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The Value of Water

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The Value of Water THE VALUE OF WATER: A framework for understanding water valuation, risk and stewardship DISCUSSION DRAFT | August 2015 AUTHORS | Alexis J. Morgan and Stuart Orr (WWF International) COVER PHOTOS LEFT: A girl pumps water in Zimbabwe. PHOTO CREDIT: Curt Carnemark / World Bank RIGHT: The renovated water treatment plant in Juba South Sudan. PHOTO CREDIT: Arne Hoel / World Bank TABLE OF CONTENTS Executive Summary ..........................................................1 1. Introduction . 7 2. Water valuation: Varying perspectives and the need for clarity...............8 2.1 The perspective of business..........................................................8 2.2 The perspective of government . 8 2.3 The perspective of civil society . 9 2.4 Confusion in the valuation terminology landscape...................................10 2.5 A review of existing water valuation frameworks . 10 3. New Water Valuation Framework .........................................14 3.1 Nested Value (X-Axis) ...............................................................14 3.2 Risk and Uncertainty (Y-Axis)........................................................16 3.3 Putting together the pieces . 17 3.3.1 A brief overview of water risk ..................................................................17 3.3.2 A brief overview of water stewardship . 18 3.3.3 Revisiting water risk and stewardship through the Water Valuation Framework..................19 3.4 Conclusions on the Water Valuation Framework . 21 4. Comprehensive metrics to understand how water affects shareholder value ........................................................23 4.1 Accounting for how water affects present value . 23 4.1.1 A Water Valuation Balance Sheet...............................................................23 4.1.2 A Water Valuation Income Statement . 26 4.2 Accounting for (future) water-related value-at-risk and at larger scales . 30 5. Exploring water tools and case studies using the Water Valuation Framework . 33 5.1 Water valuation tools...............................................................33 5.1.1 Water risk tools and methodologies .............................................................34 5.2 Water valuation case studies........................................................34 6. Conclusion . 38 6.1 Recommendations . 38 6.2 Concluding thoughts . 38 Annexes....................................................................41 A.1 Glossary............................................................................41 A.2 Valuation Case Studies..............................................................43 A.3 Water Valuation Initiatives..........................................................47 The people in Woukpokpoe village have benefited greatly from Benin’s national CDD project. They now have access to safe, clean water. PHOTO CREDIT: Arne Hoel / World Bank EXECUTIVE SUMMARY WHY DOES THE VALUE OF WATER MATTER? is report seeks to bring clarity to a corporate audience, as well as other relevant stakeholders, on how to better understand Water is arguably the most precious resource on Earth, and water valuation, water risks, and the possibilities for better water yet we often value and manage it extremely poorly. e price stewardship. After an introduction, Part 2 discusses current of water traditionally reects a limited set of costs to treat and valuation practices to date and their limitations. Part 3 then transport water, but the value of water is far greater. Low and presents a new framework for valuing water. Part 4 uses that subsidized water prices are important to ensure the human framework to help corporates to better account for water’s true right to water is met, and yet water’s low market-based cost has value. Part 5 looks at current tools and case studies to using the resulted in proigate use, freshwater contamination and, in new framework to better understand the eld. Highlights of the general, inicted costs upon society and nature. Furthermore, key sections are as follows: for business, the skewed market-based value of water has resulted in losses to shareholder value. Section 1. Introduction e value of water is dicult to quantify because dierent Section 1 lays out the basic context for the report and the basic audiences conceptualize and describe its values dierently. components to be discussed. e private sector tends to use the language of nance, while governments often employ concepts from economics and Section 2. Varying perspectives and the need for clarity civil society, using a range of environmental, rights-based, or Section 2 looks at the eld of water valuation to give context social-goods language for valuing water. All of the stakeholders to the report. e section begins