Just in time for World Water Week, the Water Risk Monetizer, industry’s first publicly available financial modeling tool that enables businesses to factor current and future water risks into decision making, now provides users with insights into how water scarcity impacts revenue. The tool’s new assessment helps water-dependent businesses better understand the full value of water to their operations and identify revenue at risk based on current and projected water scarcity.
The Water Risk Monetizer, first introduced in November 2014, was developed by Ecolab Inc., a global leader in water technologies and services, and Trucost, a global leader in valuing natural capital. The two companies say they are committed to increasing understanding of global water risks and helping businesses make more informed decisions for responsible water use (for its part, Ecolab announced in June that it helped it helped customers save 115 billion gallons of water in 2014). The Water Risk Monetizer is a secure site available for free to businesses throughout the world, and only the user has access to the information provided.
The tool is designed to help companies address the impact of water scarcity on their ability to operate, generate profit and grow. The premise for the tool in its expanded form is:
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Evaluating and Reporting
New Metrics '15.- Water scarcity has the potential to increase the cost of water, which makes operations more expensive and reduces profit margins.
- Water scarcity makes it more difficult to access the water a business needs to operate, which can decrease production and result in loss of revenue.
These realities illustrate two major factors that hinder the development of effective water management strategies: water is often not priced to reflect its full value, so many businesses are not factoring potential cost implications associated with water scarcity into business decisions; and businesses often take water availability for granted. But the world’s water supplies are limited, demand is increasing and quality is declining due to the need for more food and energy, increased economic development and other factors.
The Water Risk Monetizer provides businesses potential financial implications related to water scarcity risks and the likelihood that these implications will occur.
The tool assesses the potential cost or impact of water risks in ways similar to how other risks are considered in planning and capital allocation by providing:
- 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.”
How It Works
The Water Risk Monetizer uses scientific models developed by Trucost to quantify the potential impact of water scarcity on a facility in monetary terms.
Risk-Adjusted Water Cost (introduced November 2014)
To calculate a risk-adjusted water cost, the water risk premium model correlates 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 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,” which, 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 ten-year projections).
Potential Revenue at Risk (introduced August 2015)
To calculate revenue at risk, this new assessment estimates the value of the revenue that could potentially be lost at a facility 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.
The amount available also could change over time, as water scarcity increases or as a local economy grows (the tool forecasts revenue at risk over three, five and ten years). The revenue-at-risk model compares the estimated amount of water a facility requires to generate revenue (cubic meter per USD 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.