Schafer: Getting real about the true cost of water

One of the things you hear from business people is that there would be a lot less fresh water used if it weren't so darn cheap. It costs pennies, not dollars. It's simple economics.

But there is still a strong case to be made for saving water if you think about it the right way. Not just a social responsibility case, either, but a financial one.

That's the thinking behind one of the most interesting online tools launched in recent memory, this one codeveloped by St. Paul-based Ecolab. It went live last week as the "Water Risk Monetizer," a brand name that Ecolab shouldn't bother submitting for any creative marketing awards.

As the name suggests, the basic idea is there's a value, a cost, that's being borne today when the clean water supply is at risk.

The corporate community is now talking a lot about water scarcity, joining with environmentalists and others who have been raising alarms for years. Investors are starting to see water scarcity mentioned as a risk factor in corporate regulatory filings.

The total amount of water on the planet never actually changes, of course. When talking about scarcity today business people mostly mean not enough clean water where it's really needed.

At some point that conversation has to roll around to price. Water is too cheap almost everywhere, and maybe the oddest part is that it's cheapest in some of the places where the supply is at greatest risk.

Figuring out what water should be worth shouldn't be that hard. But University of Minnesota researcher Bonnie Keeler, who has been immersed in researching the financial implications of clean water, called water pricing "one of the classic paradoxes in economics."

Stop and think about it, she said. Clean water is essential to life and yet is priced in much of the world at next to nothing. Diamonds are very highly valued, but it's hard to argue with Keeler's conclusion that diamonds are "completely nonessential to life."

Ecolab's executives harbor no ambitions to get consumers to carefully consider the economic value of the water they use. They are trying to influence executives who run big facilities, with capital to invest throughout the globe.

It might seem like common sense, when looking at building a new manufacturing facility, to invest in equipment that cuts water usage if the facility happens to be in a watershed with clear signs that the water could run out.

But if the utility quotes a price for water that in no way reflects that risk, then a conventional return on invested-capital analysis would lead to the wrong answer.

But perhaps that's because companies aren't doing the right math, Baker said.

The calculations that the water risk monetizer is doing are pretty much the same as what Ecolab analysts do right now when deciding whether to approve an acquisition abroad. In addition to the usual cost of capital that would apply to any ­investment, Ecolab factors in a "phantom" capital cost.

"What we're doing is somehow putting a cost around political uncertainty, or legal uncertainty, or economic uncertainty," Baker said. "So we use a phantom price of capital. It's not the actual price of the capital we're paying. But we do it because we think we get a more honest reflection of the economics."

So as Baker and his executives looked at water, they thought a similar approach would lead managers to a more honest conclusion.

"The challenge with water is it's a local issue," said Emilio Tenuta, Ecolab vice president of corporate sustainability. "Greenhouse gas is a global issue. The reason we did a tool is really to drive action at the local level, at the operation's level."

Ecolab launched the monetizer with the U.K.-based consultancy Trucost. It's been in the works a little over a year.

Tenuta declined to say what Ecolab invested in the project, but an economic case for going ahead with it is easy enough to see. Ecolab, of course, sells lots of different products to treat water and reduce consumption, used everywhere from commercial dairies to the oil fields.

References to saving water pop up all over Ecolab materials, an example being a simple product announcement this summer for a new dishwashing system for restaurants that happens to save the restaurant owner 27,500 liters per year.

Part of the reason Ecolab collaborated with Trucost, and put the tool on an independent website, is that Ecolab didn't want to be accused of coming up with some arcane financial calculation that always seemed to justify buying more stuff from Ecolab.

"We are by far the leaders in the world in what we do," Baker said. "If we grow the market, we will benefit. We want our business to do well but we're also honestly interested in making a difference."