WATER RISK MONETIZER METHODOLOGY · 2014-11-05 · Monetizing water risks provides information to...

Water Risk Monetizer Data and Analytics by and

© Water Risk Monetizer Developed by Ecolab® and Trucost Plc

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WATER RISK MONETIZER METHODOLOGY

CONTENTS

Acknowledgments .................................................................................................................................................. 3

Context ................................................................................................................................................................... 3

Introducing the Water Risk Monetizer ................................................................................................................... 4

Water Risk Monetizer Evolution Timeline .............................................................................................................. 5

Valuation Framework ............................................................................................................................................. 5

Methodology .......................................................................................................................................................... 7

User Inputs ............................................................................................................................................................. 9

Water Use ........................................................................................................................................................... 9

Water Price ......................................................................................................................................................... 9

Projected Water Use Over 3 Years (Optional) .................................................................................................... 9

Annual Water Bill ................................................................................................................................................ 9

Drought Scenario .............................................................................................................................................. 10

Facility industry classification ........................................................................................................................... 10

Total Facility Revenue Per Year (Optional) ....................................................................................................... 10

Projected Revenue Over 3 Years (Optional) ..................................................................................................... 10

Projected Change in Water Price Year-on-Year (Optional) ............................................................................... 10

Quantitative Outputs ............................................................................................................................................ 10

Water Bill Forecast Model ................................................................................................................................ 10

Water Risk Premium ......................................................................................................................................... 11

Components of Water Risk Premium Calculation ........................................................................................ 11

Scope of valuation methodology .................................................................................................................. 11

Valuation methodology ................................................................................................................................ 12

Water Scarcity Forecast Model......................................................................................................................... 14

Water Risk Premium Cap .................................................................................................................................. 15

Risk Adjusted Water Price ................................................................................................................................ 15

Water Risk Premium Calculation Summary ...................................................................................................... 15



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Revenue at Risk................................................................................................................................................. 16

Components of Revenue at Risk ................................................................................................................... 17

Scope of valuation methodology .................................................................................................................. 17

Valuation methodology ................................................................................................................................ 18

Potential Revenue at Risk Calculation Summary .............................................................................................. 21

Qualitative Outputs .............................................................................................................................................. 22

Likelihood of Risk Scores................................................................................................................................... 22

Regulatory Risk Score ................................................................................................................................... 22

Reputational Water Risk Score ..................................................................................................................... 23

Water Scarcity Risk Score ............................................................................................................................. 23

Revenue at Risk Likelihood Score ................................................................................................................. 24

Limitations ............................................................................................................................................................ 24

For More Information ........................................................................................................................................... 25

Appendix: Data Sources ....................................................................................................................................... 26



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ACKNOWLEDGMENTS

The Water Risk Monetizer’s methodology and modeling approach is informed by an advisory group of experts

who provided invaluable advice and counsel throughout the development process. While Ecolab and Trucost

alone take full responsibility for the content and calculations of the Water Risk Monetizer, the advisors’ input

is greatly appreciated and critical to the tool’s functionality. The advisory group was composed of the following

individuals:

Andrew Boyd, Director, Sustainability and Environment for Integrated Supply Chain, Mondelez

International

Eric Israel, (former) Director, GRI North America, Global Reporting Initiative (GRI)

Jerry Lynch, Chief Sustainability Officer, General Mills

P.R.P. Ramakrishnan, Area Director, Engineering, Marriott International

Paul Reig, Associate, Water Program, World Resources Institute (WRI)

Tien Shiao, (former) Senior Associate, Food Forest and Water Program, Corporate Water Risk, WRI

Ellen Silva, Senior Manager, Global Sustainability, General Mills

CONTEXT

Water scarcity threatens the vitality of global businesses. When businesses do not have enough clean water it

can disrupt operations, increase costs or curtail revenue growth.

One of the challenges businesses face in considering water scarcity into their growth plans is the price paid for

water. In today’s markets, the price for water does not follow typical supply and demand considerations and

does not reflect water scarcity. In many high-growth regions of the world, the price of water is inverse to its

scarcity. The disconnect between market price and risk makes it hard to substantiate the business case to

invest in water strategies that address water-related business challenges. In addition, water scarcity can place

revenue at risk, since a facility’s revenue depends on the availability of sufficient water to conduct normal

operations.

Global demand for water is projected to increase by 40 percent by 2030. At the same time, the price of water

is rising, or will rise as scarcity increases. Recent annual water price increases around the world average 12

percent, based on Global Water Intelligence tariff data (GWI Tariff Survey, 2007-2014). As water becomes

scarcer, demand continues to grow and the price of water rises to better reflect its true value. As operational

costs increase and revenues diminish, business value at risk will increase and vitality will be threatened.

To enable growth, businesses need better information to quantify water-related business value at risk in ways

that can be incorporated into existing business decision frameworks and factored alongside operational costs

and revenue forecasts. Several very good water frameworks and tools, such as the World Resource Institute’s

Aqueduct Tool and the World Wildlife Fund’s Water Risk Filter, provide a good starting point with quantitative

and systematic assessments of water risk. However, without monetizing these water risks, it is often difficult

for businesses to use information about site-specific scarcity implications to drive business decisions.



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INTRODUCING THE WATER RISK MONETIZER

The Water Risk Monetizer leverages existing data and scientific methodologies to monetize water risks. The

Water Risk Monetizer provides two new data sets on water-related monetary risks to inform business

decisions based on water scarcity:

1) Estimates the monetary value of potential increased operating costs (risk-based water price)

2) Calculates potential revenue losses (revenue at risk)

The Water Risk Monetizer is designed to be globally relevant, simple to use and applicable across a wide range

of businesses and industries. The output is credible, actionable information that can be used in business

decision making. Advantages to this approach include:

Monetary information is less likely to lead to “decision bias” than when relying on more qualitative

types of information;

Water risk data becomes actionable, instead of just educational. Monetized water risk can be

incorporated into standard decision-support frameworks (such as ROI, IRR or NPV calculations),

compared alongside traditional financial metrics (such as revenue, expenses or EBITDA) or used in

scenario planning; and

A business can compare different types of risks, prioritize them and direct capital to better manage

and mitigate higher risks.

