Pricing Water Is Key to Mitigating Business Risk

Businesses are becoming increasingly aware of the risks of water scarcity. The CDP’s recent survey found that two thirds of the world’s largest companies are exposed to water related risks, with almost a quarter saying it could limit their growth – for some within the next year.

Drinks firm Diageo says growth of its operations in Nairobi is likely to be constrained within five years by growing scarcity. In 2014, Coca-Cola had to shut down a bottling plant in India due to community concerns over water use. Mining companies Barrick Gold and Rio Tinto have both recently walked away from planned developments this year as a result of water impact issues, while BHP Billiton has invested almost $2bn in a desalination plant to ensure water availability for its mine in Chile’s Atacama Desert.

Despite increased awareness, CDP says that the water risk assessments carried out by many companies may be inadequate. For instance, 60% do not require key suppliers to disclose water risks they may face. Only 25% conduct an assessment at the river basin level, which is crucial to understanding risk.

One of the challenges companies face in understanding and acting on the business risks of water scarcity is the price paid for water. In most markets, the price of water does not obey the most basic law of supply and demand, with water bills in some drought-prone areas of the US actually lower than in regions with higher rainfall. In some developing countries, abstracting water is almost a free for all. In the absence of a clear price signal, allocation of water becomes arbitrary as decision makers are unable to ensure that scarce water resource go to the most valuable uses.

Incorporating the full cost of water into water pricing was also the recurring theme of the Economist World Water Summit in November. Christophe Beck, international president at US water consultants Ecolab, said that if companies in China had to pay Danish water prices, they’d have to pay an additional $130bn annually, equivalent to 1.5% of Chinese GDP. He argued that while problems due to water shortages become ever more acute, action is delayed because low water prices mitigate against presenting a financial case for investing in water conservation.

Karl Lippert, president of SABMiller Latin America, explained that his company justifies increased investment in water management by quantifying the value at risk from water scarcity using techniques to translate physical risks into financial risks in a way that makes sense on a balance sheet and income statement level.

Environment ministers from Uganda and Singapore discussed the potential for water pricing in their countries, showing that water scarcity is rising up the agenda of the world’s politicians. This elevates the regulatory risks for companies that do not respond by managing their water impacts.

To help more companies generate a price for water that reflects its true cost and which can be easily incorporated into business decision making, we have worked with Ecolab to develop a free-to-use web-based tool called the Water Risk Monetizer. While existing tools focus on water in physical terms, this tool calculates a water risk premium that reflects ­the monetary value a business should place on water based on current and future water scarcity risks. It enables a company to assess the potential cost implications of water scarcity for each of its facilities around the world. The information can be used to inform capital investment decisions and to bring insight into future operating costs and how these may affect business growth.

It is not surprising that many companies are struggling to understand and manage water risks. The issue is comparatively new territory and is much more complex to manage than carbon because water impacts vary widely depending on location. Water is also a shared resource, meaning companies may have to work with other stakeholders to safeguard future supplies and cannot just rely on water efficiency. A good place to start is to understand the real cost of water. Being able to quantify risk in financial terms is much more likely to drive effective action at the company board level.