Ecolab Inc. (ECL) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's webinar. My name is Tory Grieves, and I'm Director of strategy at S&P Global Sustainable 1. It is my pleasure to moderate today's webinar titled: Beyond ESG with Financial Impacts of Drought and Water Scarcity. Ahead of the upcoming UN Water Conference taking place later this month in New York, kicking off on World Water Day, March 22. Before my fellow panelists introduce themselves a few housekeeping items. We recognize the topic of today's webinar is of great interest to you. We want this to be an interactive session and encourage you to submit questions for discussion. [Operator Instructions] The webinar is being recorded and an on-demand version will be available shortly after we conclude. [Operator Instructions] Now it is my pleasure to be joined today by Chris Goolgasian, Director of Climate Research and Portfolio Manager at Wellington Management; Xavier Leflaive, Environment Director and Administrator Principal at OECD; and Emilio Tenuta, Senior Vice President and Chief Sustainability Officer at Ecolab. Welcome, everyone. I'd like to start off, Chris, starting with you, followed by Xavier and then Emilio. Please introduce yourself and provide a brief overview of your work related to water risk. Great. Now it looks like we might have lost Chris. So maybe Xavier, we can move over to you.

Yes, happy to. Thank you, Tory. Good morning or afternoon, wherever you are. So I work at the OECD and I'm based in Paris. I lead the team in the Environment Directorate that focuses on water. We have 2 main pillars in our work, one is on financing water the one which is pretty much relevant for today. The other one is on water quality and places to mitigate exposure to pollution. Our role at OECD is to advice government on policy reforms. And well, I have more to share about this later on.

Thank you so much. Emilio, over to you.

Thanks for having us, Tory and Global S&P. it's great to be with you today. My name is Emilio Tenuta. I'm the Chief Sustainability Officer for Ecolab. And I just -- I just realized that our audience may not be familiar with who Ecolab is. We are the global sustainability leader. That offers water, hygiene and infection prevention solutions and technologies to protect people and vital resources. And to your point about water, it's essential to our operations and products and services that we make around the world. But the sustainable management of water resource is fundamental to our business since we're the global leader in water -- industrial water. And we believe the importance of water is protecting the environment, human health and the economic development in local communities and so water stewardship is at the core of what we do within our own operations as well as working through our more than 3 million customer locations everyday. And Tory I'll just end with accelerating change through the power of water is core to Ecolab's purpose to improve the health of people, planet and business around the world. So a little bit of background on Ecolab.

Fantastic. Thank you both so much and hopefully we'll get Chris back in a moment so we can have his perspective as well. But until we have him back, I'd love to start off with a polling question. Just to gauge where our audience is in their water risk management journeys. So, we'll start off with an initial poll. And our question is, does your organization manage water risk? And the answers you can provide would be, yes, that you're on your way; no; or no, but you're in the midst of developing a strategy. So we'll just wait a moment for those answers to come in. [Voting]

Great. And maybe we'll give it another -- just 30 seconds. Right after the poll, and basically, for today's conversation, we're going to be talking a lot about just the importance of water as both of our initial speakers have already touched on so far, as well as how we price water, the importance of water to financial stability. So we'll get into a rich array of topics. And just as a reminder to also keep those questions coming in the chat so that we can address them later on in the journey. Okay, very interestingly, we have quite a range of responses here. It looks like we have a mix of those who are starting on their water risk management journeys and several who are starting. So, I think today's conversation even for those who aren't yet there, will be very informative in terms of starting down that path and continuing on that journey. So let's now -- I'd love to set the scene by showing some maps of modeled drought conditions. If we can move to that slide. I'd like to start here by setting the scene on -- this is data that comes from our climate science office here at S&P Global Sustainable 1. And in the top two maps, you can see there mild drought conditions derived from the Palmer Drought Severity Index based on the latest generation of climate model data, CMIP6. Under an emission scenario at the top there ranging from 2.1 to 3.5 degree And in the top 2 maps, you can see there modeled drought conditions directed from the Palmer drought severity index based on the latest generation of climate model data, CMIP6. Under an emission scenario at the top there ranging from 2.1 to 3.5 degree Celsius warming by end of Century. And then a higher emission scenario in the bottom, showing about 3.3 to 5.7 degree Celsius of temperature rise by end of century. The left-hand map show the 2020s and then you can see how those conditions are projected to advance throughout the century into the 2080s. And what I wanted to highlight here is that while our future climate trajectory remains uncertain, of course, dependent on the degree to which we're able to mitigate our global emissions going forward. even across the range of plausible scenarios, we see drought conditions increasing in virtually every continent around the world. So while the future remains somewhat uncertain, what we have more surety of is that drought is going to -- in water risk will become a more pressing issue over time. So this is a critical conversation to be having today and great to hear that so many of our audience members are thinking about water risk, and we're really glad to be having this conversation here today ahead of World Water -- the UN Water Conference in World Water Day. All right. And it looks like we do have Chris back. Chris, are you able to hear us? And would you like to give a brief introduction of yourself before we progress?

