Vodka bottles lined up at a Diageo plant in India
Vodka bottles at a Diageo factory in India — one of over 40 plants operating in water-stressed locations © Dhiraj Singh/Bloomberg

As companies’ costs mount in an era of inflation, the price of water may seem like a surprising area of focus: water tariffs have historically been so low that they are “almost just noise on a profit and loss sheet”, according to Cate Lamb, global director of water security at green disclosure group CDP.

Yet, with climate change exacerbating both water scarcity and flooding, companies are moving water and its associated costs up their list of priorities. They are adjusting how they account for the commodity and, in some cases, even developing internal pricing mechanisms for it.

Diageo — the maker of Smirnoff vodka, Johnnie Walker whisky and Guinness — has, since 2016, set water replenishment targets for each of its country markets and required local units to invest from their main budgets to reach these goals.

Michael Alexander, global head of environment at the drinks group, says: “In a past life, many of our peers had big foundations which they used for philanthropic donations. But this approach is different: it’s all paid off the [profit and loss] of individual markets.

“They have a target to reach and, if they’re short of that target, they need to invest.”

Part of the process, says Alexander, involves taking into account the full costs related to treating, transporting, and discharging water — rather than just the tariff charged locally for access.

However, Diageo’s approach to water also attempts to address broader risks to the company, from the availability of the commodity for its own products — where water is the main ingredient — to water-related stresses in its supply chain and health risks to its workers.

Companies are increasingly applying this broader outlook to assessing the cost of water, according to CDP, as they face both pressure from investors and stress on their operations from extreme weather and water scarcity.

A survey by CDP found that, in 2021, 269 companies were using some form of internal pricing for water, up from 53 in 2017. And the number disclosing water-related data to CDP has ballooned to more than 3,300, from 176 in 2010.

“Where companies are deploying an internal price on water, that reflects traditional costs that they are responsible for paying out,” Lamb says. “But, in some instances, we are seeing companies include additional externalities — the costs avoided by improving biodiversity, for example.”

Such schemes are an attempt to step in where many governments have failed, by not regulating water in a way that accounts for pressures on supplies. In water-stressed areas, it is often households — particularly the poor — who pay high tariffs for water, leaving companies with lower bills, notes Lamb.

A worker stands at a sink to wash his hands at a Diageo plant in India
Liquid assets: Diageo has set water-related targets for all its business units, such as this one in India © Dhiraj Singh/Bloomberg

Non-profits and corporates alike are developing methodologies to assess the value of water stewardship projects.

For example, Diageo uses the World Resources Institute’s volumetric water benefit accounting system. US cleaning services group Ecolab offers an online water tool that enables companies to compare their facilities’ performance with rivals. Meanwhile, Nestlé, the world’s largest foodmaker, uses an internal water stress index to assess risks at its sites as it seeks to push through water savings. It has promised a fresh action plan by the end of 2022, based on the principle that “access to drinking water has priority over the activities of the company”.

Outside the consumer goods sector, industrial gases group Air Liquide uses an internal water price at which divisions of the company can sell to one another.

But there is no global water pricing mechanism comparable to carbon credits — which means internal water accounting remains “an art rather than an accurate science”, says Lamb.

Unlike carbon credits, water values differ significantly from one country to another. Diageo’s 43 sites identified as operating in water-stressed areas are clustered in sub-Saharan Africa and India, with a smaller number in South and Central America, Turkey and Indonesia. “Externalities have to be expressed at a local level,” Lamb says.

In spite of these variations, though, the internal initiatives do have concrete effects.

Diageo’s targets have led to the installation of water reuse and recycling facilities at many of its plants, resulting in 6.5 per cent of its total water withdrawals being reused or recycled last year. They have also led to the funding of projects outside the company’s own sites, such as desilting water storage ponds near its plant in Maharashtra, India.

Such initiatives do not lessen the need for government investment and regulation, stresses Lamb. In addition, the continuing reassessment of water costs raises a bigger question for businesses about “the impact of higher costs for goods and services — who pays?” she notes. “Do [companies] pass those costs through to their customers and, if so, are their customers willing to pay?”

“In food, beverages and apparel, that is where things start to get a bit more sensitive.” Company actions, such as lobbying for higher water tariffs, may place corporations’ sustainability arms at odds with their commercial teams, Lamb points out.

Some of the progress achieved so far on water has resulted from highlighting the dangers to companies from worsening ecological conditions — including the risk of owning ‘stranded assets’ as water scarcity makes sites unviable. Alexander maintains that “it is absolutely in our own interests to improve climate resilience”.

Yet the interests of ecosystems and of companies do not always align. “Bottled water is an obvious product that many are rightly questioning [over] its role in a sustainable society,” says Lamb. “One would also consider the future of other commodities such as sugared water being bottled and sold.

She suggests that the time has come to “consider the future” of these products. “To achieve a water-secure, sustainable future, there inevitably will be products that no longer exist . . . It’s beholden on companies, if they wish to remain a vibrant member of a sustainable society . . . to start innovating now.”

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article