Monetizing water risks provides information to help businesses make smarter decisions to protect against

water scarcity constraints to growth.

The tool builds upon and extends the insights of existing quantitative and qualitative water risk tools by

applying monetary values to water scarcity risks at a specific facility location. A single or multiple facilities can

be evaluated.



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WATER RISK MONETIZER EVOLUTION TIMELINE

Launched in November 2014, the Water Risk Monetizer has evolved over time to enhance the user experience

and expand what is measured.

VALUATION FRAMEWORK

Water-related risks are a constraint to growth for businesses around the world. Insufficient access to clean

water can significantly disrupt operations, increase costs and curtail growth. Some of the most pervasive

water-related risks facing businesses today include:

Operational risk: business disruptions due to lack of water, higher production costs or potential

revenue loss due to decreased availability of water, higher abstraction costs to obtain increasingly

scarce water and higher water costs from water companies.

Reputational risk: community and citizen concerns about unsustainable and inequitable use of water.

Regulatory risk: companies are exposed to more stringent regulation as governments anticipate

increasing water scarcity and more unpredictable water availability.

Stranded asset risk: loss of license to operate and existing capital assets become stranded (or

devalued) because water is not available.

Market risk: loss in market share, or inability to penetrate new markets, as customers become

increasingly concerned with environmental impacts.

Any assessment of risk needs to consider its magnitude and likelihood. Not all risks will be realized by a

business, those that are will be realized in different ways and over different time horizons. Some of these risks,

such as water scarcity and regulatory risk, may be realized as increased water prices. Other risks, such as a loss

in brand reputation or a stranded asset, may be realized as a loss in a business’s overall value or market

capitalization. Risks such as a business disruption due to a drought, may be realized by an immediate loss in

revenue. All these risks, when monetized, are a proxy for the full value of water to business.

The ideal Water Risk Monetizer would assess a facility’s water costs (direct and indirect water-related

operating costs), value all of the business risks that are not currently on the balance sheet and quantify how

risks become internalized by the market on a regional basis in every water basin worldwide. The ideal tool

November 5, 2014: Version 1.0 launched

Introduced the Water Risk Monetizer to help facilities understand the full value of water to their operations based on regional water scarcity and the potential impact on future operating costs

March 2, 2015: Drought Scenario added

Permitted the user to signify local drought conditions when calculating risk-based water prices

March 31, 2015: Version 1.1 launched

Added batch upload functionality, additional currencies and volume unit conversions

June 2015: Version 2.0 launched

New method to calculate potential revenue loss from water scarcity

Allows user to define projected water bill increases

Refined water scarcity valuation model to incorporate WRI water scarcity data



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would also look at water risks related to the price of water paid by a facility (“water in”) as well as the costs

and risks associated with the water quality and condition of water leaving a facility (“water out”).

As a starting point, the Water Risk Monetizer provides a risk-based water price analysis that addresses the

price of water paid by a facility (“water in”) as well as three risk triggers: water scarcity, regulatory risk and

reputational risk. The value of water is monetized based on water scarcity risk. In addition, the Water Risk

Monetizer calculates the potential revenue at risk from water scarcity, alongside qualitative analysis of the

likelihood of revenue loss being realized by the facility.

Water scarcity is a key aspect of the monetization for the following reasons:

It is an underlying factor that drives many businesses’ water-related risks

A framework is available to value water scarcity in monetary terms

Local basin data is available globally

Regulatory risk and reputational risk are likely very important and potentially large, as are the risks related to

the condition and quality of water discharges. In the risk-based water price analysis, the Water Risk Monetizer

includes a qualitative score reflecting regulatory and reputational risk. The aim is for future versions of this

tool to monetize these risks, as well as the water quality and condition of water leaving the facility (“water

out”).

Traditional financial accounting practices only value the market price for water use, its treatment, and the

revenue generated by business. As water scarcity increases and company costs (or revenue) are impacted by

droughts, businesses are recognizing that this traditional approach does not account for the full value of water

to the business and it also significantly underestimates business value at risk from water scarcity.

Forward thinking businesses are incorporating ways to better understand and account for water scarcity risks

and the value of water to their operations. Because water is a shared resource, many stakeholders within a

community may compete for the water available within a catchment. Environmental economics provides a

way to account for the full value of water to these stakeholders, by measuring and valuing the non-market,

intangible costs and benefits to society and businesses that water provides. These non-market values include,

for example, health impacts from water pollution or the loss of water available to recharge groundwater

supplies in a community.

Increasingly, businesses are realizing these environmental and societal costs in their traditional financial

accounting systems, because risks are triggered as a result of physical (scarcity), regulatory or reputational

issues. Figure 1 on the following page illustrates this accounting framework and the rationale for more holistic

accounting of water’s value to a business, as well as the potential impact of the true value of water on

operating costs and revenue loss.



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FIGURE 1: WATER RISK AND VALUATION FRAMEWORK

METHODOLOGY

The Water Risk Monetizer analyses water related business risks, and in particular provides a risk adjusted price

of water and calculates the potential revenue at risk for a facility based on local water scarcity.

The Water Risk Monetizer uses scientific models developed by Trucost to quantify the impact of water scarcity

on a facility in monetary terms. The models correlate local water scarcity to considerations that contribute to

the full value of incoming water and the potential revenue at risk based on scarcity for a specific facility,

including:

Current and projected water use

Current and projected local water scarcity

Economic variance and purchasing power

Population and GDP forecast

Table 1 summarizes the key components of the tool. Specific methodologies for the calculations are provided

in the sections that follow. As shown in Table 1, the sources of data for the tool include a combination of

global datasets on current and projected water scarcity, global data on water value and user defined input

values. Required user inputs include: facility name, location, industry classification, amount of water used, and

the current price paid for water. The user is also able to provide information about local conditions that could

contribute to water scarcity, reputational and regulatory risk and potential revenue loss.

