Water is a critical element in businesses from agriculture to beverages to semiconductors. It's an ingredient for product development, quality control, and supply chain. Most of the freshwater used by industry comes from groundwater: rainfall and snowfall that collects in rivers, lakes, and reservoirs. Watersheds regulate water quality by filtering sediments and pollutants, and regulate the flow of water by moving water from its source. Protecting these watersheds protects the bottom line.

About 4 billion people -- roughly two-thirds of the global population -- depend on forest ecosystems as a source of freshwater supply. Water scarcity is a significant issue for about half of this group, who suffer when watersheds are converted, neglected and polluted. Although watersheds' services are in high demand, they are rarely valued for the services they provide. As a result, industry invests significant funds into gray infrastructure in order to receive these same services. It's often a more costly and time-consuming solution than green infrastructure, a collection of more environmentally responsible practices for stormwater management.

In Latin America, the Nature Conservancy (TNC), the Inter American Development Bank and the FEMSA Foundation have been developing financial instruments called water funds to channel funding for watershed conservation through a central trust fund. Conservation financing mechanisms called water funds are an innovative conduit for the civil, private and public sectors to direct resources towards ecosystem conservation and to protect water supply for major cities.

How companies integrate water stewardship

A handful of progressive donors, such as the FEMSA Foundation and the Coca-Cola Co., show foresight by investing in water funds. These funds protect the companies' future supplies and mitigate risks caused by water shortages, such as plant shutdowns, loss of license to operate, supply chain disruption and operational failures.

The Dow Chemical Co. (Dow), through its partnership with TNC and the Latin America Conservation Council, took interest in the water fund mechanism. The company asked, "What is the business case for water funds? Would business buy the services provided by a water fund because it is a better alternative than other investments in water supply and quality?"

As a representative of Dow, I spent six months in Latin America earlier this year, helping answer these questions and developing a market strategy for water funds. To tackle this challenge, I interviewed representatives from operations, finance and sustainability departments in more than 30 companies throughout Colombia, Brazil, Mexico, Argentina, Ecuador and Panama to understand their water problems and investment criteria.

Water funds keep cash flowing

In my conversations with industry, I learned that water funds could solve problems related to water quantity and quality. The future and current need for water is clear. Companies are increasingly concerned about maintaining their supplies of water in the future, given increasing demand from urbanization and industrialization.

Due to quality and availability issues, companies who use raw water -- water taken directly from a river or lake -- as an input to their operations and treat that water onsite view water as an immediate risk to their operations. On average, they are willing to pay eight times more than what they are currently paying for water if watersheds can improve the supply and quality of water.That seemingly high figure is still less than the cost of either installing additional water treatment on site or buying treated water from the municipality.

By investing in water funds, industry can reduce the operational costs of on-site water treatment by reducing sedimentation and pollution levels. Additionally, water funds are a cheaper alternative than the cost of building solutions to address reduced water supply (such as building pipes to transfer water over long distance, building a new reservoir or desalinating brackish water).

My most striking lesson showed that the fund model can address even tangentially related issues. For example, one of the most fundamental problems in Latin America is the insecurity over natural resources caused by government corruption and political variability. Given the unpredictability of the public sector, companies cannot always predict or manage their costs, quality, or quantity targets. Additionally, there is a widespread view that communities target industry as the source of water pollution, regardless of the true source. This hurts companies' license to operate and their ability to conduct business in communities.

The water fund mechanism gives industry a way to discuss its problems and form a cohesive voice to negotiate natural resource quality and delivery with government. Water funds also provide transparency for identifying sources and solutions of water quality problems. Instead of just paying taxes -- without knowing where that money goes -- industry can invest in a transparent platform to directly control the quality and flow of water resources. Water funds also can improve community relationships and secure a company's license to operate by providing a platform where government, private and civil sectors can openly discuss the causes of pollution and how to fix them.

Instead of investing in expensive gray-infrastructure solutions, companies can protect their own interests and long-term water needs by investing in water funds today. Water funds are a cost-effective way for companies to address some of their most fundamental challenges -- from water availability and quality, to government corruption and variability. For example, many Mexican cities are building infrastructure to transport water longer distances due to depleted local reserves. This cost alone can cost billions of dollars in capital costs and millions of dollars on an operational basis. Investing a small fraction of this in a water fund saves both financial and human resource costs.

Tapping a fresh well of solutions

Although most operations directors and facilities managers are not yet aware of the water fund mechanism, it often can be a more cost-effective solution than gray infrastructure solutions.

By investing in the forest ecosystems that regulate freshwater reserves, companies can lower the operational costs of on-site water treatment because sedimentation and pollution levels are reduced upfront. Water funds also offer the opportunity to reduce the capital and operational costs of building infrastructure to transport water due to lower reserves. In addition, the fund mechanism gives industry a cohesive voice to negotiate natural resource quality and delivery with the government and the transparently to solve long-term water challenges.

Water image by XONOVETS via Shutterstock