Yes. Sorry, guys. Can you hear me okay?

Yes, we can. Great.

Three years of pandemic and still we're having -- I'm on my phone -- sorry about that. So I -- and the Director of Climate Research at Wellington, which sounds like a lofty title, but what it means is I work with 2 scientific partnerships, one with the Woodwell Climate Research Center on physical risk, and that's where water comes in. We defined 7 physical risks: Heat, [ draught ], wildfire, hurricanes, flood, water scarcity and sea-level rise, so water scarcity being the key topic today. Add a separate partnership with MIT on transition risk, which is all of the technological change and disruption, et cetera, that comes with decarbonizing the global economy. So that's the lead of what we do. And then subtext within that is I also run a strategy around climate resilience where I look for companies that are going to help society become more resilient to things like water scarcity. And I own a number of water-related stocks. And we have done a significant amount of research on water over the last 4 years. And in fact, today, we have our weekly meeting with Woodwell at 11:00, and you would not believe the coincidence this is true. But the topic at 11:00 is the price of water.

Very timely indeed. Well, hopefully, we'll get some good audience questions and more fuel for thought for that conversation coming up next Great. And I'm so pleased to have such a range of perspectives among our panelists here today so we can really have a rich discussion about water risk.

So despite the criticality of water to everything from basic human well-being to the ability of businesses to operate, what remains undervalued and underpriced? And I'd like to spend a few minutes here at the beginning of our conversation to explore the ways in which we might enhance society's understanding of both the intrinsic and monetary value of water. So Xavier, you -- recent scientific work has revealed new ways that countries are interconnected through the hydrologic cycle or the cycling of water through the atmosphere via processes of evaporation, precipitation and others. Could you please describe this new research, how it sheds light on the cross-boundary importance of water and discuss some of the policy implications?

Yes. Thanks, Tore, for the opportunity. I think this is really mind-blowing work, and I'm happy to share. This is not the peculiar OECD work, which is undertaken by people like Johan Rockstrom and peak Institute in Potsdam. The idea is that when you talk about what we have to consider the full hydrological cycle and much of the discussions today, I mean, today has been focused on what we call blue waters, blue water is water in rivers lakes and aquifer. And the point made by Johan Rockstrom and his team is that you should actually consider the other side of the hydrological sector, which is green water, but green water is moisture, it's vapor in the air. And that green water travels long distance, you can actually think of it as an atmospheric river. And you can show -- in the map shows, for instance, how green water, I mean how water evaporates on some parts of the globe. And because of the winds, it will travel over a long distance. Cross-borders, obviously, and then precipitate as rain in another distant territory. So here to be clear, you have that map, which is focused on Brazil. And you see -- so the blue line here is actually where water evaporates, so water that will fall as rain in Brazil. Where does it evaporate? So you can see that Brazil essentially depends on evaporation from the Atlantic portion. That water will fall on to Brazil. And the pink or grayish color here represents where water, that evaporate in Brazil, where does it fall as rain? And so you can see that, first, a big part of water that evaporates in Brazil actually falls in Brazil itself, but also it falls in neighboring countries, so typically Argentina, down south, or Peru, Colombia further west. That kind of match so that there is actually close interdependencies across countries, even if these countries are not [indiscernible] countries. And that creates a new dimension -- it has a new dimension to a discussion about water because so far, water was always considered a local issue. If you actually consider the full hydrological cycle, you realize that water becomes a regional, if not a global issue. There is another interesting -- a very interesting outcome of the research by Johan Rockstrom and his team is that this hydrological cycle has been tilted essentially because of climate change. Throughout the same period, the balance between green and blue water has been stable. Over the last century, somehow, it has shifted. And you actually -- today, you actually have less blue water, so less water in the rivers and in the soils and more green water or more vapor in the air. And this is consequential because most of our water policies are focused on blue water. And if you think about the irrigation, if you think about what allocation regime, they're all focused on blue water and nobody actually deals with green water. But green water is essential because green water actually determines the agricultural yields. It determines the capacity of sorts to capture and carbon capture and store carbon. So green water is an essential part of any climate mitigation strategy. So I think another interesting message that derived from that work is that while water has usually been seen as a victim of climate change. We understand now how it actually can accelerate our compound climate change. So I think an interesting message that we can't fix climate if we don't fix water. And that puts the discussions on about water at a very different level of a priority, both at national and global level. The policy implications, I mean, happy to explore that if we have time. But the #1 message here is that water should be considered as a global common good, not as a local resource. And as such, it will require new institutional arrangements to probably manage the hydrological cycle at global scale. It will -- it will have consequences for corporates and industry but also for the financial institutions, Happy to share more on this later today.

