How do you put a price on water? Try algorithms

Anheuser-Busch InBev uses a lot of water. It is a central ingredient in beer; but the brewing giant also uses water to grow barley, to generate steam and to clean its facilities. And when you use as much water as Anheuser-Busch InBev does, small changes in access and pricing have a big impact.

“Generally, most stakeholders agree that water is an undervalued natural resource and that we need to understand its true value,” said Hugh Share, the company’s senior global director for beer and better world. “As we see stress [on natural resources] increase globally in certain regions, I think we can expect water costs to increase.”

This challenge is what the water, energy, and hygiene services company Ecolab hopes to confront with a new water-pricing tool released last month. Using a range of factors from a region’s water scarcity to its plans for future growth, the Water Risk Monetizer aims to give corporations the information they need to make more geographically targeted, financially wise decisions about the true risks and costs of their water usage.

“The target for this tool in our mind is operations at the site level,” said Emilio Tenuta, vice president of corporate sustainability for Ecolab. “Water is a local issue and we want to make sure we start there.”

Although water is crucial to businesses from breweries to tech companies, it has traditionally been relatively inexpensive. As a result, many corporations have done little to make their water use more efficient, focusing instead on more costly resources.

“There’s been a lot of dialogue about it but very little action,” he said. “It’s very difficult to implement conservation projects when you don’t feel the implications.”

Climate change, persistent droughts and regulatory changes, however, now have businesses paying more attention. Droughts in the western US have sparked worries about the agriculture industry, while groundwater stores have been declining across the country. Earlier this summer, authorities in northern India ordered a Coca-Cola plant to cease operations, claiming the beverage maker was drawing too much water.

As corporate strategists devote more thought to water conservation, however, they are running up against a problem: water prices vary widely across the country and the globe. And these prices do not necessarily reflect wider environmental and social risks and costs that water usage might incur.

“There’s really a lot of attention that needs to be placed to pricing water more rationally,” said Ed Osann, senior policy analyst with the National Resources Defense Council.

Ecolab, along with London-based environmental data firm Trucost, has devised an algorithm to tackle this challenge. Available free of charge, the Water Risk Monetizer asks users to enter their location, the amount of water they use, the amount they expect to use over the next three years, and the price they currently pay. For manufacturing facilities, the location’s productivity is also entered.

The program then uses this information and looks at a region’s water scarcity, the role the watershed plays in the local community and environment, and the potential for changes in the area’s gross domestic product. These factors, taken together, are used to determine a premium: a number businesses can add to the base price of water to get a figure that more accurately represents the true cost – and the true risk – of their water use.

Ecolab and Trucost aren’t alone in trying to help enterprises take a closer look at their water use. The Water Resource Institute’s Aqueduct maps help users visualize different water risks around the world, for example, and the Global Water Tool from the World Business Council for Sustainable Development enables companies to generate risk analyses for each of their sites.

Meanwhile, companies can use the Water Risk Monetizer’s price premium – called, variously, a shadow price, phantom price or internal price – to assess the impact and cost of proposed projects, Tenuta said.

Many companies prefer to invest in projects that pay off within two years; using the higher shadow price in these calculations can help companies make choices that are better for both their bottom lines and the water supply over that timeframe. The pricing tool allows users to enter and compare multiple sites. The resulting numbers let companies look at their water use across locations in a very detailed way; a manufacturing company, for example, might realize that certain processes are best moved from one facility to another with more resilient water resources.

“The essence of the tool is all about taking action,” Tenuta said.

To truly make a difference, however, a company must consider the attitudes of customers and the communities in which they operate, said Will Sarni, leader of the water enterprise strategy practice at consulting firm Deloitte. And so far, the Water Risk Monetizer does not put a number – or monetary value – on these sorts of reputational risks.

Currently, Ecolab’s tool tackles this challenge by using input from WWF’s Water Risk Filter and returning a reputational risk rating of high, medium or low; it does not translate that assessment into dollars and cents – yet.

“Monetizing those types of risks is challenging, but it is something we’re hoping to do in a future iteration of the tool,” said Steven Bullock, head of research for Trucost.

Sarni explained that even as water crises loom, the good news is that these threats are likely to kickstart a wave of business ingenuity. Current water concerns should spark developments in water technology, analytics, efficiency, and treatment. “Resource scarcity drives innovation,” he said.

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