Revenue at risk: Business growth in an era of water scarcity
With more companies and investors trying to get a jump on water risk, the costs of inaction are rising.
Fourteen of the world’s 20 megacities — those with the largest or fastest growing economies and the largest populations — are experiencing water scarcity or drought conditions.
These are the very cities where demand for goods and services is growing at a rapid pace, and where businesses are looking to grow.
But how much growth can our thirsty cities sustain?
For many companies, water is critical to their business growth — just like a skilled workforce, technology or marketing. But while it is fairly straightforward for a finance director to factor such business necessities in a company’s growth models, water dependency rarely appears in the financial models of companies or investors.
New tools are helping businesses and investors to look at water differently by valuing the risk of water scarcity in monetary terms.
To help businesses understand how increasing water scarcity will affect their ability to grow, Ecolab and Trucost expanded the Water Risk Monetizer, a free online tool, to include revenue at risk assessments.
The tool’s initial launch 11 months ago provided businesses with a risk adjusted "shadow water price" based on local water scarcity and the value of water to a community. The Water Risk Monetizer now also provides a monetary value of revenue at risk, along with an estimate of the likelihood of that risk hitting the income statement.
One unique aspect of the tool is that it leverages existing water and financial data alongside scientific methodologies to estimate the amount of water available to a business — its "share" of total water available to all businesses in a water basin — based on the facility’s contribution to the local economy.
Because water is a shared resource among many users in a basin, it’s essential for a business to understand how its allocation may change, and with it any potential for constraints to continued revenue growth.
The investment community is also taking important steps to better understand the financial implications of water scarcity. Portfolio footprints historically have focused on carbon risk, but this is rapidly changing.
For example, the Canadian investment firm AGF became the first to disclose its mutual fund portfolio environmental footprint (PDF), which includes an assessment of water.
In September, the Natural Capital Declaration launched the Water Risk Corporate Bond analysis tool, helping investors understand the potential implications of water scarcity on corporate financial stability. The tool also uses a "shadow water price" for water based on natural capital accounting techniques, allowing a financial analyst to factor water scarcity into a company’s debt to income ratio.
Bloomberg’s new Water Risk Valuation tool, also launched in September and focusing on public equities in the mining industry, allows investors to estimate potential revenue loss from water scarcity and the overall implication to a company’s valuation.
Water valuation tools take an important step forward by allowing water risk data to be integrated into business and investor models. Water data becomes actionable instead of educational, making water scarcity a more tangible issue for financial managers and analysts.
Sustainability teams finally can engage boards and investors on water scarcity with answers to questions, such as: Where does water scarcity pose the biggest threat to growth? Where can I increase production now, and where should I invest in water conservation strategies?
Identifying how water scarcity could affect revenue is crucial if businesses want to continue to grow in a water-constrained world.
In 2014, 33 corporations publicly disclosed to investors via the CDP that water scarcity already threatens 1 percent to 6 percent of their annual revenue.
And in April, the Coca-Cola Company decided not to move forward on the development of an $81 million bottling plant in Southern India due to resistance from local farmers who cited concerns about strains on local groundwater suppliers.
Companies can prepare themselves for long-term growth by investing in water efficiency where it most matters.
By taking early action to understand the financial risks and opportunities of water scarcity, companies can prepare themselves for long-term growth by investing in water efficiency where it most matters.
Breweries, for instance, typically use 3.5 to five litres of water to make a litre of beer. If a company making beer wanted to expand production at a water-stressed site, it may have to significantly improve its efficiency to create the headroom for expansion, or face growing risks to its revenues — and reputation.
While many companies already have sustainability programs designed to improve water efficiency alongside reducing other environmental impacts, business has to achieve a massive step change in water consumption to continue to make profits while not exhausting the water resources on which it relies.
These new tools provide the means to account for the value of water to a business, not just its cost.