True Value of Water = Market value + Non-market values



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TABLE 1: SUMMARY OF KEY COMPONENTS IN WATER RISK MONETIZER

Component Description Scale Unit Source of data

User Inputs

Water use The ‘water in’ to the facility per year excluding any recycled water

Facility level m3

per year User input

Projected water use over 3 years

Projection of how water use will change over the next 3 years (optional: if the user does not enter data water use remains constant)

Facility level % User input

Water price The price paid for ‘water in’ to the facility – excluding any fees paid for wastewater

Facility level USD per m3 User input

Annual water bill

Water use multiplied by the water price Facility level USD User input

Drought scenario

Override of historical water scarcity value for drought area

Facility level 100% water

scarcity User selection

Industry classification

Industry sector of business operations for the facility

Facility level Specific sector User selection

Total facility revenue per year

Annual revenue (optional: if the user does not enter revenue data the tool will use modeled data based on industry averages)

Facility level USD User input

Projected revenue over 3 years

Projection of how revenue will change over the next 3 years (optional: if the user does not enter data the tool estimates revenue growth based on country-level projected economic growth)


Projected change in water price year-on-year

Projection of how the water tariff will change year-on-year (optional: if the user does not enter data the tool will use forecasted values)


Quantitative Outputs

Water bill forecast

Forecast of future water bill based on user input or based on historical trends in country level water prices

Country level, facility level

USD Global Water Intelligence, 2014

Water risk premium

Monetary valuation of risk of increased price of water due to water scarcity (calculation of the full value of water to the business at the site level)

River basin level USD

General framework: Frederick and Vandenberg, 1997 EFTEC, 2010 Water scarcity: WRI Aqueduct, 2015 Wildlife habitat and recreational activities: Loomis, 1996 Waste assimilation: Moncur and Pollock, 1988 Groundwater services: (Moran and Dann, 2008)

Water scarcity forecast

Linear forecast model of water scarcity over 3, 5 and 10 year period

Country level % Fao.org, 2014 Data.worldbank.org, 2014 Imf.org, 2014

Water risk premium cap

Water risk premium put in context to actual market conditions

Country level USD Globalwaterintel.com, 2014



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USER INPUTS

WATER USE

Water use (m3

or 1,000 gallons per year) is the total quantity of ‘water in’ to the facility per year excluding any

recycled water. The total quantity of water used is annualized by the tool but it can be entered on a weekly,

monthly, quarterly or annual basis.

WATER PRICE

The water price (per m3

or 1,000 gallons) is the unit price paid for the ‘water in’ to the facility. This excludes

any fees paid for wastewater. This data point would usually be sourced from water bills. Users can select

desired currency and unit of measurement.

PROJECTED WATER USE OVER 3 YEARS (OPTIONAL)

A projection of how the water use at the facility will change over the next three years. This is entered as a

percentage and can be an increase, decrease or kept constant. If the user does not enter a value, water use

remains constant.

ANNUAL WATER BILL

The current annual water bill is calculated by multiplying the amount of water used (m3

or 1,000 gallons per

year) by the current price of water (per m3

or 1,000 gallons). User can select desired currency and unit of

measurement.

Total water risk premium

Annual water bill added to the water risk premium over 3, 5 and10 year period

River basin, country level

USD

Revenue at risk Monetary valuation of potential revenue at risk due to water scarcity

Facility level

USD/USD (USD of

revenue at risk per USD of revenue)

Parilla, et al., 2014 Gassert, et al., 2014 Unstats.un.org, 2015 Trucost, 2015

Qualitative Outputs

Regulatory risk score Assessment of the country regulatory

framework; the user has the option to refine the assessment with some questions

Country level (default) or facility level if the user answers the optional questions

High, moderate or low

Waterriskfilter.panda.org, 2014 Reputational

risk score

Water scarcity risk score

Assessment based on water increase from now to 2030

Country level Fao.org, 2014 Data.worldbank.org, 2014 Imf.org, 2014

Revenue at risk likelihood score

Assessment of the likelihood of potential revenue loss

Facility level

Parilla, et al., 2014 Gassert, er al., 2014 Unstats.un.org, 2015 Trucost, 2015



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DROUGHT SCENARIO

An option for the user to override historical data on water availability for a specific city – using a scarcity value

of 100% – if the location currently is experiencing a drought. The Drought Scenario was developed because the

Water Risk Monetizer uses global water databases that reflect cities’ long-term water conditions that may not

capture current droughts.

FACILITY INDUSTRY CLASSIFICATION

The industry classification of a facility is selected by the user from drop-down lists of options. This variable is

required during data entry. This factor is used to model the estimated amount of water required per unit of

revenue so that the tool can allocate water appropriately in the river basin for agricultural or industrial and

institutional uses in order to estimate the potential revenue loss due to water scarcity.

TOTAL FACILITY REVENUE PER YEAR (OPTIONAL)

If provided by the user, the facility revenue per year is used to calculate potential revenue at risk due to water

scarcity. If not provided by the user, the facility’s estimated revenue is derived from data modeled by Trucost

based on industry average economic data and the facility’s industry classification.

PROJECTED REVENUE OVER 3 YEARS (OPTIONAL)

A projected percentage change in revenue over three years used to improve the calculation of potential

revenue at risk. If the user does not enter this value, the model provides a projected estimate for revenue

growth based on projected economic growth within the country and the industry’s relative contribution to the

country’s GDP.

PROJECTED CHANGE IN WATER PRICE YEAR-ON-YEAR (OPTIONAL)

Projected change in water price for the facility location. If the user does not enter a value, the tool uses

historical trend data for country-level water tariffs from Global Water Intelligence Tariff Surveys. In the

absence of country-level trend data for water tariffs, the tool uses a global average from Global Water

Intelligence Tariff Surveys for the projected change.

