Why Colgate and Nestle are setting an internal price on water

Why Colgate and Nestle are setting an internal price on water

CDP
In most parts of the world, water is cheap, with industrial users often paying below-cost rates for their water supply. That's about to change.

Water was on the agenda at the COP23 climate negotiations in Bonn, Germany, this month, with global leaders increasingly concerned that growing competition for scarce water resources could cause mass migration, escalating political tensions and massive industrial disruption. Already, more than a billion people live in areas of water scarcity, with close to 700 million having no reliable access to clean, safe water year-round.

With this stark picture in mind, new data showing an uptick in corporate action on water security is very welcome. A report from CDP this month, "A Turning Tide: tracking corporate action on water security (PDF)", analyzes the water management of 742 of the world's largest companies, including Nestle, Burberry and Kellogg’s, and finds that companies are increasingly improving their water processes and using innovative new tools to do so.

Saving water and reducing costs

Encouragingly, the number of companies qualifying for the "Water A List" this year by having best practice policies on water management in place has tripled and includes household names such as L’Oreal and Toyota. The number of companies responding to calls from investors to disclose their water management is steadily increasing as well. In just one year, the number of companies disclosing through CDP has jumped 40 percent.

Results from a recent State Street survey (PDF) of 475 global asset owners indicate that 80 percent of these global institutions have an ESG component in their investment strategies that are generating significantly improved returns. Clearly, the demand for water data won't disappear.

Perhaps this is a factor contributing to the boardroom room engagement on the issue. Our analysis indicates that water security has a firm seat at the table of more than 70 percent of the most significant corporate boards. A higher level of oversight goes hand-in-hand with increased funding: Companies have committed a groundbreaking $23.4 billion to support more than 1,000 water projects in over 90 countries.

For example, U.S. mining company Alcoa has invested $115 million in a new filtration system for its Australian operations. The new system reduces freshwater use by 317 million gallons per year — more than 450 Olympic-sized swimming pools (PDF) — reducing both costs and environmental impact.

The real price of water

In most parts of the world, water is cheap, with industrial users often paying below-cost rates for their water supply. But basic economics dictates that increased demand for a scarce resource soon will push up such artificially low prices.

In fact, Carine Smith Ihenacho, global head of Ownership Strategies at NBIM, CDP’s Lead Global Water Partner, stated in the report that they "do not expect such implicit subsidies to be sustainable longer term." Yet only a small number of companies currently cite higher water prices as a potential risk, either in their direct operations or along their supply chain. When water is undervalued, the business case for action is often misunderstood or difficult to see. 

CDP
<p>Companies reporting data to CDP has committed more than $23.4 billion to support more than 1,000 projects.</p>
This is why 53 companies (7 percent of our sample), including multinationals such as Colgate Palmolive and Nestle, have established an internal price on water that takes into account the social and environmental costs of water — a significant development.

For example, beverage giant Diageo uses an internal total cost of water tool, which estimates the full cost of water to a given plant. This estimate allows the plant to anticipate and plan for the financial impact of price or tariff increases, and supports Diageo’s overall goal to improve water use efficiency by 50 percent by 2020. Meanwhile, by applying a tool developed by Rutgers University, Colgate Palmolive has found that its average "true" cost of water is 2.5 times more than the purchase cost.

Evidently, accounting for the real price of water can help companies hedge against risk and supply chain disruption as the price of water inevitably rises.

The dry facts

In the aftermath of COP23, the stakes are high as we assess corporate progress towards a water-secure world. From brand damage to disrupted supply chains, increased costs to constrained growth, water security in a changing climate is big business and poses material threats and opportunities to the world’s biggest companies.

Encouragingly, our research shows that more large corporations are rising to the challenge — and for those not included on the A list this year, the message is clear. Tackling water scarcity is a source of genuine, strategic opportunity, and the time to act is now.