Understanding water risks: A business imperative
The decline in both the availability and quality of water is well-documented, prompting many businesses to assess the potential financial impact of this issue on their operations. Kirsten Kelly talks to Mike Smith, a director at Talbot, about water risk profiling.
“As an economist, I work with our clients to assess the costing and financing of various water projects, as well as the financial impact of not implementing such mitigation strategies. This largely involves assessing water supply and quality risk, and converting that into a financial impact. It’s about monetising water and factoring in the cost if it becomes unavailable or fails to meet a certain quality standard,” explains Smith.
When conducting a water risk assessment, Talbot evaluates the specific catchment area where the business operates. Both the present and future water supply versus demand is calculated. Talbot will also examine activities upstream from the client – this can include elements such as pollution caused by a wastewater treatment plant or factory, use of water in excess of licence as well as climate change.
Augmentation strategies
“We pinpoint possible climate change impacts. There are models that predict the change in weather patterns and the impact of these changes (flooding or drought) on a catchment area. Furthermore, we evaluate the performance of water service providers (WSPs) as well as any existing augmentation strategies in the catchment area,” says Smith.
For instance, Phase 2 of the Lesotho Highlands Water Project will have a bearing on water supply in Gauteng. There are plans for the building of various dams as part of the uMkhomazi Water Project that will supply the Pietermaritzburg and Durban areas. Depending on the client and position of these dams; it could be good news for one client (creating a more consistent water supply) and bad news for another (removing water from one catchment to supply another).
Regulations and tariffs
“Another component of water risk is compliance and reputational issues. When compiling a water risk profile, we will flag restrictions from a regulation perspective as well as assessing any existing water use licenses against the current industry practices,” adds Smith.
“Then there are tariffs. In South Africa, there is a general lack of consistency around water and discharge tariffs, and particularly the escalation thereof. But by looking at historical data, we believe that there will be double-digit increases going forward.”
Financial markets and consumers also need to be considered. Environmental, social, and governance (ESG) performance is receiving greater attention from investors, customers, suppliers, and other stakeholders and is becoming a bigger part of future enterprise value. For many companies, water plays a critical role in ESG and corporate social responsibility performance. Investing in responsible water management can measurably improve a company’s ESG profile while reducing operational risks.
Challenges
Regulations, climate change, demand and supply, market pressures as well as augmentation plans impact each other, making water risk profiling an extremely complex task.
Furthermore, water risks are dynamic and can change on a weekly, daily or even hourly basis. Fortunately, Talbot uses data-driven solutions that provide a more dynamic analysis of future water risks.
“All of the data and information that we use is extremely granular and localised, so businesses in the same catchment area may have entirely different risk profiles. Similarly, a multi-site business will have a different set of risks per location,” states Smith.
Like all models, the quality of the data used determines the outcome and accuracy. Smith notes that the renewal of the Blue Drop, No Drop and Green Drop Reports has been a great step forward in making people aware of the state of local infrastructure.
Next steps
Once Talbot has identified the water risks of a business, they are then well-positioned to create a strategy for their mitigation and adaptation.
“Our process engineers will firstly optimise a company’s water usage, thereby reducing consumption. From there, we look at options like water recovery plants and/or buffering water supply through storage. Ultimately, we are targeting water resilience, and that requires a multi-pronged approach,” says Smith.
“It is important to monetise water risks to give credibility to investment decisions on water projects. For example, a water recovery plant may cost a company R150 million, but their loss in production, if they have a water supply issue, as well as their discharge tariffs, may cost them R200 million over the next five years. With limited water availability and its deteriorating quality, businesses are increasingly aware of the financial impact of water on their bottom line,” concludes Smith.