The company ate half of that increase, but consumers paid the other half when Surly raised the prices on its beers.
“Barley is this year’s big question mark, with weather around the world the way it is,” Ansari says. Given his company’s reliance on agricultural inputs, “water has a pretty close relationship” to the bottom line.
For consumers, paying extra for a can of Bender or Furious is “small beer,” so to speak. But we can expect more scenarios in which water scarcity ripples through the economy.
A report two years ago from the 2030 Water Resources Group—which includes McKinsey & Company, the World Bank, and several global food and beverage companies—projected that the world will use 40 percent more water in 2030 than it does today. And already, population growth and economic development are placing unsustainable demands on the global fresh water supply. Climate change is likely to make the problem worse.
Not a believer in climate change or scary water-shortage statistics? Some in the financial sector are. Ceres, a Boston-based alliance of environmental groups and institutional investors with about $10 trillion under management, is pressing companies to assess and disclose their water-related risks. And last year, the Securities and Exchange Commission issued guidance saying that among the climate change–related information that companies may need to reveal if it could impinge on their financial results is the “availability and quality of water” for their operations.
Eden Prairie–based Supervalu includes drought among the potential business risks it identifies to investors, noting that drought can affect the quantity and quality of crops and adversely affect the cost and availability of certain products its supermarkets carry. The company has been reporting weather and similar risks for some time, but added the drought factor in 2008, according to Supervalu spokesperson Mike Siemienas, a year when withering crops sent global grain prices soaring.
Bloomberg added “ESG”—environmental, social, and governance—metrics to its terminals for investment professionals two years ago, including data on companies’ water usage as a potential business risk. Thomson Reuters
Jina Penn-Tracy, a Minneapolis financial advisor and founder of Raeheart Financial, says that use of such data to make investment decisions isn’t yet widespread, but mainstream investors, especially institutional ones, increasingly think about water as a risk factor. “It’s really new. It’s a new conversation that’s happening,” Penn-Tracy says.
Unless you work in Minnesota’s water technology sector, however, it’s probably not a conversation that you’ve heard in the boardroom or the breakroom. Here in the Land of 10,000 Lakes, running short of water might seem like a particularly distant prospect. But in some ways, economic development in the state is already constrained by limited water supplies. Cargill walked away from a proposed ethanol plant near Pipestone in 2005 because it couldn’t secure the more than 350 million gallons of water that it would need annually to operate. An ethanol plant that did get built, Granite Falls Energy, began drawing 400 gallons of water per minute out of the ground in 2006, and neighbors complained that their wells were going dry. The plant now draws water from the Minnesota River instead, but the state has the option to cut off that supply in times of drought.
It’s understandable that most businesses aren’t focused on water issues yet, says David Kurzman, who manages a $30 million cleantech investment fund for Leuthold Weeden Capital Management in Minneapolis. “As is human nature, we tend not to talk about things until they’re crises,” he says. “Water is generally further down the checklist, but that said, it should absolutely be part of the disaster recovery plan” for any company. “Most businesses in manufacturing and many in the service industry would come to a screeching halt if access or the cost of water suddenly became prohibitive.
“At what point does this hit people’s radars, and when does it becomes a political issue, something that people pay attention to?” Kurzman asks. “I don’t have a good answer to that, but it will happen.”
It’s already happening in some companies. Coca-Cola is in the midst of assessing “water vulnerabilities” at every one of its bottling plants by 2013, and is buying water efficiency systems from the water technologies division of General Electric, which has a plant in Minnetonka. Both Coca-Cola and Pepsi have projected that if they don’t become more water efficient at their plants in northern China, within 15 to 20 years they’ll have insufficient water to operate there.
It’s not just the food and beverage industry that needs to worry about water. Also vulnerable is the power industry, the biggest user of water in Minnesota. A full 60 percent of the water used in the state is drawn from lakes and rivers to generate energy or cool equipment inside power plants.
“The less water there is, or the warmer the water, the less effective it is to cool the plants,” says Ramsay Sawaya, Xcel Energy’s director of risk analytics. In 2006, for instance, Xcel had to reduce power generation at its Monticello nuclear plant because drought conditions and low water levels caused water temperatures to warm beyond the point at which Xcel is permitted to use then discharge it. When that happens, Xcel has to make up the difference by buying more expensive electricity on the open market or firing up less efficient power plants. The added expense is passed on to Xcel customers. (Sawaya says the risk of loss for investors is small in all of this. However, in 2007, Xcel faced pressure from the New York Attorney General’s office to make better risk disclosures to investors and as a result, the company added climate change–related drought as a risk factor in its financial reporting.)