Maybe just one quick follow-up question, David. This is such an interesting topic. And I think we could spend probably the entire hour on this. A number of questions have come in from our audience, just interested in any examples of, I think, known mitigation strategies or any policies that are in place today to manage green water? Do you know of anything that's in place? Or is this such the cutting edge of science that the [ policy and ] sort of interventions will follow?

Well, there are 2 ways you can answer that. I mean, one, which I find really interesting. Ultimately, the question about green water is who owns the rain, who is in charge of managing the rain. Because if you see -- if you conceptualize this -- that green water at an atmospheric river, that [ crossed borders ] over a long distance. If you happen to live in a dry country, you can precipitate some of that vapor as rainfall on your territory. But from that perspective, you are taking that water away from another country down wind, who could claim that, well, seriously, that's what they used to generate rain for -- on my territory. So who should be in charge? Who owns the rain? That's one way of framing the issue. And obviously, there is no answer. This is really a new area for both policy and regulation. Another answer is to say, there are already a number of instruments that exist. If you think about policies related to land use change and the management of soils, Typically, in Brazil, I'm sorry to put the spot on Brazil, there are other examples. But if -- I mean, deforestation in Brazil will affect the capacity of water to evaporate in some [ spirit ] from the soil in the vegetation in Brazil. And so land use in Brazil will affect the -- I mean, precipitation in Northern Argentina or in Eastern part of Peru and Colombia. So somehow considering land use and soil management, and you have to consider land use and soil management as one way to manage green water.

Yes, absolutely fascinating. And I think what's what that highlights as well, we typically think of global emissions in this kind of context where deforestation or afforestation in one place can affect global emissions balances. I think what's so interesting here is, as you initially pointed out, water, which is sort of commonly thought of as such a localized issue can actually also be thought of in this global context with respect to even those land use changes in the forestation as well. And that was actually a direct question that had come from our audience too about whether deforestation affects this cycle. So glad that you highlighted that as well. I think we should -- yes, go ahead.

Can we provide some commentary as well.

Yes, sure. Please jump in.

So it's interesting and I think fascinating to see this research. And I'm a person that spent 4 decades in the industry. So I got to say that I know that water has been thought of local, very local, hyperlocal in my opinion. But I don't -- I'm still trying to get my head around how this will actually change that in the future, right? So I think it's incumbent on us to help, let's say, a beverage company in Sao Paulo, Brazil, who is focused on water challenges, and they're thinking of themselves in a basin, right, that is water stressed, whether it be quantity and quality and how the fact that evaporation and water and product, which leaves the watershed, right, is going to actually -- how greenwater is actually going to help them. So I just want to make sure that we're being pragmatic about this.

Yes, absolutely. All right. I think we should move on for now. We can certainly circle back to this topic in the Q&A if we have additional time. But thank you so much, Xavier, for highlighting that recent research and for the discussion. I think what's interesting, given our discussion so far about the importance of water and even these new ways of understanding how water is connected between countries, still to date, the price of water has been assumed to be near or close to 0, especially here in the U.S. So Chris, I'd love to turn to you and I actually have 3 questions for you. Why has this been the case? Why has water been priced so low to date? And how do you see that price of water shifting? And lastly, what are the likely implications in your perspective of that shift?

