What’s going on?
As discussed in Part 1 of this series, many companies include a water stewardship aspect in their environment, social and governance (ESG) programs and commitments. When companies have operations that occur in high water stress environments, the water stewardship commitments are often translated into water replenishment efforts focused on watershed level impacts. To meet these commitments, companies must find projects that are developed enough to estimate the cost and resulting water replenishment volume.
In Part 2 of this series, we reviewed the changes we expect to see in the water replenishment space, namely, a matured marketplace with project standards, expanded investment opportunities with the influx of shovel-ready gray infrastructure projects, and the presence of for-profit development.
As with any mature market, investments (in this case water replenishment projects) will be assessed (or rated) based on certainty of achieving the planned benefit (or return) as well as their vulnerability to externalities such as climate change. To date, investment risk associated with project uncertainty has not been a major factor in the pricing and prioritizing of water replenishment projects. In addition, current methods for validating the investment do not capture broader watershed health implications and do not use available technology for quantifying the replenished volume. In water stressed areas, long term water availability has become a major issue of concern for companies. As companies assess watershed replenishment opportunities, they want to know how that investment is going to impact long term water availability.
We expect evolution in three areas that will directly improve investment behavior:
- Risk assessment. Evaluating project risk (i.e., uncertainty in achieving the stated volumetric benefit) will become more important when defining, packaging, and pricing water replenishment projects.
- Improved validation. Standards and methods for pricing, benefit forecasting, implementation, and particularly validation will likely be a requirement for future projects as stakeholders become increasingly wary of greenwashing and water availability constraints in certain regions worsen.
- Leveraging data. Enhanced predictive and validation methods will likely rely on new technology applications for data collection, analytics, and reporting. These technologies may include satellite measurements, cloud-linked in-stream monitoring, and detailed watershed models (e.g., digital twins), to name a few.
While the three expected changes listed above are being avidly discussed across the water, environmental, corporate ESG, and startup domains, few changes have occurred or been adopted across the market, leaving ample opportunity for improvement.
Identifying uncertainty
In recent years, many nonprofit organizations, with private sector support, have made significant strides in jump-starting water stewardship approaches. In particular, the World Resources Institute (WRI), with support from other organizations released the Volumetric Water Benefit Accounting (VWBA): A Method for Implementing and Valuing Water Stewardship Activities. This method has quickly become the industry standard for developing and implementing water stewardship programs. A similar but more expanded method, the Water Resilience Assessment Framework (WRAF), is being developed by a group led by the Pacific Institute under the CEO Water Mandate. In mid-2021, The Nature Conservancy, with support from Anheuser Busch-InBev, released Measuring and Evaluating the Impact of Corporate Watershed Projects. This recent framework begins to capture broader watershed impact, progress tracking, and communication.
As the water stewardship market matures, a more comprehensive framework is required, one that captures uncertainty and more clearly informs the prioritization and selection of replenishment projects. Studies by the environmental risk analytics company Lotic Labs, indicate that many current industry standard methods for evaluating the benefit of a water replenishment project do not account for regional precipitation trends and can introduce uncertainty of up to 20 percent. With the combination of increased public and investor scrutiny, these levels of uncertainty will make a project less viable. We expect improvements to accounting methods, such as the VWBA, will reduce uncertainty and better define risk.
Predicting and validating beneficial impact
Improved validation is important for stakeholders as well as the project funder. Both groups want assurance that the investment to deliver certain predicted watershed benefits are actually delivering. At present, validation is in its nascent form and the industry standard is to confirm that the project inputs into VWBA for accounting match the actual conditions. This is an implicit validation but does not explicitly confirm that the replenishment benefit is realized by the watershed or broader ecosystem. We expect that water stewardship funders (i.e., corporate ESG programs) will increasingly rely on accounting firms to validate stewardship investments and benefits moving beyond current frameworks.
Direct measurements such as stream flow, groundwater level, and soil moisture are most desirable; however, without additional large datasets (e.g., historical flows, precipitation, land use changes) it can be hard to distinguish between natural variability and variability directly resulting from project implementation. Labs and research groups across academia and the non-profit space are working on more granular models, direct measurement sensors, remote sensing, collaborative data sharing, and AI processing packages to solve this issue. We expect significant progress within the next 2 to 5 years.
What will the future hold?
As water stewardship evolves, we anticipate replenishment project pricing, planning and prioritization to reflect uncertainty risk. This will yield more service opportunities related to risk evaluation, project rating, and risk mitigation prior to project funding. In addition, we expect more stringent project validation criteria driven by the public, consumers, stakeholders, and investors. These criteria are likely to be developed and implemented by accounting service firms. Improvements in measurement, sensor technology, and environmental analytics will likely accompany more stringent validation and direct measurement of investment benefits.