QUANTITATIVE OUTPUTS

WATER BILL FORECAST MODEL

Future water bill calculations are based on historical trends from the GWI Water Tariff Survey (Years 2007-

2014). Where there is no local data available in the GWI Water Tariff Survey, the global average increase of

12% is assumed. The user is given the option to override the modeled trend year-on-year increase if there is

site-specific data.



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WATER RISK PREMIUM

The water risk premium is a monetary estimate of the increased price of water, which may be realized by a

business as an increase in its operating costs. The water risk premium is calculated based on the full value of

water, as estimated by local water scarcity. The Water Risk Monetizer looks at the amount of water available

at a specific location, the amount of water used/needed by a facility, additional demands on the supply of

water and the impact of a facility’s water use on the watershed. The result is a water risk premium that

quantifies the full value of water scarcity to a facility in monetary terms.

The water risk premium considers projected water use over time, local water scarcity, economic variance,

population forecast, GDP forecast, and impacts of water use on the community, including factors such as

groundwater recharge, waste assimilation, wildlife habitat and recreational activities. The model aligns scarcity

data with current market conditions by capping the water risk premium at the highest price paid for water

globally today.

The resulting water risk premium is a financial indicator that companies can use to make better business

decisions to address water-related constraints to growth.

COMPONENTS OF WATER RISK PREMIUM CALCULATION

The magnitude of the water risk premium is calculated based on local water scarcity and the total economic

value of water. The valuation methodology for this model is described below.

SCOPE OF VALUATION METHODOLOGY

The water risk premium valuation methodology estimates the monetary value of water to stakeholders, as

shown in Figure 1, which is not included in the current market price of water. The model uses the Total

Economic Value framework (EFTEC, 2010), shown in Figure 2 below, which is a useful framework for valuation

supported by the World Business Council for Sustainable Development (WBCSD, 2013), a global CEO-led

organization of forward-thinking companies that work to develop and scale up business solutions to address

the world’s most pressing sustainability challenges. The Total Economic Value Framework is a company road-

tested set of principles supported by the WBCSD in their guidance documentation on water valuation. The

Total Economic Value Framework categorizes the different components that make up the full value of water. It

also recommends appropriate valuation techniques to address the costs that are not currently reflected in the

market price (these costs are shaded in dark blue). These costs represent the societal costs of water use that

could be internalized by a business or incorporated into the market price for water in the future. Based on an

extensive literature review, Trucost focused its water valuation on direct and indirect use values of water

including wildlife habitat and recreational activities, waste assimilation and groundwater recharge. These are

listed in Table 2 below. The valuation methodology for these components is explained in the next section.

Other values, such as the non-use value of water and the future option use value are not included in the

valuation methodology because the academic community has not reached consensus on how to monetize

these elements.



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FIGURE 2: THE TOTAL ECONOMIC VALUE FRAMEWORK

TABLE 2: VALUES OF WATER INCLUDED IN THE SCOPE OF THE VALUATION

Direct and indirect use value

Definition

Wildlife habitat and recreational activities

Recreation benefits provided by water included activities such as fishing, boating, rafting and swimming as well as activities such as picnicking and hiking that are enhanced by their proximity to water resources.

Waste assimilation Freshwater has the capacity to treat water pollutants through chemical processes such as oxidation. This capacity is finite, and depends on the quantity and types of water pollutants.

Groundwater services Groundwater generates several environmental services such as water purification or wetland maintenance.

Other Other use values (for example, salt dilution)

VALUATION METHODOLOGY

Trucost’s valuation methodology links the direct and indirect use values of water shown in Table 2 to water

scarcity in the river basin. As defined by the Food and Agricultural Organization (Fao.org, 2014), water scarcity

is the freshwater withdrawal as a percentage of total renewable resources. This definition of water scarcity

focuses on the physical risk or water stress from the quantity of water used rather than its quality. The

methodology employed by Trucost to calculate the direct and indirect use values of water follows two steps:

Firstly, Trucost reviewed academic literature that applied a homogenous framework to valuing water use

values in different locations across the United States (New England, Mid-Atlantic, South Atlantic-Gulf, Great

Lakes, Ohio, Tennessee, Upper Michigan, Lower Michigan, Alaska-White-Red, Missouri, Texas-Gulf, Rio Grande,

Upper Colorado, Lower Colorado, Great Basin, Pacific Northwest, California, Souris-Red-Rainy) (Frederick and

Vandenberg, 1997). The values calculated in this study includes waste assimilation, wildlife habitat and

recreation values. Trucost plotted the different use values according to the water scarcity of the United States



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regions under analysis. Water scarcity data was provided by the United States Geological Survey. Trucost then

modelled the relationship between the use values and water scarcity using statistical modelling software (R

Development Core Team, 2012). This relationship is a quadratic function of water scarcity and is expressed

using a value curve, plotting water scarcity on the x axis against use values on the y axis.

The value curve obtained in the first step was adjusted to build the mathematical relationship between water

scarcity and each of the use values. Trucost conducted a literature review to calculate weighted average values

for each of these use values. All valuation estimates were standardized to the year 2012 in USD equivalents

per m3 per year to provide a consistent basis for comparison. Trucost then calculated the weighted average

water scarcity of the study sites. The results are illustrated in Figure 3 below.

In the context of this project, water scarcity was calculated at a regional basin level using WRI’s Aqueduct

database (WRI Aqueduct, 2015) which covers more than 15,000 watersheds.

Trucost used the following steps to calculate the monetary value of one m3 of water in one specific region:

Calculate the region’s water scarcity based on the facility location entered by the user; and

Calculate the different use values of water: wildlife habitat and recreation; waste assimilation; and

groundwater recharge and adjust them according to country level purchasing power parity (PPP) or

economic variance.

The sum of the use values represents in monetary terms the risk premium or water scarcity value of water and

is expressed in USD per m3

(or user selected currency and unit of measurement).

