Water Stewardship and Business Value
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Water Stewardship and Business Value

Creating Abundance from Scarcity

William Sarni, David Grant

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eBook - ePub

Water Stewardship and Business Value

Creating Abundance from Scarcity

William Sarni, David Grant

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About This Book

The tangible value of increased water efficiency, reuse and recycling and improved social license to operate are moving more companies to adopt water stewardship strategies. This book frames an expanded strategy for water stewardship andbusinessvalue creation, including brand value, that benefits a range ofstakeholders including consumers, customers, investors and employees.

The book showsthat until recently the linkage between full business value and water stewardshiphas beenmissing from the corporate agenda. This linkage and value creation from a leading water strategy is increasingly important to socially responsible investors and "aspirationals" who value companies that have a social mission or focus to their overall business strategy. In general the largest portion of a company's market capitalization is intangible value and understanding how a water strategy contributes to this intangible value is essential.

Theauthors include cases studies and a framework or path forward to guide companies as they seek to build leading water strategy that goes beyond water stewardshipto drive full business value from this investment. The book establishes the linkages and value from an integrated water and business strategy and an approach for companies to follow.

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Publisher
Routledge
Year
2018
ISBN
9781317237471

Part I
The basics

Why water? Simply put the private sector can’t function without water and the public sector can’t have economic growth and prosperity without water. Despite this reality all stakeholders struggle to manage and value water yet alone be stewards of water.

Chapter 1
Why water and business value?

