Waterbeta final

waterBeta® is a trademark of Equarius Risk Analytics, all rights reserved, used with permission
Equarius Water Risk Index, patent pending, 2018
Financial waterBeta®:
A Portfolio Approach to Value Corporate
Water Risk Exposure
Iuliana Mogosanu
Ross School of Business and School for Environment and
Sustainability
Faculty Advisor: Professor Peter Adriaens
Civil and Environmental Engineering, School for Environment and
Sustainability, Ross School of Business
1

2
Agenda
● Water Scarcity and Corporate Risk
● Investor Water Risk
● Impact of Water Risk on Stock Volatility
● waterBeta® Methodology
● Application of Methodology in Five Industry Sectors
● Conclusions

3
Water Scarcity and Corporate Risk
“It is becoming increasingly difficult to provide a reliable supply of water in many parts of the
world due to increase in water demand from population growth and economic expansion
combined with a decrease in water supply due to climate change and polluted water sources”
2016 Annual CDP Report on Corporate Water Disclosure

4
Water Scarcity and Corporate Risk
Source: Ceres - An Investor Handbook for Water Risk Integration, 2017
• No common perspective on how to evaluate the impact of water risk due to difficulty in
quantifying the value of water as a scarce resource
• Private sector tends to value water in terms of finance, either as a resource input (i.e., the cost
to withdraw or consume water as determined by water prices) or as a liability (i.e., the cost to
treat pollution or mitigate regulatory requirements)
BUT
VALUE OF WATER > COST OF WATER Value-at-Risk Model

5
Investor Water Risk
Major barriers to integrate water risk into portfolio management:
• Lack of clear mandates of fund manager clients to prioritize water risks in investment
decisions
• Lack of comparable data between companies on corporate water performance (a
benchmark)
• Lack of consistent disclosure of water metrics by companies
• Lack of an effective water risk analysis framework
• No consensus on which metrics should constitute a comprehensive water risk analysis
Practices to analyze water risk:
• Shadow price for water as a
proxy
• Network of experts
• Water risk as a variable in
quantitative models
• Indicators used in ESG scores

• Water risk is not incorporated in asset
risk-pricing strategies
• Most widely used volatility measure of a
company’s performance is financial β
(beta)
• Information asymmetry impacts how
events that affect the short-term
corporate financial performance are
priced
6
Impact of Water Risk on Stock Volatility
Corporate risk exposure is influenced by the water intensity of production and by company’s
water supply capacity without major interruptions and capacity to discharge the wastewater
Alternative: Statistical analysis of market data based on portfolio
theory could provide a market signal for the value of water to
corporate activity

7
waterBeta® Methodology
A novel approach to quantify and value the
impact of water risk on stock volatility
Portfolio
Theory
Water
Resource
Productivity
Natural
Language
Processing
Empirical
market and
corporate
data
Water
resource
information
at watershed
level
Capital Markets Impact
Water and
extreme events
Corporate risk
signaling
Voluntary
and SEC
disclosures
(intangibles)

8
waterBeta® Methodology (cont.)
Stock volatility
Systemic risk
Financial Beta
(standard deviation of
asset returns relative to
the market)
Idiosyncratic risk Water risk
Geographic component
Industry specific
component
waterBeta®Water risk can be
diversified away under
portfolio theory, if the risk
can be independently
assessed!

CONSEQUENCE:
9
Hypothesis: Water risk depends on the type of corporate activity in the watershed, its
economic output productivity from the water resource, and the geographic distribution
of its fixed assets (plants, farms, utilities)
Quantify the value-at-risk (VaR) signal of the company stock relative to its industry
sector
• Is the risk systemic or idiosyncratic?
Aggregate and benchmark the output productivity of the firm relative to the water
resource risk exposure of its assets
• Bloomberg-Aqueduct (analytical tool that relates economic output relative to water quality, quantity and
regulatory risks)
Assess the operational value generated from real asset investments
• Ratio of net PP&E and enterprise value (EV)
Adjust by a correction factor
• What is the size of water intensity?
• What is the percentage of water withdrawal in the industry?
• Intangibles (disclosures and value chain exposure)?