Sure. All good questions. Yes, I mean, we've kind of coined this concept some years back that the price of water is assumed 0 and that's not going to remain the case. Here's how you know it's assumed to be 0. We have thousands of companies under coverage. We know them pretty well. We also ripped through disclosures. We couldn't find any company who has a price of water disclosed as part of their cost of goods sold statement or raw materials or anywhere else. Now think about that statement, right? It's quite interesting, given you've got every 10 case 400 pages long and every cybersecurity risk and the other thing that demand is disclosed in there, and you can't find any type of assumption that price of water is $0.03 a gallon or anything like that. So I think it's been assumed to be free because by and large, it has had no limit to supply and negligible cost to most producers. So essentially, they mentally assumed is close to free. Obviously, it's not technically free, but it's very cheap as far as an input cost goes compared to most other input costs. I'm not an economist, but if you think of it in other terms, it's something that has very high value and very low price and the inverse of that is gold, which has very low value and very high price, right? Gold has like 10% industrial use. It's much more of a monetary play. So I think that that's going to reverse. I think what's going to happen is, as and we are already seeing this as the water supply dries up, the price of water will become more material. It will start to be disclosed. It will start to be discussed in terms of how it's being managed more efficiently, not just in obvious sectors but in less obvious sectors. And I think ultimately, what you're going to see that will be -- the major headline is you're going to see a price of water in all of the normal usual suspect places where you see prices of everything else. We have watched TV and social media and newspapers and seeing what level the stock markets at, what level of Bitcoin was at, what the 10-year treasury is at what the inflation rate is, what the gold price is what Bitcoin is, whatever the hot topic of the day gets a price on the TV screen. At some point, I think we're going to have a price of water on the screen. Now as was mentioned earlier, obviously, that's a very regional price because this is all location based. It's unlikely we will have a uniform global price like we do on oil or on gold. But that's okay. Regional prices work too. You need something to provide the transparency and the importance of the climate issue that's going on and the pricing will help do that.

Yes. So interesting to think about that. Do you -- I'm curious, do you have any sort of hypothesis about how far off in the future that price will come. Are we talking 5 years, 10 years? Any thoughts on that?

I think it's coming fast because I think the disclosure is going to force it. There's a lot of work being done by different groups on disclosure around water management. And once you get the disclosure either mandated or [ volunteered ], if you will, then the price of the water is going to have to be part of that disclosure. You're not going to be able to just say, we manage our water in the following ways. You're going to have some cost assumptions with that. So I would guess it's inside of the next 5 years, it is a massively ramping problem right now, as we all know. When I mentioned the 7 physical risks earlier, this -- we've forecasted everything out 10, 20 and 30 years. We have a mapping tool that looks very similar to the output you guys have shown up on the screen. And for the most part, we have been taught from our scientific partners, hurricane changes here now, heat changes here now. Wildfire changes here now. sea level rise is the most furthest off in the distance. And water was in a sense a bridge of those 2 where we thought the worst of it was 2030s, but that has already accelerated and we're getting it now. And this is one of the consistent themes from climate scientists just about everything is happening at a worse rate than the predictions. And generally, the reason for that is that the scientific community is super conservative in their projections. So the water issue is a here-and-now issue. It's not a 2030s issue. Just one state we get lost in all the news feeds and we're focused on a banking crisis right now. But France has gone on 32 days, essentially without rain as we speak. This is the longest time in history. I mean this is the type of thing we're living through right now.

Yes, very timely, very important. Thank you for those perspectives. I did want to just open the floor to Xavier and Emilio, do you have any responses to this conversation of the price of water or also any potential implications you see if water were priced within the next 5 years, what that might lead to?

I'll just say that the -- I completely agree, by the way, with that perspective. And I often think that and the way we look at it is water is obviously undervalued we think of the full value of water, to your point, Tory, about the externalities that water is providing us, whether it be industry, whether it be a user in a community, whether it be agriculture. The fact that water has been subsidized for most economies is obviously the biggest challenge to the point about it's price. It's just -- if you look at the monthly water bill and people still use water lavishly even in high-risk areas. And so I think there is a huge opportunity for us to rethink the way we manage water. And I love the concept of having a -- just like a stock ticker having where water is being priced because you know the supply and demand. Historically, the economy, the economic rules haven't applied to water, and that's obviously going to have to change because the water crisis is getting worse, as you've pointed out, next week, the UN Water Conference is getting together really to raise the profile of water, which is something that UN hasn't done in 50 years.

Amazing Javier, any thoughts?