Nowadays people know the price of everything and the value of nothing.
(Oscar Wilde)
One of the questions that routinely appears in any discussion on water is “what is the value of water?” In particular, the issue is about the disconnect between the price (and/or full cost) of water and its intrinsic value. At some level, most people know that the value of water extends well beyond its price.
Why should economic value, or any other dimensions of value, only be measured by market price? It is incomplete, at best, to assume that market price completely captures market value. For example:
Water has economic value only when its supply is scarce relative to demand. Whenever water is available in unlimited supply, it is free in the economic sense. Scarce water takes on economic value because many users compete for its use. In a market system, economic values of water, defined by its price, serve as a guide to allocate water among alternative users potentially directing water and its complementary resources into uses in which they yield the greatest total economic return.
(Ward and Michelsen, 2002)
If the above statement is correct, only market commodities can have an economic value. Items not sold in a market, such as water, would not have economic value. If this were the case, then economic value would be a narrow concept and, more importantly, would not align with many people’s intuitive sense of what is valuable (Hannemann, 2006).
Adam Smith in Wealth of Nations is often quoted on this issue – the distinction between marketprice and economicvalue, using water and diamonds as examples:
The word Value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the passion of that object conveys. The one may be called “value in use”; the other, “value in exchange”. The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.
(Smith, 1776, Book I, Chapter IV)
Plato and Smith express what we all essentially know – that market price does not reflecttrue value. The market price reflects the changes in supply and demand while the true value is more basic, enduring and stable. Moreover, these concepts of value highlight three key principles: 1) demand is separate from supply, with demand indicating what things are worth to people while supply indicates what things cost; 2) market price reflects the interaction of both demand and supply and is separate from each; and 3) the value that people place on an item (their demand for the item) reflects their subjective preferences (Hannemann, 2006).
In other words, subjective value is really about “values.” The discussion of values associated with water is one of the key dimensions missing in our broader discussions on water stewardship and water risks (typically framed as physical, regulatory and reputational risks).
The narrow focus on the price and economic value of water has been one of the key elements in the move from water management to water stewardship. While water stewardship thinking, frameworks and tools have benefitted the public and private sectors, it is clear to the authors that this is not adequate to address the complexity of twenty-first-century challenges such as the energy–water–food nexus, the need for democratization of access to safe drinking water (and water data) and dramatic failures in water policy and governance.
There is no shortage of water tools, reporting and disclosure frameworks and water stewardship initiatives. The proliferation of these initiatives can mask the key issues and challenges still facing the private and public sectors in addressing water as a key driver in economic development, business growth and ecosystem/social well-being.
We still don’t adequately value water and, more importantly, don’t have the governance mechanisms in place to ensure equitable, universal access to safe drinking water and the ability to preserve water for eco-systems. The authors maintain that valuing water and embedding this value into business decisions and public policy is essential – now more than ever.
Unfortunately, discussions on price and value are far too constricting, as the value of water encompasses much more than the focus on economics (see Young and Loomis, 2014). The value of water includes dimensions such as: brand, ecosystem/environmental contributions, cultural and spiritual norms, a driver for economic development, business growth and innovation in technology, public policy, business models and financing.
Perhaps it is time to start with a blank sheet of paper and craft how to truly value water by accommodating environmental, economic, social and spiritual dimensions, along with the value from innovation. In particular, missing from our current view on the value of water is how the ongoing process to manage this scarce resource is driving innovation in technology, partnerships, funding/financing and business models. Scarcity drives innovation and, as a result, creates value to the private and public sectors – this innovation dimension will move us from scarcity to abundance. Innovation can thus create abundance, as will be described in more detail in Part III, Chapter 6.
The value of water as a strategic business issue is tied to sustainability as a driver of company value creation. Sustainability has moved from a vague concept (e.g., triple bottom-line [economic, environmental and social value], or the “right thing to do”) to providing quantifiable, tangible and intangible value to the public sector, private enterprises and the natural environment. An overview of the value of sustainability sets the stage for our expanded view of the value of water and creating abundance.
Companies that invest in sustainability initiatives deliver significant positive financial performance, which is now gaining attention by investors (Whelan and Fink, 2016). As outlined in the paper by Whelan and Fink, research by Arabesque and the University of Oxford found that 90 percent of 200 case studies that were evaluated concluded that “good” environmental, social and governance (ESG) practices result in better operational performance, and 80 percent of a company’s stock price performance correlates with “good” sustainability practices.
Additional research summarized in the article supports the positive financial value of embedding sustainability into business strategies:
  • Between 2006 and 2010, the top 100 sustainable global companies experienced higher mean sales growth, return on assets, profit before taxation and cash flows from operations, compared to control companies.
  • During the 2008 recession, companies committed to sustainability practices achieved above-average performance in the financial markets, at an average of US$650 million in incremental market capitalization per company.
  • Companies with superior environmental performance experienced lower cost of debt by 40 to 45 basis points.
  • Studies suggest that companies with strong corporate responsibility reputations “experience no meaningful declines in share price compared to their industry peers during crises.” Firms with poor CSR reputations declined by “2.4 to 3 percent: a market capitalization loss of US$378 million per firm.”
In addition, according to the Ernst & Young’s globalInstitutional Investor Survey (Ernst & Young, 2013), investors are increasingly viewing companies’ nonfinancial disclosures as “essential” or “important” to investment decisions. Moreover, 62.4 percent of investors are concerned about the risk of stranded assets (i.e., assets that lose value prematurely due to environmental, social or other external factors) and over one-third of survey respondents reported reducing their holdings of a company in the past year because of this risk.
Corporate sustainability initiatives can increase employee loyalty, efficiency and productivity and improve human resource metrics in recruitment, retention and morale. One study found that employee morale was 55 percent better in companies with strong sustainability programs, compared to those with poor ones, and employee loyalty was 38 percent better.
Sustainability strategies also add value by driving customer engagement and increasing sales. Again, as summarized in Whelan and Fink (2016), nearly two-thirds of consumers across six international markets believe they “have responsibility to purchase products that are good for the environment and society” – which is about 82 percent of the consumers in emerging markets and 42 percent in developed markets. This trend is perhaps best summarized in claims by Unilever that its “brands with purpose” are growing at twice the rate of others in its portfolio.
Water is unique and, as a result, creates unique value beyond any sustainability value proposition. While stakeholders can argue about the value created by sustainability, no one can credibly argue that they can do without water, which as a result has immeasurable value.
Water as a critical resource for business and economic growth is just being understood and quantified. Historically, water was assumed to be essentially free and abundant. This is no longer the case. While many companies understand water-related risks, very few have truly quantified the value of water to their business and how it can “fuel” business growth. In addition to quantifying reputational risks, companies who have a leading edge water stewardship strategy now need to quantify the brand value from their investments. Quantifying the brand value from water stewardship enables companies to make “better” long-term investments to support business growth.