FIGURE 3: WATER SCARCITY VALUE OF WATER

0

2

4

6

8

10

12

14

16

18

0% 20% 40% 60% 80% 100%

USD

PER

M3

WATER SCARCITY

Total value of freshwaterTotal value of wildlife habitat and recreationTotal value of waste assimilationTotal value of groundwater recharge



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WATER SCARCITY FORECAST MODEL

To estimate the water risk premium over 3, 5 and 10 years, Trucost built a country level water scarcity forecast

model. The river basin water scarcity at each location is then forecasted based on this country specific model.

Water scarcity is defined as freshwater withdrawals divided by renewable water resources. Due to the

complexity associated with future renewable water resources which are highly dependent on climate change,

Trucost focused on forecasting water withdrawals (water use); in this forecasting model, renewable water

resources remains constant based on the latest data available from AQUASTAT database (FAO.org, 2014). The

main factors driving water use are population, economic growth, electricity demand, technological change,

climate change and structural changes to supply (Alcamo, et al., 2003).

The total water use of a region is broken down into domestic, agricultural and industrial withdrawals. For each

dimension, Trucost built a linear model based on historical data. These models were then applied to projected

variables up to 2030. Table 3 on the following page presents the variables and data sources used in this model.

TABLE 3: WATER SCARCITY FORECAST MODEL

Scope of water scarcity forecast model

Water withdrawals Forecast to 2030

Renewable water resources Not forecast

Variables

Domestic withdrawals Population

Industrial withdrawals Gross Domestic Product

Agriculture withdrawals Agriculture Gross Value Added

Data sources for historical data

Water withdrawals AQUASTAT database (Fao.org, 2014)

Explanatory variables World Bank database (Data.worldbank.org, 2014)

Data sources for projected data

Explanatory variables International Monetary Funds (Imf.org, 2014)

Factors affecting water withdrawal that have not been incorporated into this model include: technological

changes, and structural changes to supply and average income of the population, amongst others because of

the lack of global data available at a site specific level.



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WATER RISK PREMIUM CAP

It is unlikely that a business will realize, or internalize, the total water risk premium in its water bill. Therefore,

the Water Risk Monetizer tool takes the water risk premium and puts it into the context of actual market

conditions which helps the user understand what is more likely to be internalized in the shorter term. In order

to achieve this, the water risk premium is capped with the highest water market price existing in the world

today. According to the Global Water Tariff Survey (Globalwaterintel.com, 2014) the highest water bill is in

Aarhus, Denmark, with a value of USD 4.5 per m3.

The water risk premium equals the water risk premium IF the water risk premium is below the risk cap;

OTHERWISE it equals the risk cap. The risk cap increases over 3, 5 and 10 years with the same country specific

extrapolating factors as for the water bill (see the section on the water bill forecast model).

RISK ADJUSTED WATER PRICE

The risk adjusted water price is the sum of the annual water bill and the water risk premium per unit of water.

It represents the full value of water to the facility based on local water scarcity.

WATER RISK PREMIUM CALCULATION SUMMARY

User defined

User defined by water use projection

Constant Constant

Water use

(m3 or 1,000

gallons per year at the facility)

Monetary value of unpriced local benefits water provides

(USD or selected currency per year)

(Unpriced benefits include wildlife habitat and recreation activities, waste assimilation

and groundwater recharge)

Water Risk Premium

(USD, adjusted by risk cap)

(Potential increased operating costs due to

water scarcity)

Yea

r 1

0

Adjusted for local water scarcity and country level purchasing power parity (PPP) or economic variance

Adjusted using three, five and ten year water scarcity forecast model

Ye

ar 1

Y

ear

3

Yea

r 5

If the water risk premium

exceeds the risk cap, the risk

cap is applied

If the risk cap is applied in Year

1, it is adjusted by a three, five

and ten year price forecast

using country level GDP per

capita forecast



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REVENUE AT RISK

Revenue at risk is the estimated value of the revenue that could potentially be lost at a facility due to the

impact of water scarcity on operations. The tool uses a revenue at risk model to estimate the amount of water

that should be available to the facility – its “share” of total water available to industry water users in the basin

based on the facility’s contribution to the local economy.

Because water is a finite resource that is shared by many users in a water basin, the amount of water that

should be available to a facility may be less than what a facility needs. The amount available also could change

over time, as water scarcity increases or as a local economy grows. The revenue at risk model compares the

estimated amount of water a facility requires to generate revenue (m3 per USD of revenue) to the facility’s

share of water in the basin if water were allocated among water users based on economic activity

(contribution to basin-level GDP). If more water is required than the basin share of water allocated (as

determined by the model), then a proportion of the facility’s revenue is potentially at risk.

Figure 4 below summarizes the conceptual framework for the revenue at risk model. More details on the

valuation methodology are provided below in Figure 4.

FIGURE 4: CONCEPTUAL FRAMEWORK: POTENTIAL REVENUE AT RISK DUE TO RIVER BASIN WATER SCARCITY



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COMPONENTS OF REVENUE AT RISK

A facility’s potential risk of revenue loss due to water scarcity considers two components: magnitude and

likelihood. The magnitude of potential revenue loss is the dollar of revenue at risk per dollar of revenue. The

likelihood of potential revenue loss is scored as high, moderate or low, and provides an indication of how likely

the revenue at risk will be realized by the facility.

SCOPE OF VALUATION METHODOLOGY

The magnitude of revenue at risk is the estimated monetary value of potential revenue loss as a result of water

scarcity, calculated at a facility level based on local water scarcity. It relates the amount of water required by

the facility to generate revenue compared to the availability of water to meet facility demand.

The likelihood of revenue at risk is attributed to a number of factors. Likelihood increases if the facility

operates in:

An industry with a high water requirement per unit of revenue

A location with a high-quality regulatory framework for water

An industry that is not exempt from any water restrictions imposed by regulators

A location with increasing water scarcity



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VALUATION METHODOLOGY

MAGNITUDE OF POTENTIAL REVENUE AT RISK

The model estimates the amount of water a facility requires to generate revenue, and estimates the amount

of water available to the facility if water were allocated among users in the local basin based on economic

activity. If more water is required than the basin share of water available in the river basin (as determined by

the model), then the facility’s revenue is potentially at risk, as shown below:

Revenue is at risk if: Estimated Amount of

Water Required >

Estimated Basin Share of Water Available

The model estimates the amount of water required based on the annual amount of water used by the facility

and the facility revenue. The facility revenue can be entered by the user, but is an optional input. If the user

does not enter facility revenue, the model estimates this value using Trucost’s environmentally extended

input-output (EEI-O) model, based on industry average data and the facility’s industry classification. The

facility’s industry classification is a user entered value.