3 quick points, if I may. We I think it's great to put that item on the agenda because it has to be discussed. It has been a vibrant discussion in the water community for decades. But it's interesting to see how the finance community can maybe approach that or revive that discussion. I'd like to point 3 caveats. One, on almost philosophical perspective, there can be discrepancies between value, price and cost. So we understand that water is not properly priced and I reckon economic organization so somehow [indiscernible]. With this now we also understand that water has multiple values, including cultural, sometimes religious values, and it's unclear how a price can capture these multiple values. And I refer for those who are interested, I encourage you to visit the website of a Dutch initiative called Valuing Water Initiative, where they try to approach it. So the connection between value and price is quite complex. So while the pricing mechanism can help, it may not address all the issues related to valuing water. The second item, second caveat is a political economy. I don't know any country we have been working and have been working in quite a few. We actually give farmers the proper price for the water they use essentially because governments, national and local have been reluctant to put the price on water or at least to put the price that will affect some of the users. And the third point I would like to highlight is that somehow there are already mechanisms to put a price on water, we call them water markets. And I suppose that you're aware of that. One that is really attracting attention is the one of the in Australia and the murray-Darling Basin where you can actually trade the right to use water. Among water users in the same basin. That, in a way, is a way to put a price signal on scarcity and somehow to reflect the value that water has for you as a farmer or a city or in industry. So that has happened that works under certain conditions. I just would like to signal that it took 25 years for Australian authorities to design and find [indiscernible] The water market is very complex institutional arrangement. So again, very -- I think it's great that the finance community...

Those are -- if I can just -- those are excellent points. The act on this is you know the price of water when it has to be tanked in and shipped in. So that's the immediate hack to the real price. And we have a growing number of cases where water has to be trucked in and tanked in [ California ] Farms, South Africa nearly reached day 0 a few years back. So you can see in real time what the price of water is when it has to be trucked in...

Yes. We also had one audience member right in that in the Western U.S., there are prices on water use. This audience member is saying that $1, $2, even $4,000 per acre if you're starting to buy. So in some places, we are seeing some prices of water, but I think not ubiquitous and not in most cases in most scenarios. Xavier, a number of people have asked if you could just please repeat that the Dutch Initiative or the -- that you mentioned the website and...

Yes, Valuing Water Initiative. Simple, but a very hotly debated issue.

Great. Wonderful. Thank you so much, rich discussion gave me a question that I'll save for the end as well. If we could flip to the blue chart, I'd like to shift gears a bit more to talking about corporate water strategies. And while water is important to all people and businesses in the world, some industries, just focusing on the corporate perspective for the moment are more sensitive to water stress and drought than others. Here, I just want to highlight some data that's hot off the press of our 2022 Corporate Sustainability Assessment, which is an assessment done annually here at S&P Global. And in our latest assessment, we have -- this is a survey sent out to thousands of companies. This data reflects just over 1,000 companies that responded to our survey this past year. And we found that the highest water use industries in terms of annual net freshwater consumption, consumption being water that cannot be put back into its original source. -- our electric utilities, not shown, which I'll talk about in a second, followed by chemicals and oil and gas. The electric utilities are not shown here because it absolutely dwarfed everything else on this chart. It was 4x the consumption of the chemicals industry. So please note that important caveat here. But I wanted to show this as well because as you see here, it's not just heavy manufacturing or utilities that are just on this graph. We see that there are a range of industries, food products, beverages, real estate, automobile manufacturing. Industries, so much of our economy relies and uses -- relies on and uses water every day and to different extents. So I wanted to use this as just a tee up for Emilio to talk about for companies that are particularly vulnerable to water risk, what tools are available to help them address that risk? And what strategy should they employ to effectively manage water risk?

