Over 730 million people now live in countries which have ‘high and critical levels’ of water stress, according to the UN. The impacts are already being felt, as water rationing, increased droughts, and lower crop yields are now commonplace.
Access to clean water is a human right. This is expressed in Sustainable Development Goal 6, which aims to “ensure availability and sustainable management of water and sanitation for all”. While many people take water for granted, the available amount is decreasing but societal demand is growing. By 2030, the UN predicts there will be a 40% shortfall of available global water supply. Water is currently undervalued at a scale which leads to inefficiencies, underinvestment, and a lack of understanding around the risks the crisis poses, both now and in the near future.
If businesses don’t know how they are exposed to a problem, they can’t be expected to address it properly. We can only address the global water crisis by valuing water appropriately. Companies and governments have a mixed record on the issue. The price paid for water does not reflect the real costs of extracting, transporting, using, and polluting. Regulatory authorities often set water tariffs that do not reflect scarcity conditions, or give incentives to use it more wisely.
For many corporates there is a lack of awareness or an assumption that freshwater will always be available to meet their needs, but the picture is changing. Valuing water is growing in prominence in both boardrooms and policy circles.
In 2021, CDP’s water questionnaire was issued to over 6,000 companies on behalf of over 680 financial institutions and 200 large corporates, which used their role as investors and lenders to ask companies to respond. CDP’s analysis of the responses shows how global companies are starting to take stronger and more meaningful action on water. Over 3,300 companies now disclose their data, a number which has increased year-on-year from 176 in 2010. Last year, 118 of these companies made it onto CDP’s Water A List, a grade reserved for those putting water concerns at the heart of how the business is run.
One of the ways companies are now doing this is through setting an ‘internal price’ on water. This approach is an exercise in working out the monetary value of water to a business. An internal price could factor in the environmental costs of extracting water in a local area, or the benefits of improving water quality, efficiency, and securing water supplies. This price is then used to inform investment decisions and protect against shocks caused by water shortages.
The way an internal price is actually used varies across businesses. Our data shows that some use a hypothetical ‘shadow price’ to assess risks and opportunities, while others determine it based on the cost of securing adequate water sources, and even charge a fee to internal departments for their water impacts. This approach can lead to behavior change and improve environmental management practices. In some cases, it also enhances corporates´ engagement with local stakeholders.
Taiwanese electronics company AU Optotronics discovered the benefits of a setting an internal price when assessing the impact on wastewater. The company reported to CDP that “…not only is the water saving counted but also the monetization value of river pollution avoided, biodiversity maintained, and the increase of our water independence, which reduces costs when droughts occur.”
Over the past 5 years CDP has used its yearly water questionnaire to ask about internal pricing. The results from 2021 show that 269 companies confirmed they applied a price, but that it was used for different purposes. 52% of respondents said it was used to accurately reflect real and potential costs, while only 12% used it to work out the wider societal benefits. One of the more concerning findings was the lack of awareness on the issue, with many companies confusing the price to mean the tariff charged by water suppliers.
These results show both the road taken and the one ahead of us. The growth in companies disclosing and taking leadership on water issues has increased in recent years. But there remains a substantial number which are still unaware of the problem.
Internal water pricing can act as a way in by helping companies understand their impacts and what they can do about it. Voluntary disclosures to CDP demonstrate that, even in the absence of an efficient pricing mechanism set by water authorities, businesses can proactively factor in risk and opportunities. However, they need clear guidance on what an internal water price should look like and how to calculate it, alongside examples of the many benefits.
CDP will work with companies on water pricing to scale up its adoption among the world’s largest water consumers. Learn more about how to report on water pricing to CDP here.