Because water is a shared resource, the share of water available to a facility is estimated by the model, taking

into account local water scarcity and economic activity. The estimated basin share of water available within a

river basin for domestic, agricultural, industrial and institutional users is based on basin-level water

withdrawals and the location’s Gross Domestic Product (GDP), which provides an estimate of the demand for

water in the basin from all the different users of the water. In any given location, the model assumes there are

specific volumes of water for agricultural use, or for industrial and institutional use. The facility’s industry

classification determines which volume of water the model will allocate to the facility.

The model uses GDP to account for different users within the river basin that are competing for a finite

amount of water. As GDP increases, the competition for water also increases (assuming the amount of water

stays the same). The tool uses the most recent IMF GDP forecasts. The most site specific GDP data is used. The

Water Risk Monetizer draws first from megacity GDP but, if unavailable, it selects state GDP and finally, if

unavailable, it selects national GDP to estimate the basin share of water available for the facility’s industry.

If the user applies the Drought Scenario, the Water Risk Monetizer estimates water availability in a simulated

drought condition, where there is less water available. The tool uses the inter-annual variability of water, as

provided by the WRI, to simulate the scenario where there is a 10% chance that less water will be available.

The 10th

percentile of water available was selected using sensitivity analysis as it has the highest correlation

with the drought severity metric, also provided by the WRI.

The model estimates the facility’s revenue per unit of water by dividing the total facility revenue by the

amount of water used by the facility (user input value).

In addition to estimating potential revenue at risk for the first year, the tool forecasts revenue at risk for years

3, 5 and 10, based on estimated future water requirements and availability. The user has the option to

estimate future values for the amount of water required and the percentage change in annual revenue. If the

user does not enter these values, water required by the facility remains constant in Years 3, 5 and 10.



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The tool forecasts the estimated amount of water available to the user in Years 3, 5 and 10 based on projected

economic growth for the location. The forecast estimates future water demand based on GDP projections. The

modeled allocation of water to agriculture or industrial and institutional users is based on the mean value and

hence is held constant over time. (Please see ‘Limitations’ for forecasting future water availability.)

FIGURE 5: CONCEPTUAL FRAMEWORK: COMPONENTS OF REVENUE AT RISK CALCULATION



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LIKELIHOOD OF POTENTIAL REVENUE AT RISK

The likelihood that a business will realize revenue loss is scored as high, medium or low by the tool, based on

five variables, as listed in Table 4. Each variable is assigned a value between zero and one, and each variable’s

weighting to the overall score is shown in the table. Water scarcity is weighted the highest because this

physical risk is more likely to lead to a loss in revenue than the other variables.

TABLE 4: LIKELIHOOD OF REVENUE AT RISK DUE TO WATER SCARCITY

Variable Description Influence Weighting Data sources

Water requirement of industry per unit of revenue

Demonstrates how critical water is to an industry’s revenue. Seven high-level industries are considered including Agriculture, Mining, Utilities, Manufacturing and Construction.

Higher requirement, higher likelihood.

12.5% Trucost’s EEI-O model

Water requirement of specific industry per unit of revenue

Demonstrates how critical water is to each industry within its sector. The seven high-level sectors are divided into more than 450 industry sectors.

Higher requirement, higher likelihood.

12.5% Trucost’s EEI-O model

National or local water regulations

Demonstrates the level of governance of water regulation and the level of enforcement in each country. The user can choose to override this to make it more specific to site location based on an optional user input.

Higher quality and level of enforcement, higher likelihood.

12.5% WWF Water Risk Filter; User input

Importance of the industry to the national or local economy

Identifies the importance of each industry to the national economy (GDP) which aids regulatory restriction decisions. The user can choose to override this to make it more specific to site location based on an optional user input.

Lower importance, higher likelihood.

12.5% UN Stat

Water scarcity Identifies if the facility is located in a region of reduced water availability.

Higher scarcity, higher likelihood.

50% WRI

In addition, the user can indicate whether the facility has historically experienced a loss of revenue due to

water scarcity that will increase the likelihood score (optional user input value). The WRI lists water scarcity

values over 40% as “High risk.”

The overall likelihood score is presented as High, Moderate or Low. The Water Risk Monetizer assumes a high

likelihood when all variables are, on average, over 50% and the likelihood is Low if variables are less than 25%.



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POTENTIAL REVENUE AT RISK CALCULATION SUMMARY

User defined or industry average

User defined by water use and revenue projection

Constant

Constant

Estimated Amount of

Water Required

(m3 per dollar of

facility revenue)

Estimated Basin Share of Water Available

Modelled at a river basin level, accounting for domestic, agricultural and industrial

water use in the basin.

(m3 per dollar of local GDP)

Revenue at Risk

The difference between water required and basin share of

water available is represented as a proportion of facility

revenue.

(USD per USD of revenue)

Ye

ar 1

0

At a specific location, the model estimates the basin share of water available for agricultural or industrial and institutional users based on basin level water withdrawals and local GDP

The estimated basin share of water available is influenced by future demand for water, which is based on a three, five and ten year GDP forecast

Ye

ar 1

Y

ear

3

Ye

ar 5

If the estimated amount of water

required is less than the

estimated basin share of water

available, the tool gives a value

for potential revenue at risk of

<$0.01 or <1%



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QUALITATIVE OUTPUTS

LIKELIHOOD OF RISK SCORES

In addition to placing a monetary value on water scarcity risk, the Water Risk Monetizer scores the likelihood

of risks across three factors: water scarcity, regulatory risk, and reputational risk. These risks are qualitatively

assessed as high, moderate or low based on user inputs and the World Wildlife Fund Water Risk Filter

(Waterriskfilter.panda.org, 2014).