Absolutely. So -- and I want to acknowledge that it's World Water Day, March 22. So this is obviously an important day for all of us as we talked about with the UN Water Conference. And industry, to your question about the tools available, I think one of the things that the UN Water conference that there'll be a lot of discussion about the open call to action and what the public and private partnerships that we need, but also the -- when we walk away, what are the ways that we're going to be able to really take action. And that involves, in many cases, not only policies but also the tools at the local level to drive action that we need. And we often -- when you think about this, it's challenging because at the local level, what we found is there's an execution gap that corporates set very bold ambitious targets, and we'll talk about this in a little while. And -- but the challenge, of course, is how that cascades down to the local level. And how we have a lack of tools to enable and inform those users at the local level who are so focused on manufacturing or services of their -- whatever the product and services that they're developing and delivering. And so if we could pull up, Tory, some of the slides, I'd like to just share a bit of the work that we've done. If you go to the next slide, I thought it'd be important to share that to build on the story and why companies are leaning in on this is a slide from the National Oceanic and Atmospheric Administration. They publish every year kind of the extreme weather events and the link between -- in my mind, the link between climate and water and the crisis couldn't be more clear when you see this chart in the United States, for instance. So the business impacts from climate change and water scarcity continue to increase with each passing year. These are the number of, in this case, 18 weather climate disasters and events that led to more than $1 billion each of impact. So obviously, that has a significant impact to the economy. And obviously, water in many cases, had a significant role in this. The next slide actually provides something that really shares what's happening in places like Europe. Last year, I was -- in September I was in Germany. And we saw a significant drought that blanketed Europe, and this chart does a great job of sharing the year-over-year change of water stress. When we talk about quantity and quality. This is from the combined drought indicator in Europe to really share the type of water stress conditions they haven't seen in a very, very long time. Now let's move to the next slide because the good news is we have -- we wanted to share with everyone a tool, the publicly available tool that is available. We worked with actually our partner, S&P Global. We've also had other partners like Microsoft. And this is a tool that really is all about our conversation up to now, which is water is underpriced. It's also undervalued. How do you begin to look at the full value of water. It's a free publicly available tool. It's called the smart water Navigator. It allows us to understand using the WRI, the World Resource Institute's water stress data set that they updated in 2019. The ability for us to understand, given the watershed you're operating in, what is that stress. How do we then use the right algorithm to look at externalities, things like the impact of biodiversity, the impact of ecosystem services, groundwater recharge. All the things that today aren't accounted for in the monthly water bill. And then more importantly, how does this and give you a full value, we call it a risk-adjusted price that enables you as a business and industry to really monetize the value that currently isn't being realized on the monthly water bill. And then finally, it gives us a chance to really look at how we engage with stakeholders in the watershed to drive collective action because we know that we can't do this alone. And then finally, on the next slide, before I give it back to you, Tory, which is how have we worked with the industry to really develop what I call a simple 4-step framework at the local level because, as I mentioned, there's this execution gap. And it starts no surprise, with first and foremost, identifying the risk and the tool enables us to really not only identify those risks but provide a monetary value per cubic meter on that risk. The second is the tool also provides, given the baseline water stress data from WRI, an absolute water target that allows us to have sustainable water use. So it actually gives us what is that target based on where you are today? And then finally, you have to implement an action plan, a road map that allows us to achieve that target. And then, of course, you have to measure our progress. So tracking is obviously a key aspect of how companies have started to look at managing water and rethinking the way they look at water in their operations. So Tory, this is a free publicly available tool. I said Ecolab Smart Water Navigator, so I just wanted to show that as one example.

Yes. It's fantastic. And yes, I really encourage everyone to check out this tool. It's a great free resource that's available now. I did have one follow-up question and maybe open it up to all the panelists, which is -- what are some of the ways as companies are thinking about their climate risk management strategy and then in water risk, how integrated should those strategies be? Do you see any interrelation between -- if water is an issue today and a lot of climate issues are a little bit further off in the future, how do you recommend that companies to address those. Because they are interconnected as we saw through Xavier's first that are set of slides.

Okay. Can I just kick it off and then I'd love to hear from the others. But -- what we've seen is that water and energy, one of the forgotten pieces of the climate puzzle towards your point is the link between water and energy. If you think of manufacturing, whether it be automotive assembly, whether you think of data centers, where you think of food and beverage processing, breweries that we see that thermal energy in moving pumping, cooling, heating water is a big part of the manufacturing process, but it's often forgotten. And so often what we see is that there's an opportunity to optimize water use in industry by 30% to 40%. Along with that is about 18% to 22% thermal energy savings, somewhere between 3% and 4% electrical savings. And that could lead to anywhere between 8% to 11% greenhouse gas emissions reduction. So there's clearly a link in water has to be part of your climate strategy.

Great. Xavier or Chris, any additional comments?

Yes. I agree with all that. Two quick things. One, the most important thing just about any company can do is work on its relationship with the local government and society and people that have to use the water to live on versus having it for industrial use. We already have a lot of political issues with this in different regions. You've seen a lot of stuff go through social media where beverage companies have been under attack because there's been a drought and they're producing at the same place where the local citizens need access to the water. That's clearly the #1 thing you have to do as a company is have the right relationship with the local government to figure out who is going to have priorities in a massive drought, how all that's going to be dealt with. Those are massive risks. That's more important than I think anything else the company can do. Secondly, just an observation, everything that's happening with carbon, I think is going to happen with water. So if you think about the concept of carbon footprinting, we're going to have water footprinting, -- we're going to have some type of net zero for water. We're going to have frameworks and pledges and all of that. And I think all that's on the come. It's in the first or second inning in carbon in the fifth or sixth soon has some catch-up to do, but it's quite clear to me that that's going to happen.

Great. I might move on and actually, Xavier, I'll turn to you in a moment, and if there's any additional kind of thoughts you had on this, feel free to incorporate. I'd like to shift now to thinking about -- we've talked a lot about sort of the value of water to companies and specific users. But I'd like to kind of zoom up a few levels in terms of the economic system and think about the broader scale of financial impacts that water risk poses. So Xavier, how are central banks starting to think about the impact of water risk on broader scale financial stability?

