Water-related risks can have significant impacts on a company’s financial performance and long-term value, making it crucial for investors to understand and assess these risks. As water scarcity and related risks continue to increase, it becomes even more critical for investors to evaluate a company’s water-related risks and management strategies. Fortunately, there are various tools available that can help investors assess water-related risks and identify potential investment opportunities in companies that are better equipped to manage these risks. In this article, we will introduce some of these tools from an investor’s perspective and discuss how they can be used to evaluate water-related business risks and make informed investment decisions.
The Water Risk Filter
The Water Risk Filter is an online tool developed by the World Wildlife Fund in partnership with the German Development Bank DEG and the German Technical Cooperation Agency GIZ. It assists businesses and investors in evaluating, quantifying, and addressing water-related risks in their operations and investments. The tool provides a comprehensive assessment of water-related risks, including physical, regulatory, and reputational risks.
Water-related physical risk pertains to the potential adverse effects on a company’s operations and value chain resulting from physical water-related factors. It encompasses two primary components: basin risk and operational risk.
- Basin risk refers to the risks associated with water scarcity, poor water quality, floods, and other water-related issues in a watershed or river basin. These risks can impact the availability and reliability of water supply and the health of surrounding ecosystems for all users in the basin, including companies and their operations.
- On the other hand, operational risk refers to the risks associated with a company’s water use and management practices. It is a concern for firms that rely heavily on or significantly impact water resources in the course of their activities. Operational risk assessments typically involve analyzing a company’s water use and discharge patterns, identifying areas of high water consumption and potential water losses, and evaluating the effectiveness of current wastewater treatment technologies and water management practices.
Water-related regulatory risk refers to the potential impact of water-related regulations on a company’s operations and value chain. This type of risk can manifest in two ways:
- Basin risk refers to the risk that a company’s operations may be affected by unstable, ineffective, or poorly implemented water-related regulations at the basin or regional level. For example, if a company operates in a region where the water supply is highly regulated and there is a shortage of water resources due to climate change, it may face difficulties in accessing sufficient water for its operations.
- Operational risk refers to the risk that a company’s operations may be impacted by changes in existing water-related regulations or non-compliance with these regulations. For example, if a company is not prepared for new regulations related to water usage and discharge, it may face fines and restrictions that could impact its operations.
Water-related reputational risk refers to the potential negative impact on a company’s reputation due to stakeholders and local communities perceiving that the company is not conducting its business in a sustainable and responsible manner with respect to water. This type of risk can take two different forms:
- Basin risk refers to the pre-conditions in the river basin that can make reputational risk more likely to manifest. For example, if a company operates in a region with significant media scrutiny or where there is conflict over water resources, reputational risks may be more likely to arise. Similarly, if the conditions and values of freshwater resources and freshwater biodiversity are threatened, stakeholders and local communities may view the company as contributing to the problem.
- Operational risk arises from how a company manages its water resources and wastewater discharge. If a company’s operations are perceived as unsustainable or environmentally damaging, stakeholders and local communities may view the company in a critical or unfavorable manner, which can result in reputational damage.
Reputational risk can have significant financial and operational impacts on a company, as negative publicity and a damaged reputation can lead to decreased customer loyalty, investor confidence, and employee morale. To manage water-related reputational risk, companies need to prioritize sustainable and responsible water management practices, such as reducing water usage, improving water quality, and engaging with local communities and stakeholders to ensure that their concerns are heard and addressed. By doing so, companies can protect their reputation, build trust with stakeholders, and contribute to a more sustainable water future.
The Ceres Investor Water Toolkit
The Ceres Investor Water Toolkit is a resource created by the nonprofit organization Ceres to assist investors in evaluating and managing water-related risks within their investment portfolios. The toolkit aims to offer investors a comprehensive understanding of the water-related risks faced by companies and how those risks can affect their financial performance.
The toolkit offers a detailed, step-by-step guide to help investors evaluate water-related risks in their portfolios. It encompasses a range of tools and resources that investors can utilize to assess the water risks of their investments, including water risk screening tools, data sources, and case studies.
In addition, the Ceres Investor Water Toolkit offers guidance for investors to incorporate water risk management into their investment decision-making processes. The toolkit suggests ways to integrate water risk considerations into investment policies, due diligence procedures, and engagement strategies with portfolio companies.
The Ceres Investor Water Toolkit has gained widespread adoption among investors globally, including asset managers, pension funds, and endowments. By utilizing this toolkit, investors can gain a better understanding of the water-related risks present in their portfolios and take necessary measures to mitigate those risks. This can ultimately contribute to the sustainable management of water resources while simultaneously reducing potential financial losses.
The World Resources Institute’s Aqueduct Database
Developed by the World Resources Institute (WRI), the Aqueduct database is a globally accessible, open-source database that offers in-depth information on water-related risk factors such as scarcity, quality, and flood risks at the local level.
By integrating multiple indicators such as physical water stress, drought severity, groundwater stress, and flood occurrence, Aqueduct provides a comprehensive perspective on water risks. It further analyzes the potential impact of these risks on diverse sectors, including agriculture, energy, and manufacturing.
One of the key features of Aqueduct is its ability to provide customized risk assessments for specific locations. This allows investors to understand the specific water risks facing the operations and supply chains of a company and also helps businesses develop tailored strategies to manage these risks.
Aqueduct has been widely adopted by businesses, investors, and governments around the world. Companies such as Coca-Cola, Nestle, and PepsiCo have used the Aqueduct database to assess their water risks and develop strategies to manage them.
In general, the tools mentioned above are widely regarded as leading frameworks for evaluating water-related risks for investors. The selection of one tool over the others may depend on the specific requirements and preferences of the investor in question. Utilizing such tools can provide investors with a comprehensive understanding of water-related risks facing the companies they invest in. This, in turn, can help them make informed investment decisions and also encourage companies to manage their water risks more effectively. By promoting sustainable water management, investors can contribute to the long-term success of their investments while also supporting the responsible use of a critical resource for the benefit of society and the environment.
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