A high score for each indicator suggests there is a higher probability or likelihood that the business value at

risk will be realized and the facility’s future water bills will increase over time or there will be a loss in

revenue.

REGULATORY RISK SCORE

The regulatory risk score is based on country level qualitative assessment from the World Wildlife Fund Water

Risk Filter. If desired, the tool user is able to provide local data on regulatory risks to supplement the more

regional data in the World Wildlife Fund’s Water Risk Filter. Table 5 describes the data incorporated in the

tool:

TABLE 5: DATA INCLUDED IN THE REGULATORY RISK SCORE

Data from WWF Water Risk Filter

Indicator Scoring Effect on overall regulatory risk

Sophistication and clarity of water related legal framework From 1 to 5

A lower score will decrease the regulatory risk score

Enforcement of water related legal framework From 1 to 5

Official forum or platform in which stakeholders come together to discuss water-related issues of the basin

From 1 to 5

Optional user led data

Question Answer Effect on overall regulatory risk

How would you rate the quality of the water legal framework in your local area compared to your country as a whole?

A. Much worse B. Worse C. Same D. Better E. Much better F. Do not know or N/A

A better local legal framework will decrease the regulatory risk score

Data from the World Wildlife Fund’s Water Risk Filter provides an average country level regulatory risk score

between 1 and 5; this score is adjusted based on the user’s optional answer. The regulatory risk is low when

the score is below 2, moderate if the score is between 2 and 4, and high if the score is higher than 4. The

regulatory risk score will also feed into the revenue at risk score, described below.



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REPUTATIONAL WATER RISK SCORE

The reputational risk score is based on country level qualitative assessment from the World Wildlife Fund’s

Water Risk Filter. If desired, the tool user is able to provide local data on reputational risks to supplement the

more regional data in the World Wildlife Fund’s Water Risk Filter. Table 6 on the following page describes the

data incorporated in the tool.

TABLE 6: DATA INCLUDED IN THE REPUTATIONAL RISK SCORE

Data from WWF Water Risk Filter

Indicator Scoring Effect on overall regulatory risk

Cultural and/or religious importance of local water sources From 1 to 5

A lower WWF Water Risk Filter score will decrease the reputational risk score

Exposure of this country to local/national media coverage reporting on criticizing on possible water issues

From 1 to 5

Exposure of this country to global media coverage reporting on criticizing on possible water issues

From 1 to 5


Question Answer Effect on overall regulatory risk

Have there been environmental issues at your facility that have affected your company's reputation?

A. Yes, several times B. Yes, one time C. No D. Do not know or N/A

Fewer existing environmental issues will decrease the reputational risk score

Is your facility aware of the stakeholders depending on the same water resources?

A. No, none of them B. Yes, some of them C. Yes, all of them D. Do not know or N/A

Greater awareness of other stakeholders will decrease the reputational risk score.

Data from the World Wildlife Fund’s Water Risk Filter provides an average country level reputational risk score

between 1 and 5; this score is adjusted based on the user’s optional answer. The regulatory risk is low when

the score is below 2, moderate if the score is between 2 and 4, and high if the score is higher than 4.

WATER SCARCITY RISK SCORE

The water scarcity risk score is based on the water scarcity forecast model developed by Trucost and explained

in a previous section. This model provides a coefficient or a gradient for each country, capturing the water

increase between 2014 and 2030 which is then applied to the river basin water scarcity value where the facility

is located.

If the facility is in a river basin where 2030 water scarcity is:

Between 0% and 17%: the risk score is considered low

Between 17% and 67%: the risk score is considered moderate

Between 67% and 100%: the risk score is considered high



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REVENUE AT RISK LIKELIHOOD SCORE

The revenue at risk score is the likelihood that there will be a loss in revenue as a result of water scarcity. As

described above, the score considers water scarcity, the industry’s importance to the local economy, the water

required by the industry, the quality of local water regulations and the facility’s historical trend of revenue

loss. The regulatory risk score, described above, is used as an input for the revenue risk score. Table 7

describes the data incorporated in the tool.

TABLE 7: DATA INCLUDED IN THE REVENUE AT RISK SCORE

Data from External Sources (WWF, UNStat, Trucost)

Indicator Scoring Direction

Regulatory risk score 1 to 5 A lower regulatory risk score will decrease the revenue at risk score

Water dependency of high-level industry Ranking A lower water dependency will decrease the revenue at risk score

Water dependency of specific industry within high-level sector

Ranking

Importance of industry to national economy Gross value added (GVA) ranking

A higher GVA to GDP ratio will decrease the revenue at risk score

Water scarcity 0 to 1 Lower water scarcity will decrease the revenue at risk score


Question Answer Direction

Has your business lost revenue due to water scarcity in the last year?

A. Yes B. No C. Do not know or N/A

If revenue has been lost in the last year, it will increase the revenue at risk score

Is your facility’s industry exempt from potential water restrictions imposed by local regulators?

A. Yes B. No C. Do not know or N/A

Exemptions from water restrictions will decrease the revenue at risk score

LIMITATIONS

Inherent in any model are limitations, which are highlighted in the discussion and table that follows.

The Water Risk Monetizer was designed to provide a fast, easy-to-use water scarcity risk assessment in

monetary terms at a facility level, taking into account local conditions. The output is intended to inform

business decision-making and action on water scarcity risks. The tool does not provide a holistic, detailed

facility-specific water risk assessment.

At present, the tool’s scope includes only risks associated with water scarcity and a facility’s incoming water

use. As described more fully in the introduction to this methodology, we acknowledge there are other water-

related risks and the tool will be updated over time to incorporate modules that assess these other risks.

Developing a globally relevant tool that is able to address local conditions is challenging, and comes with

limitations. Gaps in local level data often exist, and the uncertainty in making estimates and assumptions has

been mitigated through extensive consultation with subject-matter experts and other important stakeholders.