Well, that's really the new frontier. I think when it comes to the economic and financial analysis of water. And just as a transition with the previous discussion, I think it's pretty clear from the previous maps that every corporate globally is somehow exposed or potentially exposed [ and vulnerable ] to water risks. You can't think of an industry or sector which is not affected. And you can think about a place, location, country, where there is not either too much, too little or too polluted water. Yet if you ask to the financial institutions [indiscernible] banks, how exposed they are, or vulnerable they are to water risk, most of them will say, "I don't know." And so that's where I see here some sort of a disconnection between the economy at large and the financial industry. And going beyond the role of corporates and the economy, I mean, typically, our property values are also exposed to waters risks. And that's a big part of the portfolio of banks in a number of financial institutions. So we -- in the water community, we find it puzzling that somehow corporates now get it. They understand that they're exposed and vulnerable and somehow the financial institution in the thing they can still be shielded from water risk. So that's why we think there is an urgent need for new regulations from central banks to enhance the role of the financial system to [ understand ] water related risks. Again, water related disclosure of financial institutions is very limited. And still, the risks are not insignificant. In 2022, the European Central Bank found that about 80% of institutions in financial institutions in Europe, perceive that risks from climate change and environmental degradation might affect the -- or might have material impacts on their risk profile and their strategy. And yet approaches to map and mitigate these risks very -- and even financial institutions. And so the European Central Bank recommended that there is a need for more methodological sophistication and the use of more granular data on risk profile to really capture or monitor the materiality of water related risks. One country has done particular repute in this domain, it's the Netherlands and the Central Bank of the Netherlands started to study [ mandate ] in the Netherlands from a financial stability perspective. Financial stability of the mandate of the central banks. And initial results are showing that there are implications for the financial systems, including credit risks. But the thing is that when you have good and robust data on flood risks, data was essentially missing to assess exposure. And more generally, there is a data gap on exposure and vulnerability to what related risks in their financial impacts. And that's my comment on the previous discussion. I mean the tool is very commendable, and I think it's a very interesting and variable development. The limitation will be access to data. Of course, we are aware that there are new tools to provide the right level of data at the appropriate level of disaggregation. But we still have to learn better and how to use them and how to use them for -- I mean, to support risk assessment and decision making. So from that perspective, we think central banks have a role to play as supervisors and regulators to understand macro and macro potential risks and to develop tools and stress testing. We see a lot of value in stress testing. If it is done in a robust way and in a comparable way across jurisdiction. The good news is that some of you may be aware of the GFS it's the network or for gaining the financial system. It's a network of 66 central banks around the world. It has placed to mobilize financial institution to beyond carbon and consider wider on momentary issues, including biodiversity, and we hope to put water on their radar so that they can provide some guidance to bit understand how climate value diversity water, the kind of challenges these dimensions pose on financial stability risk. And just as an indication, some of you already mentioned the UN 2023 Water Conference, which will take place in New York next week. I don't want to do some name dropping, but it so happens that the Director General of the IMF will participate. If you think about it, this is a major development in a very, I think, variable or very inspiring signal that the IMF, so the ultimate financial regulator globally, considers that water should probably future high or at least higher on the agenda. I don't think she would have considered attending a water conference 2 years ago. So I don't -- we don't expect any particular commitment or pledge, but at least, I think her participation in the conference shows that there is interest. There is awareness from the IMF that they can't ignore water. And if they want to deliver on their mandates, they have to factor water risk in. So we see that as a very encouraging development.

Yes. Well, absolutely fascinating. That's a really encouraging signal looking to the conference next week. We do have just a few minutes to take some additional questions from the audience, probably just a couple. But one interesting one that might tie in here has come in and open this to the floor. Chris, you might have some thoughts on this question in particular. How do the water targets and water actions that companies are taking impact their company valuations? Are there any examples of that happening to date?

