November 28, 2011

Water's Economics as Muddy as Ever

(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers)

It's hard to put into words how dry and hot Texas was this past summer. "Off the charts" is both figuratively and literally accurate: the data for the last 100 years shows a tight regression of temperature and water availability in Texas...except for the 2011 drought, which is far off the line (three degrees hotter with an inch less rainfall than any previous year).

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The economic cost of the drought has been incredible; Texas lost $5.2 billion in agricultural production alone. With agriculture making up 9 percent of the state's economy, and water shortages already threatening growth in the state's energy industry, it's not a reach to suggest that the future of the Texas economy will be tied closely to water availability. And it's not a short-term problem, either. As Columbia University's Richard Seager told the New York Times this summer, "You can't really call it a drought because that implies a temporary change...You don't say, 'The Sahara is in drought.' It's a desert. If the models are right, then the Southwest will face a permanent drying out."

The trend is clear globally as well. Due to rising population, coupled with increasing demands by the agriculture and energy industries (often referred to as the water-food-energy nexus), global demand for clean water will outstrip supply by an average of 40 percent by 2030. While this reality poses grave risks to thousands of communities, it is also the driver of a daunting, and often confusing, economic dilemma which businesses must prepare for. It's time for companies operating in the many dry regions around the world to equip themselves with the tools and mindset they need to navigate this new normal.

While access to water has been recognized as a basic human right, it is also increasingly clear to see that it is a commodity — a resource in high demand that should be valued according to its supply.

But for such a transparent substance, water's economics are anything but clear. Water is one of the world's most glaring commercial anomalies, with a price reflecting nothing more than the costs to extract and distribute it. The value is exempt from the ebb and flow of the market. Even as demand vastly outpaces supply, the market price is as static as a boulder in stream.

With such imprecision in the marketplace, companies must take it upon themselves to identify long term risks, quantifying the true value of water in order to steer clear of long-term hazards. Much of the leading work in understanding water risk has come from Coca-Cola. The beverage giant is now working with the World Resources Institute's Aqueduct Initiative and sharing its extensive global database of previously proprietary data on water availability and risk. By identifying these risks, Coca-Cola is providing a strategic resource for broader communities facing water shortages.

Many companies are now calculating their "water footprint," which adds up the water they use throughout the value chain. The first corporate water footprint was jointly published by SABMiller and WWF in 2009, and since then Coca-Cola, Nestle, and UPM-Kymmene, and others have published footprints for key product lines. However, while the problem affects people globally, water is inherently local, so a global corporate footprint is only so useful. What the calculation does do, however, is help companies highlight those specific, local dangers where a low water supply could disrupt both business operations and the surrounding community.

But managing the risk, and preparing for the 40 percent global supply gap, will require a tough balance of local and large-scale, collective action in cities and watersheds around the world. Andy Wales' company, SABMiller, recently invited businesses, NGOs and other organizations to join a global water initiative, the Water Futures Partnership, in conjunction with the World Wildlife Fund (WWF) and the German development agency (GIZ). This article is part of an ongoing invitation to companies and NGOs worldwide to join the partnership.

From SABMiller's experience — and the work of others across many business sectors — we have learned that once a company understands water's real economic value, both innovation and efficiency weave their way into long term water plans. MillerCoors, for example, has partnered with The Nature Conservancy to help farmers develop a tool to save potentially more than 400,000 gallons of water in every crop rotation - a saving of nearly 20 percent. This kind of deep supply chain work fits the model of "shared value" creation that strategy guru Michael Porter laid out in HBR earlier this year.

While some voices in Texas have called for more action from the government, the real opportunity for leadership will be in the private sector. The leading water-aware companies may be better attuned to slowly emerging water disasters and best equipped to help reduce the gap between supply and demand. They will avoid business disruptions and build more resilient enterprises. They will also, by recognizing the true value of water, help protect everyone's access to clean water.

(This post first appeared at Harvard Business Online.)

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Related Posts (with Will Sarni)
Is Water the Next Carbon?
Innovation in Managing Water

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