Ceres is encouraging more companies to do so-called “water accounting.” However, in order to be meaningful for investors, the assessments need to go beyond company-wide numbers and drill down into local and regional risks in the water basins where both the company and its suppliers have operations, says Brooke Barton, who leads Ceres’ work on water scarcity issues.
“We advise companies to spend a good amount of effort understanding not just where their owned-and-operated sites are, but really go deeper in their supply chains,” Barton says. In general, global companies face “much higher uncertainty about water.”
The Twin Cities are fortunate to sit on a bowl of deep, healthy aquifers, but even those aren’t bottomless and will face growing demands as the region’s population grows. Minnesota’s population is projected to grow by about 22 percent, to 6.4 million people, by 2035, and water use in the state is increasing at a rate about 1.6 times faster than population, according to a 2011 University of Minnesota report, the “Minnesota Water Sustainability Framework” (available at wrc.umn.edu).
“The problem is, especially for our groundwater, we’re not really sure what we have,” says Faye Sleeper, co-director of the university’s Water Resource Center, which produced the report. Underground aquifers supply about 75 percent of the state’s drinking water, the report says. It’s not known how long it takes these aquifers to recharge, though there’s evidence that it’s a very long time.
The Metropolitan Council issued a report on the Twin Cities’ water supplies in March 2010 and concluded that they appear adequate to meet projected demands, but that they aren’t evenly distributed. Pockets around the metro, including the Interstate 94 corridor and an area north of St. Paul near Hugo, may need to connect to adjacent water systems.
But the biggest and most immediate water risks are to Minnesota companies with operations in more arid parts of the world, including some parts of the U.S., according to Adam Rix, a managing partner with St. Paul–based TurningPoint Capital Partners and founder of consulting group the Watermark Initiative. Rix says companies have damaged their reputations and faced regulatory backlash by not understanding how water is valued and perceived in the different parts of the world where they do business.
“I think the first place to start for any Minnesota company that wants to operate outside of Minnesota would be with an appreciation of how water affects politics, economics, social behavior, and cultural norms,” Rix says.
Awareness of water scarcity may be building at a drip, Ceres’ Barton says, but “it’s not an issue we’re going to see go away.”
“No longer can you just rely on the water infrastructure to be there for you like you have in the developed world,” says Todd Gleason, Pentair’s vice president of strategy and marketing. “And they’re not going to build if for you. You need to manage it yourself.”
Pentair designed a water reuse system for a Ritz Carlton hotel in Bangalore, India. It’s one of the world’s fastest-growing cities, and population growth, pollution, and erratic rainfall patterns are already straining the water supply there. Bangalore is growing so fast that infrastructure isn’t keeping up, which pushes new burdens onto developers.
That’s where Pentair sees an opportunity. The company predicts that the market for water reuse systems will grow to $8.4 billion by 2016. A more comprehensive University of Wisconsin–Milwaukee analysis last fall estimated that the world market for water-related equipment and operations will grow from about $483 billion in 2010 to $600 billion by 2016. That’s about as large as the market for cell phones today.
Investment bank Goldman Sachs said in a 2008 report that water is “the petroleum for the next century,” and advised investing for the long term in water reuse, filtration, desalination, and testing, as well as water infrastructure. Pentair was one of the investments the bank recommended, and the company is among a cluster of big players in water technology that have headquarters or major footprints in the Twin Cities. Pentair’s water division employs about 550 people here, producing filters and pumps. Others include Dow Water and Process Solutions, a subsidiary of the global chemical giant that employs around 600 people in Edina, and GE Water and Process Technologies, which has about 500 employees in Minnetonka. (The acquisition of Minnetonka-based Osmonics in 2003 brought GE to Minnesota to set up shop). Maplewood-based 3M makes water filters as well as sensors that are used to detect leaks in water infrastructure.
Water and a more scarce supply of it are “a tremendous opportunity for, I would say, 30 different companies here in town,” says Adam Rix of TurningPoint Capital Partners in St. Paul, a venture capital and private equity firm that invests in water-related companies. Ultimately, Rix says, the opportunity is not just for companies with water technologies but for others that service or supply industries where there’s incentive to reduce water consumption. He cites as examples Bloomington-based Toro, with its production and sale of water-efficient irrigation systems and monitoring tools used for lawns, golf courses, and in agriculture; St Paul–based Ecolab, with cleaning and sanitizing systems; and Cargill, with its giant-sized role in global food production.