by looking at how the private have a legitimate claim on water and its use, and so a corporate sector, government, and civil society value water dierently. e perspective must both understand and negotiate these dierent section then progresses to look at two key often-mistaken terms: ways of valuing water as a scarce resource. FIGURE A. The value of water to a company, the economy, society and nature CORPORATE (AND ECONOMIC VALUE CREATION/ SOCIETAL VALUE ECOLOGICAL VALUE UNCERTAIN FACILITY) VALUE LOSS FROM WATER USE FOR (WELL-BEING) CREATED/LOST BY CREATION/LOSS FROM GOODS AND SERVICES DERIVED FROM HYDROLOGICAL WATER USE HUMAN SYSTEMS National, regional and local WATER USE Companies (and governments are interested Ecological systems their facilities) derive in economic (shared) value Humanity uses water are tied to all proprietary value (and manage water-related for various purposes, hydrological systems through water use, costs/externalities), which are which range from and ultimately which is enhanced or lost affected by water use decisions, incalculable values provide a broad based on their industry including allocation. (e.g., basic health array of services to (corporate risk), their and survival) to society while also corporate response Corporations link to economic personal enjoyment maintaining natural (water management or value creation via jobs/taxes; (e.g., recreation) and systems. stewardship) and external also, corporations suffer from economic use. forces (basin risk). health costs, cleanup costs, etc. MONETARY VALUE ACCOUNTED FOR VIA SOCIAL VALUE CERTAIN VALUE TO THE FACILITY VALUE TO THE BASIN 1 “Water Valuation” and “Water at Risk.” e section concludes Water stewardship is a form of water risk mitigation that by looking at the strengths and limitations of two current seeks to preserve and create value at multiple scales and levels valuation tools: e WBCSD Water Valuation Framework and of certainty. A more traditional, limited water management the Total Economic Valuation (TEV) framework. response, as seen in Figure C, focuses on a narrow range of current facility and corporate value elements (largely current Section 3. New Water Valuation Framework cost), only partly addresses corporate water risks, and largely Section 3 proposes a new water valuation framework in light ignores basin-level risk mitigation or value creation. Unlike of recent focus on water risk and water stewardship. Water traditional water management, water stewardship helps to is valued dierently by the private sector, governments, and maximize long-term shareholder value (as well as social value). civil society as seen in the gure below. Each stakeholder has a Companies are therefore encouraged to push their response dierent language or discipline to talk about the value of water eorts, via water stewardship, to the right and top of the from nance to economics to others. Furthermore, corporate valuation framework to maximize water value. water value is nested within economic, social and ecological Section 4. Comprehensive metrics to understand how water value. It is also able to distinguish between the price, cost water affects shareholder value and value of water, since a focus on the former two (especially price) results in signicant undervaluation of water in corporate Section 4 looks at how the private sector can comprehensively decision making.. take into account how water aects corporate shareholder value and use this information to inform their management practices Water valuation is linked to uncertainty (i.e., water risk), and demonstrate value creation and preservation to their which manifests at various scales and is informed by dierent various audiences (from shareholders to local communities). disciplines using dierent audience-specic methodologies. e measures derive from the valuation framework and are Both time and space are linked to water value (see Figure B). structured around a modied income statement and balance To eectively communicate water value, it is key to understand sheet (as seen in Figures D and E). Employed together, they which elds (e.g., nance, economics, etc.) are relevant to your outline not only how facilities can better measure how water audience and how those elds are impacted by uncertainty. FIGURE B. How valuation is affected by uncertainty VALUATION INAPPROPRIATE: Uncertainty implies incomplete information (i.e., some or all of the relevant information is missing). Normally there is minimal accounting for such water-related value. UNCERTAIN INFORMED BY: COMPLEXITY THEORY, SCENARIO MODELLING INFORMED BY: HISTORY, GEOLOGY, ETC. FUTURE VALUE FUTURE (limited valuation) (longer term social and natural sciences) RISK-BASED WATER-RELATED VALUE: Risk implies partial information (i.e., some or all of the relevant information is stochastic). A
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