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Is water being underpriced?

The value of water is rising. What does it mean for you?

The United Nations predicts that by 2025, two-thirds of the world’s people will be living in water-stressed conditions. Indeed, the World Resources Institute’s (WRI) Aqueduct Water Risk Atlas colored nearly all of North Africa and much of Asia shades of red representing either high or extremely high exposure to water-related risks. Water-related risks cover a suite of threats such as floods, drought, access to a clean supply and groundwater contamination, that continue to worsen as climate change, overuse and human populations grow.

Many practitioners and analysts from the water space argue that, at its core, water stress is a problem of valuation; that the true value of water vastly outweighs its price or current economic worth.  A report (PDF) by International Rivers, an organization focused on international river conservation, stated the world water crisis is not a problem of scarcity but one of mismanagement. Water is undervalued and therefore underpriced, opening up the door for it to be wasted and exploited, it stated. This is also what supporters of water markets and rate increases are saying in drought-stricken places such as California, arguing the low cost makes matters worse.

So how can the global community improve and scale up its water valuation methods, which will lead to sustainable water management, and potentially solve the world water crisis?

The true value of water vastly outweighs its price or current economic worth.

It’s a smart question to ask in the wake of World Water Week. The annual conference is a consortium of policymakers, academics, practitioners and private sector actors gathered in Stockholm to address critical water issues. This year, they assembled under the theme of "Water for Development." The valuation issue fits in well under this theme as properly valued and managed water is a key component for sustainable development.

Learn more about sustainable water systems at VERGE 2015 Oct. 26 to 29 in San Jose, California.

A group made up of Ecosystem Marketplace publisher Forest Trends, WWF, sustainability consultancy Valuing Nature, the power company Engie and WRI hosted a session called Revealing the Value of Water. It looked at specific case studies valuing water and the methodologies they used.

Valuing water will not save the world, said Samuel Vionnet, a sustainability expert at Valuing Nature. But it’s a significant part of solving development-related challenges and should be embedded in development projects, stakeholder engagement processes and other forms of communication.

The value in valuation

More sectors are becoming interested in water and the large role it plays in delivering sustainability to a city, region or business. CDP reports that over 570 institutional investors requested information around companies’ water risks.

And a report from last year, Corn or Current: The Agro-Industrial Water Conflict, is further evidence of the financial sector’s interest in water. Investors commissioned the firm, MSCI ESG Research, to evaluate their exposure to risks based on the water conflict between energy interests and agriculture operations.

"The financial sector is interested in understanding this conflict better and understanding their risks. It’s on their radar," said Paul Feig, an associate with WRI and speaker during the World Water Week event.

Thirsty industries such as electric power are often located in regions where thousands of acres are irrigated farmland creating an ideal situation for strife. Stranded assets, food security, diminished brand value due to bad press and a decrease in productivity are a few of the risks investors are concerned about, said Feig. The research company used data from WRI’s Aqueduct to evaluate the conflict.

In short, the report found that of the 972 irrigation-intensive U.S. counties, 412 are in water-stressed spots. For the electric power sector, this translates into $21 billion in sales at risk while the agriculture sector is exposed to over $1 billion in crop sales at risk. This also leaves energy security and agricultural supply chains more vulnerable.

"If this competition over water was to result in agriculture losing water, the impact on companies and their investors would be significant," Feig said.

Thirsty industries such as electric power are often located in regions where thousands of acres are irrigated farmland, creating an ideal situation for strife.

"Different stakeholders look at water in a number of different ways," said Alexis Morgan, a water stewardship specialist at WWF. With the Corn or Current report, investors are thinking in terms of risks and money tied up in water resources. The corporate sector thinks in similar terms, Morgan said, although currently it’s more focused on operational expenses-water treatment costs, for instance. But the government often looks from a social perspective and rights-based angle: the human right to clean water.

“It’s important to look at all of these versions of water valuation in a comprehensive landscape,” Morgan said.

A steady stream of valuation

While it isn’t happening at the scale many would like, water valuations are happening all over the world, adding information and knowledge to this data-sparse space, as the session’s presenters made clear. A cost-curve analysis on green interventions in Lima’s watersheds drove Peru’s national water regulator to allocate millions of dollars to green infrastructure projects over a five-year period. The assessment — which Forest Trends, Peruvian organization CONDESAN, U.S.-based environmental firm Kieser & Associates and financial tool Aquafondo carried out — defines innovative and cost-competitive green water management methods. One such technique is restoring pre-Incan canals that allow water to trickle down the Andes mountains slowly just in time for the region’s dry season.

In drought-prone, dry Australia, recycled water was a more cost-effective choice for cooling operations versus groundwater.

Meanwhile in Bolivia, Valuing Nature produced a report (PDF) measuring the potential value water could have on the Santa Cruz region’s agricultural sector in the form of irrigation. The sector is much more dependent on rainfall but Valuing Nature’s study estimated the potential net value of freshwater for the soybean sector — the dominant crop in the region — at $460 million a year. Ultimately, the assessment’s objective was to boost investments in the region’s forests. As the value of water in the agriculture sector is recognized, the important role of forests for maintaining healthy watersheds and climate regulation is recognized as well.

“Information like this that makes the business case is how you influence policymakers and other stakeholders,” Vionnet said.

And in drought-prone, dry Australia, Engie measured the cost of using groundwater versus recycled water (PDF) for its cooling operations and found recycled water was a more cost-effective choice. The water recycling initiative already has amounted to nearly $2 million in savings. The initiative also has reduced pressure on the scarce water resources in the region and led to less pollution and healthier wetland ecosystems. Anne Prieur-Vernat, an environmental researcher at Engie, estimates the community benefits in monetary terms at over $1 million.

“It’s a win-win for all stakeholders,” she said.

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