New Water Analysis Tool Monetizes Revenue at Risk
by RP Siegel on Friday, Aug 28th, 2015
World Water Week is going on right now in Stockholm, Sweden. This year marks the 25th edition of the annual international event aimed at calling attention to issues surrounding water.
Over the years, businesses have played an increasing role in dealing with the issue, which makes sense considering the size of the impact that business has. What also makes sense is the fact that smart water policy can not only save companies money, but in many cases, water also represents a strategic asset, without which many businesses could not operate. A major aspect of the sustainability journey has been the process of making ecosystem assets that were previously considered externalities visible to the financial side of businesses.
Back in 2014, a joint effort between Ecolab, a global leader in water technologies and services, and Trucost, a global leader in valuing natural capital, produced the Water Risk Monetizer.
This secure website is a tool available to businesses at no cost. An expanded version, announced today, provides new insights to help businesses factor current and future water risks into decision-making with a localized assessment of water scarcity impacts on current and future revenue.
The expanded version takes into account the fact that:
- Water scarcity has the potential to increase the cost of water, which makes operations more expensive and reduces profit margins.
- Water scarcity limits availability, making it more difficult to access the water a business needs to operate which can decrease production and result in loss of revenue.
“As water scarcity increases around the world, business leaders need actionable information to help them understand and manage their current and future water-related risks,” said Douglas M. Baker, Jr., Ecolab chairman and chief executive officer. “The Water Risk Monetizer helps businesses make informed decisions to enable growth in this new era of water scarcity.”
Two major factors have interfered with effective water management strategies. First, like many other natural capital resources, water is generally not priced to reflect its full value. As a result, many businesses don’t factor potential cost implications associated with water scarcity into business decisions. Second, businesses often take the water they rely on for granted.
It’s like McGee Young said in our conversation about the ROI of sustainability. Referring to those sticking with a strict show-me-the-impact-on-this-year’s-bottom-line approach, he said, “They are working with the outdated assumption that the environment we are operating in is not about to change into one that will be far more expensive and difficult.”
Not only are the world’s water supplies limited, but demand is increasing and quality is declining due to the need for more food and energy, increased economic development, and other factors. The new monetization tool provides businesses with information on the financial implications related to water scarcity risks and the likelihood that these implications will occur.
Specifically, the tool provides:
- Risk-adjusted water cost: monetary estimate of the full value of water at a facility level, based on what water would cost if supply and demand were accurately reflected.
- Potential revenue at risk: estimated amount and likelihood of the revenue that could potentially be lost at a facility due to the impact of water scarcity on operations.
“The new revenue-at-risk indicator illuminates the threat that businesses face from water scarcity,” said Richard Mattison, chief executive of Trucost. “It helps companies raise awareness about the need for investing in sustainable water management, as well as providing a practical water risk assessment tool to factor water scarcity into business decisions.”
The original water risk premium model calculates a risk-adjusted water cost by correlating local water scarcity to considerations that contribute to the full value of incoming water, based on scarcity, for a specific facility, including:
- Current and projected water use
- Current and projected local water scarcity
- Economic variance and purchasing power
- Historical trends in country-level water tariffs
Using algorithms derived from published scientific studies on water scarcity and in-stream water values, such as groundwater recharge, waste assimilation, wildlife habitat and recreational activities, the tool correlates a facility’s water use to these local water scarcity considerations to calculate a “water risk premium.”
The water risk premium, when added to the local price a business pays for water, quantifies the value a business should place on water based on real and future water scarcity risks (current, three-, five- and 10-year projections).
The new Potential Revenue at Risk function estimates the value of the revenue that a facility could potentially lose due to the impact of water scarcity on operations. The tool uses a revenue-at-risk model to estimate the amount of water available to the facility – its “share” of total water available to industry water users in the basin based on the facility’s contribution to the local economy.
Because water is a finite resource that is shared by many users in a water basin, the amount of water that should be available to a facility may be less than what a facility needs.
That amount available could also change over time, as water scarcity increases or as a local economy grows (the tool forecasts revenue at risk over three, five and 10 years). The revenue-at-risk model compares the estimated amount of water a facility requires to generate revenue (cubic meter per U.S. dollar of revenue) to the facility’s share of water in the basin if water were allocated among water users based on economic activity (contribution to basin-level GDP). If more water is required than the basin share of water allocated (as determined by the model), then a proportion of the facility’s revenue is potentially at risk.