How a shadow price on water could prime innovative technologies
As corporate water stewardship strategies have evolved over the past several decades, so has a greater acceptance that the price of water — what a company actually pays per gallon or liter of water from a utility — is inadequate to quantify water as a business risk.
That reality decelerates the adoption of innovative water technologies and business models to mitigate business risks. Meanwhile, it has become increasingly clear that the acceleration of climate change-related impacts and deeper corporate commitments require a more sophisticated framework to overcoming those adoption barriers.
The need for a new approach to identify, fund and implement innovative water technologies and business models is critical. The impacts of climate change on water resources is well documented in places such as the American West, where the Colorado River Basin was named the most threatened in the U.S.
Striking in the declaration by American Rivers was the statement that “rising temperatures and drought driven by climate change, combined with outdated river management and overallocation of limited water supplies [emphasis added], threaten the entire region.”
How can stakeholders, in particular the private sector, contribute to scaling innovative water technologies and catalyze other stakeholders to accelerate changes in public policy to adapt to 21st-century water realities?
We propose the increased adoption of shadow pricing (the price of water plus consideration of risks, costs for energy and associated carbon emissions, etc.) and business value at risk strategies (additional considerations such as brand value, license to operate and grow, etc.) to overcome the challenges and barriers of using internal return on investment criteria to consider these strategies.
Companies such as Unilever and Nestle SA have established internal costs for water (shadow prices) factoring in water risks, costs and other factors. A June 2021 report by Barclays Capital, “Water: The ‘True Cost,'” lays out the rationale for investing in water actions, including technology innovation. The key finding, in our view, is that for the consumer staples sector, “the cost of inaction will be 18x the cost of action.”
What do we do with this conclusion, and how do we overcome the “tyranny of the simple payback” (a quote from friend and colleague Joe Rozza) return on investment calculation?
Our recommendations for corporations with ambitious water strategies are as follows:
- Inventory and evaluate the current challenges and barriers to adopting innovative water technologies and business models to mitigate business value at risk and achieve your goals and objectives. Consider concerns such as does the company lack internal incentives to take technology risks? Or does it require too short a timeframe for investment paybacks?
- Develop a framework and commitment for integrating a shadow price and for embracing a business value at risk strategy that can be used to incentivize the adoption of innovative solutions to water scarcity, poor quality and equitable access to water. You can quantify business value at risk using tools such as the WWF Water Risk Filter WAVE Tool or use a more subjective approach in which watershed-specific investments are accommodated outside of established return on investment criteria.
- Build a program to identify and directly invest in innovative water technologies to increase the pipeline of innovations for considerations. Programs such as the 100+ Accelerator, PepsiCo Labs and watershed-focused venture funds such as the Future of Water: Colorado River Basin Fund (disclosure, Will Sarni is founder and CEO of the fund) increase corporate exposure to innovative solutions and opportunities for investment to support entrepreneurs.
There is an opportunity to overcome the status quo approaches to water management and stewardship. However, time is of the essence to address the impacts of climate change on critical watersheds, globally.
May 23, 2022 at 02:34PM
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