of both droughts and floods. The American West, including California, has been in the grips of drought for years. And droughts are impacting companies operating in parts of Brazil, South Africa, India and China, among other areas.

“With trillions of dollars’ worth of assets set to be at risk from drying and drowning, investors are more focused than ever on leaders and laggards in the sustainability transition,” wrote Paul Simpson, CEO of CDP, in the report’s foreword.

On behalf of 643 institutional investors, this year’s report questioned 1,252 large, global companies about their water management; nearly half responded.

The results showed that these companies reported a combined $14 billion worth of water-related financial impacts, a number that has increased by five times since the previous year’s report.

And the findings also revealed the close link between water and climate change.

“Climate mitigation and climate adaptation – both are reliant on water,” said Morgan Gillespy, the report’s lead author and CDP’s head of water. “Improving water security can contribute to our ability to achieve the world’s greenhouse gas emissions reductions.”

A flood warning sign in the village of Muchelney in Somerset, U.K.. A new report from CDP highlights the business risks from water insecurity caused by both droughts and floods. (Ben Birchall/PA Wire)

CDP’s report found that for responding companies, nearly a quarter of their greenhouse gas emissions reductions were dependent on having a reliable supply of freshwater. And those reductions are crucial as countries struggle to meet global targets of greenhouse gas reductions.

“If we take away that freshwater resource, then there is no way we are going to get to these emissions reductions,” said Gillespy.

On the other hand, she said, companies that do embrace better water management often see a corresponding drop in greenhouse gas emissions. CDP’s report found that just over half of companies that focused on water management saw a drop in greenhouse gas emissions.

“When companies start this journey toward improved water stewardship, they often focus first on direct operations – if you implement water efficiency measures that therefore require less energy, you immediately see a greenhouse gas emissions reduction,” said Gillespy. “You also see a cost-savings reduction as well.”

Unfortunately, not every case of improved water security results automatically in fewer greenhouse gas emissions. Things like increasing water recycling can led to more energy usage, resulting in a trade-off between water and energy.

And, with limited resources, some companies may prioritize greenhouse gas emissions over water security because of increased attention to climate change on the global stage. But that choice could be detrimental to businesses.

“Every year the financial impacts of water are increasing,” said Gillespy. “If that’s not a wakeup call to companies, I don’t really know what is.”

For the most part, progress on addressing key metrics around water security for businesses has remained relatively flat from year to year, which translates to a business risk, said Gillespy. And also an opportunity. Both the Paris climate agreement and the United Nations’ Sustainable Development Goals show a clear role for the private sector to play, she said.

“We are seeing a small but growing number of companies that are leading the pivot toward the better management and stewardship of freshwater resources. What we now need to do is bring everyone else along with them,” said Gillespy. “Investors need disclosure from companies in these sectors so that they can better understand both the risk and the opportunity.”