Wherever possible, local level data has been included in the tool or alternatively, the user is provided with the

option to provide local insights, to increase the accuracy of the results.



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TABLE 8: LIMITATIONS OF THE CURRENT TOOL AND MITIGATION STRATEGIES

Limitation Mitigation Strategy

Water Risk Monetizer’s scope is limited to water scarcity related risks

Water Risk Monetizer is a fast, easy-to-use and educational screening tool to understand a facility’s exposure to water scarcity risk in monetary terms. It is not intended to be a detailed risk assessment tool that takes into account all business risks.

Only incoming water use is considered The tool analyzes risks relating to incoming water to the facility. Costs related to water use inside the facility and risks related to the water discharged are not currently addressed by the tool. These other water related risks may be significant, and will be addressed in future versions of the tool.

Data gaps and coverage In recognizing the limitations inherent in global datasets, the Water Risk Monetizer uses local data wherever possible or provides for local data input by the user. For example, with GDP this is done at a megacity, state or national level depending on the availability and reliability of the data source.

Uncertainty in forecasting data Forecasting also has limitations including reliance on historical data, assumptions about variables and other factors. Wherever possible, the Water Risk Monetizer sources forecast models from internationally recognized data providers and advice from subject matter experts.

Water required for revenue at risk calculation is based on industry average data, based on Trucost EEI-O model.

The tool provides an input override option to allow the user to specify facility revenue data.

GDP is not calculated at a river basin level GDP is calculated at a national level for most countries. Wherever possible, state level GDP is used (for the United States and for China). Further granularity has also been achieved by incorporating the GDP of megacities (Parilla et al, 2014).

Water risk premium calculation is based on secondary data sources

The development of valuation co-efficients for all river basins across the globe leverages existing academic studies that have been conducted in different locations. This means that there may be uncertainties and sensitivities in the original academic studies that will be apparent within the Water Risk Monetizer. To mitigate against this risk, Trucost have used valuation techniques recommended within the Total Economic Value (TEV) framework supported by the World Business Council for Sustainable Development (WBCSD, 2013).

FOR MORE INFORMATION

For more information about this methodology, valuing water or valuing water related business risks in business operations and supply chains, please contact Trucost at [email protected] or [email protected]

mailto:[email protected]

mailto:[email protected]



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APPENDIX: DATA SOURCES

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of the WaterGAP 2 global model of water use and availability. Hydrol. Sci. J. 48(3), 317-337.

Data.worldbank.org (2014). Data | The World Bank. [online] Available at: http://data.worldbank.org/

[Accessed 20 Aug. 2014].

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http://www.fao.org/nr/water/aquastat/data/glossary/search.html?lang=en [Accessed 19 Aug. 2014].

Fao.org (2014). AQUASTAT database. [online] Available at:

http://www.fao.org/nr/water/aquastat/data/query/ [Accessed 20 Aug. 2014].

Frederick, K. and Vandenberg, T. (1997). Economic values of freshwater in the United States. Resources for the

future. [online] Available at: http://rff.org/RFF/Documents/RFF-DP-97-03.pdf.

Gassert, F., M. Landis, M. Luck, P. Reig, and T. Shiao. 2014. “Aqueduct Global Maps 2.1.” Working Paper.

Washington, DC: World Resources Institute. Available online at http://www.wri.org/publication/aqueduct-

global-maps-21 [Accessed 20 May 2015].

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http://www.globalwaterintel.com/ [Accessed 20 Aug. 2014].

Gray, S. and Young, R. (1974). The economic value of water for waste dilution: Regional forecasts to

1980.Journal (Water Pollution Control Federation), pp.1653-1662.

Imf.org (2014). IMF Data and Statistics. [online] Available at: http://www.imf.org/external/data.htm [Accessed

20 Aug. 2014].

Loomis, J. (1996). The Economic Value of Instream Flow: Methodology and Benefit Estimates for Optimum

Flows. Journal of Environmental Management, 32(2), 441-447.

Merritt, L. and Mar, B. (1969). Marginal values of dilution waters. Water Resources Research, 5(6), pp.1186-

1195.

Moncur, J. and Pollock, R. (1988). Scarcity rents for water: A valuation and pricing model. Land Economics,

pp.62--72.

Moran, D. and Dann, S. (2008). The economic value of water use: Implications for implementing the Water

Framework Directive in Scotland. Journal of Environmental Management, 87(3), pp.484-496.

Parilla, J., Leal Trujillo, J., Berube, A. and Ran, T. (2014). Global Metro Monitor An Uncertain Recovery. [online]

Available at: http://www.brookings.edu/research/reports2/2015/01/22-global-metro-monitor [Accessed 02

June 2015].

R Development Core Team (2012). Vienna: R: A language and environment for > statistical computing.

Trucost (2015). Environmentally Extended Input-Output Model. London: Trucost.

http://rff.org/RFF/Documents/RFF-DP-97-03.pdf

http://www.wri.org/publication/aqueduct-global-maps-21

http://www.wri.org/publication/aqueduct-global-maps-21



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Unstats.un.org (2015). National Accounts Main Aggregates Database. [online] Available at:

http://unstats.un.org/unsd/snaama/introduction.asp [Accessed 15 May 2015].

Water.epa.gov (2014). Importance of Water to the United States Economy | Importance of Water | US EPA.

[online] Available at: http://water.epa.gov/action/importanceofwater/ [Accessed 20 Aug. 2014].

Waterriskfilter.panda.org (2014). The Water Risk Filter. [online] Available at: http://waterriskfilter.panda.org/

[Accessed 20 Aug. 2014].

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[online] Available at: http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID=15801 [Accessed

15 May 2014]

Wolchover, N. (2014) What is a Drought? [online] Available at: http://www.livescience.com/21469-drought-

definition.html [Accessed 09 Jun. 2015]

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2015].

http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID=15801

http://www.livescience.com/21469-drought-definition.html

http://www.livescience.com/21469-drought-definition.html

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