Well, you're going to have -- this is the existential question about climate change at large, which is how do you input claim change into the multiple or earnings stream of the company. It's a very hard thing to do. And oftentimes, it's a misleading thing to do with climate value-add risk and VAR type metrics that some entities are trying to push around out there. There's just too many assumptions and too many variables to often get this into the price. So if you can't get it into the price, the next best thing is to engage with the management team and understand the risk level and what they're doing about it, that's also a sign of governance. So what I would say is you can have a very deep and technical discussion with management teams about how they're addressing this and then decide how that fits in with your view of management credibility with governance and whether it could lead to a disruption in the future that could hit the earnings stream for some number of quarters. We now have evidence of this happening with droughts in Taiwan where the semiconductor industry was severely impacted for a few periods of time in terms of supply and manufacturing because to the earlier point, you had this governmental intervention where they had to make decisions on who was going to get the water. So I think you will have more of those where you get a supply disruption and manufacturing disruption that does hit earnings, putting a long-term multiple discount on that or putting a long-term earnings change on that is a very hard thing to do for lots of obvious reasons. So I would say you have to assess it as part of how you assess the management team.

Really interesting. Any other comments, [indiscernible] Emilio?

Well, I have no experience on how -- water management -- I mean what [ water-wise ] strategy can influence the valuation of the company, but there are already instances of how some water management can provide access to cheaper loans. And there is a case in Spain, where hydropower generator was able to access a chip alone from the bank by committing to reduce its water footprint. I mean that's something that is documented in the literature. And you can find some additional information on the website of an organization called CDP, Carbon Disclosure Project. And I think that's an interesting development because it shows that some men could put a premium or could see an interest in minimizing the water footprint of the other people they lend money to. So again, I'm not sure how that translates into the value of the company. But at least you can already provide access to cheaper model.

Yes. Fascinating. Fantastic. We have just a few minutes here. I'd like to do a whip around the room, rapid-fire last question to each of our panelists here. I want to thank everyone for those wonderful questions submitted by the audience and of course, thanks to our panelists as well. All right. So my last question to each of you is imagining we were to convene again on the topic of water risk 5 years from now. What would be the most important discussion topic at that point. Let's start with Emilio, then go to Chris and finish up with Xavier.

So I would say that our vision of a water-resilient future relies on tangible action. I think if anyone took the panelists comments from this call that we need to take tangible action the UN Water Conference. And I think what we see 5 years from now is that we need to be able to get ahead of this UN SDG goal, which were SDG Goal 6, on water and sanitation and hygiene, we need to get ahead of that and that we would be ahead of that by the fact that over the next 5 years, we're all taking what I refer to as a net positive water impact strategy, which means simply put, giving back to the watershed more than we're taking from it. And it involves a number of interventions, some of them we spoke about today, but one in particular that we did get a chance to speak about, which is the reliance on nature-based solutions to really drive volume metric and quality benefits back to the watershed that help us on the hydrological cycle that we talked at the beginning that says, as we return more water than we're actually consuming, that's the key to success in 5 years.

Great. Thank you. Chris?

Yes. I'll give you more than one, if that's okay. So first, I'll talk about the U.S. This is a global issue, obviously, but just in the U.S., I think this will become a presidential election point either in '24 or '28. You now have a number of states involved in a massive conflict over river flow in which the government is involved and they cannot mediate the decision, this affects hundreds of millions of citizens in the U.S. This issue is going to become big enough, it's going to hit the presidential stage that might finally be the point at which we pay more attention to it in terms of legislation and action. Secondly, some -- recapping some earlier points, I think companies will be disclosing much more on water, including their assumed cost of water. I think you'll see the price of water on TV and every other media place you normally look. And the last thing I would look out for is narrative change. The big narrative change to me is that you are hearing this phrase water reclamation being used in place of wastewater. That spin on that phrase is very telling. I think a much higher percentage of the people in the future are going to be essentially drinking wastewater that's been treated and now branded reclaimed water because reclaimed water sounds a lot as than wastewater. But that is telling you the size of the issue. Is the leadership and regulatory bodies and governments is rebranding the concept of wastewater into reclaimed water.

Definitely. Great. Xavier?

Well, I can already subscribe to what has been said, that would be -- these would be major improvements. One thing I would like to add maybe is that assuming that in the next 5 years, we managed to develop the metrics and the data to document how water risk transfer or channel towards financial performance in financial risk, then maybe we will have a better understanding of what kind of policies and regulations are required that the financial system, the financial industry becomes analyzed somehow and contributes to channeling the money we need to ensure water security and the achievement of ambitions related to access to water and the role of water in the economy and in our communities.

Great. Fantastic. Thank you all for those points. I'd be honored to have this conversation again in 5 years. It's been tremendously fun and interesting speaking with you all. That appears to be all the time we have today. So I just want to go -- thank you all again today to our panelists for joining. Thank you to everyone in the audience for also joining us today. As a reminder, you can watch this webinar replay and also contact us here at S&P Global with any questions. Thank you again. Hope to see you soon.

Thank you, Tory.