Valuing The True Cost Of Water

By Nina Cambadelis, Johann Clere 14 April, 2016

Cambadelis & Clere walk us through Veolia's valuation tool & how it can mitigate water risks & identify opportunities

Tomorrow’s water challenge is huge. Global demand for water is growing, which threatens the balance between demand and supply. Veolia is committed to developing new decision-making tools that provide a better understanding of the environmental and economic implications of water use.

Among these decision-making tools is the “True Cost of Water” tool. Through this tool Veolia is helping public authorities and industrial companies better understand and evaluate their water-related risks.

Assessing the financial impacts of water-related risks

Water-related risks can be numerous for any given site. They can be physical & operational, such as plant shutdown due to water shortages, financial, such as decrease in investors’ confidence, regulatory, such as penalties for water pollution and reputational, such as decrease in brand image due to a bad water management.

The tool enables industry & stakeholders can evaluate & compare different water strategies

There are few tools available to assess the financial impacts of these water-related risks. Trying to fill this gap and to address our customers’ needs, Veolia developed the “True Cost of Water” Tool. The Tool aims to improve internal business decisions and strengthen external stakeholder engagement. Thanks to this, industry and stakeholders can evaluate and compare different water strategies. But to truly assess impacts a better understanding of the true cost of water is needed.

Evaluating the true cost of water

A better understanding and assessment of the true cost of water is crucial to integrate water-related risks into financial and strategic decisions. For instance, water decisions such as the implementation of water reuse installations in water stressed areas are sometimes not considered since they are perceived as high investments in comparison to the low price of water. However, a deeper analysis might support such installations and help better understand the economic impacts of local water issues. To better analyse such situations one can use the total cost analysis method.

Comparing water strategies through total cost analysis

The total cost analysis compares the economic implications of different water strategies in the short and long term. The first step includes a comparison of capital expenditures (CAPEX) and overall operational expenditures (OPEX) of the given water strategies by factoring cost of water treatment and technologies, cost of pumping, price of water, etc.

Mapping economic impact and likelihood of water-related risks

The second step of the analysis is assessing the true cost of water by estimating the magnitude of the economic implications of the water risks. Indeed, additional expenses can appear over the lifetime of an operation: economic consequences of plant shutdown due to water shortages, temporary loss of operating license, vulnerability to changing regulations, whether it is in terms of water allocations or taxes for water pollution, etc.

Veolia combines total water cost analysis with environmental assessments to support decision-making processes

One of the first steps is to select the relevant risks for the operation and the local context. Indeed, water-related risks will be different for a consumer goods factory in the south of Europe compared to a mine site in the United States.

After this selection is made, an economic and sensitivity analysis of each selected risk is conducted based on financial and operational data. The results provide a baseline of economic impact and likelihood of a wide range of water-related risks (see the image below).

Once the baseline has been identified, one can use the tool to better understand the derived economic impact and likelihood of different water strategies, as well as their respective value enhancements. In the example case illustrated below, a water-reuse solution is shown to help reduce both the impact and the likelihood of potential reduced water allocation.

Mitigating environmental and economic risks at the same time

Veolia combines total water cost analysis with environmental assessments to support sound decision-making processes that mitigate environmental as well as economic risks. Veolia uses cutting-edge quantitative metrics, such as the Water Impact IndexTM, the first indicator enabling a comprehensive assessment of the impact of human activity on water resources to ensure long-term water supplies and healthy water ecosystems.

Creating shared value for shareholders and stakeholders

The True Cost of Water tool is part of Veolia’s aim to create shared value creation opportunities that benefit both shareholders and stakeholders, as well as the environment.

Better pricing of water externalities and integrating them into business planning and models is critical to ensure integrated sustainable water practices and long-term economic growth.

For more about the tool watch our video and see more on our comprehensive water assessments for the largest Thai paper products supplier here.

Further Reading

• Quantifying Water Risk: What’s My Number? – Industries are exposed to water risks but financial valuation of such risks remain elusive. China Water Risk’s Thieriot reviews existing quantification tools & methods and highlights gaps that need to be filled to put a number on water risks
• Corporate Bonds Water Credit Risk Tool – China Water Risk sat down with GCP’s Liesel Van Ast & GIZ’s Simone Dettling, two developers of the Corporate Bonds Water Credit Risk Tool to find out how it helps investors & banks mitigate exposure and impact on the bottom line
• WWF’s Stuart Orr on the Water Risk Filter – WWF’s Stuart Orr on the newly launched Water Risk Filter Tool. The tool is free and helps companies & investors assess exposure to water risks in their industry and basins where they operate and invest
• Mapping Water With Aqueduct – With a water supply crisis as a top five risks facing the world, WRI’s Tien Shiao walks us through how Aqueduct can help companies and investors gain perspective
• Water Stewardship: Actions Must Match Risk – Despite acknowledgement of water risks, 58% of companies in CDP’s 2014 Global Water report do not have a public commitment to water. We expand on actions needed in China & globally to match the risk
• Investors Value Fuller Disclosure – PwC partner, Gayle Donohue argues that existing corporate reporting with undue focus on financial aspects of the business model is outdated, and outlines research which shows fuller disclosure of ESG information could translate into more BUY recommendations
• Bloomberg’s Views on Water – Bloomberg’s Liu & Bullard, discuss the importance of ESG analytics and why water use & efficiency data is crucial in the face of an increasingly water-insecure future in identifying portfolio risk
• US$1.9tn – The True Cost of Water – New TEEB report estimates the unpaid environmental cost of capital at US$7.3 tn of which US$1.9 tn is water. Chaoni Huang of Trucost tells us why this is this is the unpaid natural capital cost of water