Module
Approach
Assess the Strength of the Business
Case for Pursuing a Water Sustainability Strategy
Assessing the business
case typically involves comparing the cost of action to
address an opportunity or risk with the benefits derived from
taking action. If the value of pursuing an action is greater
than the costs associated with the action (adjusting future
costs and benefits with a time discount rate), then there
is likely a business case for doing soa positive net
present value (NPV). This NPV approach applies whether one
is determining the business case for upgrading a wastewater
treatment facility or assessing the business case for establishing
a cross-functional committee to develop a company water strategy.
The challenge often
lies, however, in determining the cost and benefits of taking
action. While the organizational costs of taking action are
often relatively straightforward to estimate, the benefitsor
avoided costs of inactioncan be more difficult to quantify
due to future uncertainty. Estimating the value of less tangible
benefits, such as reduced risk and improved relationships
with critical customers, can be particularly difficult.(1)
Some companies have developed or adapted total cost
assessment or probabilistic risk assessment tools to
support their efforts to determine costs and benefits. Nonetheless,
business managers are accustomed to making decisions that
involve weighing difficult-to-quantify costs and benefits.
Yet the common toolbox
of valuation and decision-making tools, such as NPV, can lead
companies to underestimate the value of decisions and investments
that create options for future action. Recent research has
highlighted the difficulty of selecting appropriate discount
rates for comparing short-term costs and longer-term benefits
of environmental investments.(2)
New tools, however, are emerging to assist business managers
in making investment decisions amidst significant uncertainty
about the future. The concept of real options
adapts financial options tools to the evaluation of a business
opportunities.(3)
Incorporating the value of future optionssuch
as secured access to sufficient quantities of clean freshwater
at an affordable priceinto corporate decision-making
can significantly improve the financial attractiveness of
strategic investments. Steps that expand, or keep open, future
options for a company often create value. For example, a companys
investment in watershed protection could contribute to a valuable
future option for its facility to expand production
capacity in the future by alleviating local water quality
pressures.
Even when the benefits of pursuing
an action outweigh the costs (e.g., a positive NPV exists),
the activity may not compete effectively for limited organizational
investment resources and attention. Some water sustainability
projects may be too small to easily attract management interest,
or they may have a lower return on investment than other projects
under consideration. To the extent that investments in water
sustainability initiatives can reduce costs, increase competitiveness,
safeguard the business license to operate,
and remove potential constraints to future growth, these benefits
are likely to resonate with company leadership. The benefits
of addressing water-related challenges, such as reduced risk,
enhanced competitiveness, and improved relationships, become
more salient in making the business case when they relate
to important business priorities or critical customers
expectations.
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