References

Ernst & Young (2013). Institutional Investor Survey: Pension and Insurance Fund Attitudes Toward Investment in Renewable Energy Infrastructure. [online] Available at: www.ey.com/Publication/vwLUAssets/EY_-_Cleantech_institutional_investor_survey/%24FILE/EY-Institutional-investor-survey-results.pdf.
Hannemann, W. (2006). The Economic Conception of Water. In: P. Rodgers,M. Lamos and L. Martinez-Cortina, eds., Water Crisis: Myth or Reality? London: Taylor & Francis, pp.61–91.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Book I. London: W. Strahan; T. Cadell.
Ward, F. and Michelsen, A. (2002). The Economic Value of Water in Agriculture: Concepts and Policy Applications. Water Policy, [online] 4(5), pp. 423–446. Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.488.9784&rep=rep1&type=pdf.
Whelan, T. and Fink, C. (2016). The Comprehensive Business Case for Sustainability. Harvard Business Review. [online] Available at: https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability.
Young, R.A. and Loomis, J.B. (2014). Determining the Economic Value of Water: Concepts and Methods, 2nd Edition. London: RFF Press/Routledge.

Chapter 2
Valuing water

Access to a secure, safe and sufficient source of freshwater is a fundamental requirement for the survival, well-being and socio-economic development of all humanity. Yet, we continue to act as if freshwater were a perpetually abundant resource. It is not.
(Kofi Annan, 2001)
This statement from Kofi Annan reminds us that historically water was assumed to be essentially free and abundant, so the amount of water used in business was typically of little concern. Impacts from water scarcity are now being felt by businesses, and as a result they are responding in varying degrees. Water scarcity is being driven by population growth and industrial expansion, both of which are further complicated by the negative effects of climate change such as droughts and extreme weather events. This combination of factors is placing constraints on water access and use even in some geographies where water has historically been abundant.
The competition for water places increasing demands on the private sector and can impact global and regional business strategy. Many companies understand water-related risks, but very few have truly quantified the value of water to their business and how it can “fuel” business growth (Sarni, 2014). In addition to fueling business growth, businesses must look to quantifying the reputational risks and how these risks affect the brand value. Companies who have a leading-edge water stewardship strategy now need to quantify the brand value from their investments in order to fuel the growth of a positive brand value. Quantifying the brand value from water stewardship enables companies to make “better” long-term investments to support business growth.
This view of water as “fuel for growth” builds upon the strategy of “integrated water resources management” (IWRM). IWRM is defined as “a process which promotes the coordinated development and management of water, land and related resources in order to maximize economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystems” (Global Water Partnership, 2012). Water management essentially consists of “actions by an authority mandated by the state (within which, ownership of the resource is vested by law) to manage water resources on behalf of all water users”; the water stewardship approach is about “private actors increasingly involving themselves in the management of the common pool – public good regarding water” (Hepworth and Orr, 2013). This definition is one of several but does reflect the key concept of water as a common good and therefore requires engagement by all stakeholders to ensure its protection.

Benefits of water

Water has value to every person, business and ecosystem. Placing a value on water is challenging because it is a shared resource and not everyone has the same view of water – both value and values. There are many variables that determine the value of water to a person or business.
From a physical attribute perspective, quantity and quality are the most significant, in part because they dictate how much water is available, and if the water is potable or suitable for other purposes (e.g., irrigation). There are risks with quantity and quality because of the decreasing amount of freshwater and the increasing amount of water pollution due to population growth, climate change, urbanization and rising incomes (JP Morgan, 2008).
Quantity and quality are the fundamental factors of water management, but if we want to move towards water stewardship strategies, we must look towards “sustainable development’s five dimensions: political, social, economic, environmental, and cultural” (Chelby, 2014). The con...

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