Why CSOs see drought risk rising on the agenda

The OECD's latest Global Drought Outlook delivers a stark warning: drought costs are escalating at an annual rate of 3-7.5%, with average drought impacts projected to cost 35% more by 2035 than today. For Chief Sustainability Officers (CSOs) and corporate leaders, this represents far more than an environmental concern – it's a fundamental business risk that demands immediate integration into materiality assessments and enterprise risk management frameworks.

With nearly half of global land area experiencing extreme drought conditions in 2023 and 40% of the planet seeing more frequent and intense droughts in recent decades, companies can no longer treat drought as a peripheral risk. The time for reactive approaches has passed; proactive drought risk management is now essential for business continuity and long-term resilience.

Materiality assessment integration

CSOs must fundamentally reconceptualise how drought appears in their materiality assessments. Traditional approaches often view drought as a localised agricultural issue, but the OECD report reveals its systemic nature across multiple business dimensions. Companies should evaluate drought materiality across four critical areas: direct operational impacts, supply chain vulnerabilities, market disruptions and regulatory compliance risks.

Direct operational impacts extend beyond obvious water-intensive industries. Manufacturing facilities face production disruptions when water supplies dwindle, while energy companies experience reduced hydroelectric capacity and increased cooling costs. Even service-based companies encounter challenges as drought affects data center cooling requirements and employee productivity in climate-controlled environments.

Supply chain materiality requires mapping drought exposure across all tiers of suppliers. Agricultural commodities face obvious risks, with crop yields declining up to 22% in particularly dry years according to the OECD analysis. However, second and third-tier suppliers often harbor hidden vulnerabilities – semiconductor manufacturers requiring ultra-pure water, textile producers dependent on cotton cultivation or packaging suppliers relying on forest products from drought-affected regions.

Risk assessment framework evolution

Traditional risk assessments typically evaluate drought through a narrow lens of water scarcity. The OECD findings demand a more sophisticated approach that considers drought as a systemic risk multiplier. CSOs should develop risk assessment frameworks that capture both the direct impacts of drought and its cascading effects across interconnected systems.

Physical risks require geographic mapping of operations and supply chains against drought probability models. The OECD identifies hotspots including the western United States, South America, southern and eastern Europe, southern Australia and parts of Africa and Russia. Companies with exposure to these regions need enhanced monitoring systems and alternative sourcing strategies.

Transition risks emerge as governments implement drought adaptation policies. Water allocation restrictions, agricultural support programs and infrastructure investments create regulatory uncertainties that can materially impact business models. Companies heavily dependent on water-intensive processes may face mandatory efficiency requirements or pricing changes that affect competitive positioning.

Financial risks manifest through multiple channels. Insurance costs increase as drought frequency rises, while asset values decline in drought-prone regions. Working capital requirements expand as companies build inventory buffers against supply disruptions and credit facilities may face tighter terms due to increased operational risks.

Supply chain vulnerability management

The OECD report's emphasis on agricultural productivity losses – with 62% of monitored aquifers in decline – signals profound supply chain implications. CSOs must develop drought-resilient sourcing strategies that go beyond traditional diversification approaches.

Critical raw materials assessment should prioritise water-intensive inputs and evaluate alternative sources. Companies dependent on agricultural commodities need to understand soil moisture trends, groundwater depletion rates and irrigation system efficiency across their supplier base. This requires deeper engagement with suppliers to understand their water management practices and drought preparedness.

Supplier resilience programs should incorporate drought-specific metrics into vendor assessment criteria. This includes evaluating suppliers' water efficiency investments, drought contingency planning and geographic risk distribution. Companies should also consider supporting supplier adaptation through technology transfer, financing programs or collaborative research initiatives.

Cascading risk recognition

Drought impacts extend far beyond immediate water availability. The OECD analysis reveals how soil degradation, ecosystem disruption and biodiversity loss create compound risks that affect business operations in unexpected ways. CSOs need to recognise these interconnected vulnerabilities in their risk assessments.

Infrastructure risks emerge as drought conditions stress transportation networks, energy gridsand communication systems. Reduced river levels affect shipping capacity, while increased wildfire risk threatens transportation corridors and facility operations. Power grid stability declines as hydroelectric generation falls and cooling demands surge.

Social risks amplify business impacts through community displacement, labor availability changes and consumer behavior shifts. The OECD notes that droughts are responsible for 34% of disaster-related deaths and exacerbate poverty and inequality. Companies operating in drought-affected regions may face workforce disruptions, social license challenges and reputation risks.

Strategic response framework

CSOs should implement comprehensive drought response strategies that address both mitigation and adaptation requirements. Water efficiency investments become critical across operations, with the OECD highlighting innovations in recycling, harvesting and conservation technologies that can significantly reduce industrial water consumption.

Ecosystem-based adaptation offers dual benefits by enhancing natural drought resilience while supporting biodiversity goals. Companies can invest in watershed restoration, sustainable land management and ecosystem services protection that strengthen regional water security while advancing environmental commitments.

Technology integration should focus on drought monitoring, predictive analytics andautomated response systems. Advanced weather forecasting, soil moisture sensors and supply chain visibility platforms enable proactive management rather than reactive crisis response.

The OECD's drought outlook represents a defining moment for corporate sustainability leadership. CSOs who recognise drought as a fundamental business risk and integrate comprehensive response strategies into their materiality assessments and risk management frameworks will build competitive advantages in an increasingly water-constrained world. Those who fail to act may find their businesses among the casualties of our increasingly drought-prone future.