The Twin Cities are among a handful in North America that are emerging as hubs of water technology. Others include Milwaukee, Toronto, Boston, and Philadelphia. Pentair’s decision to transform itself was one development that helped put Minnesota on the water industry map.
Pentair’s origins in the 1960s were in inflatable, electrical, and mechanical devices, and then the paper industry. In later decades, it grew into a diversified industrial company. But 11 years ago, it decided to make a big bet on water technology, going on a water-focused acquisition spree between 2000 and 2007.
“We were dabbling in water,” Gleason says. “We had experience with some pumps and pool products.” But Pentair saw “an exciting growth opportunity and felt that if we really doubled or tripled or quadrupled down our investment, both organically and inorganically, we could be a leader in water.” Today the company’s water unit accounts for about $2 billion in annual sales, roughly two-thirds of the company’s total sales.
Steve Riedel is a representative in the Minnesota Trade Office who specializes in environmental industries. He says that besides the presence of big businesses like Pentair, GE, and Dow here, the factors raising Minnesota’s profile in the water industry are water-focused research at the University of Minnesota (see “Minnesota’s Newest Water Start-Up” on the facing page), and a growing cluster of small and medium-sized companies that have water-related products and services—some of them founded by former employees of those big global players.
Considering their size, some of these smaller companies have surprising reach, but that’s the nature of the water market, Riedel explains. Even a company like Flatwater Fleet, based near Duluth with just a few dozen employees who make equipment to rehabilitate wells by flushing out sediment, is able to sell into about 60 countries where fresh water is at a premium. Riedel says a midsized company locally, Aeration Industries International based in Chaska, has sales in about 90 countries, selling a technology that puts oxygen into water in order to clean it.
That pressure is creating opportunity for engineering companies, as well. Historically, most wastewater treatment plants have treated water only to a level that would make it safe, or legal, to be discharged and diluted into a lake, river, or stream.
Dave Anderson, general manager at Lemna Technologies, a Minneapolis civil engineering firm that specializes in wastewater treatment, says that in the past half decade or so, the company has been seeing more requests for facilities that can treat water to make it safe enough for other uses, especially in arid regions that depend on irrigation for agriculture.
“Worldwide, water is scarce, clean water especially,” Anderson says.
One project that Lemna worked on is a municipal facility that it designed and built in Cuauhtémoc, Mexico, where stricter water quality regulations recently went into effect. The treatment plant is one of the largest in the world, Anderson says. Moving water through three five-acre ponds, Lemna’s system uses screens, baffles, and bacteria to treat sewer water at a rate of 280 liters a second. The effluent, or discharge, is used to irrigate apple orchards and cool a nearby power plant. Anderson says Lemna expects more work in Mexico as cities seek to comply with new water quality regulations and address water scarcity issues.
Similar developments are taking place in the southwestern United States. Later this year, the city of Oxnard, California, will open its “Advanced Water Purification Facility,” which will reclaim wastewater from the municipal system for crop irrigation and industrial uses.
3M is looking at a different kind of water reclamation. It hopes that its recent venture into leak-detection technology might also be seen as a solution to water scarcity problems. 3M’s licensed technology is built around highly sensitive microphones that can detect the sound of a leaky pipe. One product is a wand that lets water department workers walk around and listen for leaks at strategic points on the street. Another is a set of devices that can be attached to pipes by magnet and remotely transmit data and alerts when they detect possible leaks.
So far, most of these detection systems have been sold in the United States and Europe to cities that want to catch leaks before they become expensive infrastructure problems—sinkholes or sewer backups. James Miller, global marketing manager for 3M’s water leak detection business, sees other potential for the sensors. He says that in many cities, about 20 percent of municipal water is lost to leaks.
“A real simple solution is to stop the leaks,” Miller says.
There’s room in the water market for all kinds of solutions. It’ll take the proverbial silver buckshot, not bullet, to deal with projected shortfalls, says GE’s Joe Such.
Looking at the risks posed by water scarcity, he says, “The glass-half-full [view] is people are recognizing it, and we and others have the technology to solve this problem today.”