10
waterBeta®:
• Developed by Equarius Risk Analyics
• Idiosyncratic volatility signal representing excess risk from water scarcity or
extreme events, uncorrelated to general market trends
• Used in hierarchical cluster analysis Price premium or discount of the
financial asset
w𝒂𝒕𝒆𝒓𝑩𝒆𝒕𝒂® = 𝒇(
𝑽𝒂𝑹 𝒂𝒔𝒔𝒆𝒕
𝑽𝒂𝑹 𝒊𝒏𝒅𝒆𝒙
∗ 𝑪𝒐𝒓𝒓𝒆𝒍𝒂𝒕𝒊𝒐𝒏 𝑷𝒓𝒊𝒄𝒆 𝒂𝒔𝒔𝒆𝒕 , 𝑷𝒓𝒊𝒄𝒆𝒊𝒏𝒅𝒆𝒙 , 𝑭 𝑨𝒔𝒔𝒆𝒕𝑹𝒊𝒔𝒌,
𝑵𝒆𝒕 𝑷𝑷𝑬
𝑬𝑽
, 𝝱𝒊𝒏𝒕𝒂𝒏𝒈𝒊𝒃𝒍𝒆)
Assumptions:
• waterBeta® is expressed as a probability loss
• Benchmark for each company is a relevant index for that specific industry
• Since water risk and weather are extreme events over short periods, value-at-risk
(VaR) represents the 95th percentile of quarterly losses based on daily share price,
the so-called “fat tails”
• waterBeta® needs to be modulated by the exposure of the company’s real assets to
geographic risks at the watershed, catchment, or sub-catchment level.

11
• Initial list of companies clustered in
5 different industries provided by
Dana Investment Advisors
• All companies are US-based due to
information restrictions and
w𝐚𝐭𝐞𝐫𝐁𝐞𝐭𝐚® contributions from
specific regions
Criteria to select a sample size of 25 companies:
• Available information in Bloomberg-
Aqueduct
• Focus line of business (NAICS code
alignment)
• Market cap > $10 billion (large caps)
• Number of assets (facilities) in US
Research project developed in close cooperation with an industry
partner from the investment community: Lydia Miller, Dana
Investment Advisors
Utilities Semiconductors
Household
Products
Food Beverages
Duke Energy Intel Corporation Procter & Gamble General Mills Coca-Cola
Southern Company QUALCOMM Colgate-Palmolive Kellogg Pepsico
Exelon Texas Instruments Kimberly-Clark Tyson Foods
Constellation
Brands
Consolidated Edison Applied Materials Clorox
Conagra
Brands
Brown-Forman
Corp.
DTE Energy
Lam Research
Corporation
Church & Dwight Ingredion
Molson Coors
Brewing Company
Application of waterBeta® Methodology,
cont.

12
Daily share price data of 25 US-based companies and the benchmark index for each
industry extracted over a 10-year period (2007 to 2017)
Objective: Algorithmically quantify the contributions of water risk signals to overall
stock volatility
Computed:
Quarterly correlation
(company daily stock price,
index daily stock price)
Quarterly company VaR
relative to the quarterly
index VaR
To capture short-term
events + impact of daily
volatility movements
Indexes:
• MSCI USA Utilities
• PHLX
Semiconductor
• S&P Food &
Beverage Select
Industry
• S&P 500 Consumer
Staples
cont.

13
-1710.00
-1510.00
-1310.00
-1110.00
-910.00
-710.00
-510.00
-310.00
-110.00
90.00
Duke Energy VaR ($MM)
Four major impact events Systemic risk or Idiosyncratic risk?
cont.

14
-450.00
-400.00
-350.00
-300.00
-250.00
-200.00
-150.00
-100.00
-50.00
0.00
Conagra Brands VaR ($ MM)
More quarters with impact events, but lower potential losses compared to Duke
Energy
cont.

15
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
Normalized Average Quarterly VaR
Duke Energy MXUSOUT Index
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
Normalized Average Quarterly VaR
Conagra Brands S&P 500-3020 Index
Duke Energy stock is more volatile
than the industry benchmark on a
quarterly basis
Conagra Brands stock is mostly less
volatile than the industry
benchmark on a quarterly basis
cont.

16
Bloomberg-Aqueduct:
• Water risk mapping tool where and how water risk and opportunities
are emerging worldwide
• Estimates the water stress as amount of withdrawals relative to the available
flow in the watershed
Water risk
Low <10%
Low to medium 10-20%
Medium to high 20-40%
High 40-80%
Extremely high >80%
• Considered the economic output (facilities)
in US regions with high and extremely high
water risk
• Duke Energy: power plants map across US +
Aqueduct US watershed map
• Conagra Brands: factories map across US +
Aqueduct US watershed map
cont.

17
FAssetRisk based on percentage of capacity
output in high and extremely high water
stressed US regions: 22.21%
FAssetRisk based on operational costs as
percentage of revenue corrected by the
number of facilities in the high and extremely
high water stressed US regions and the type of
facility: 7.56%
cont.

18
FAssetRisk based on operational costs as percentage of revenue corrected by the number of
facilities in the high and extremely high water stressed US regions and the type of facility:
30.66%
cont.

19
-0.10
0.00
0.10
0.20
0.30
0.40
WaterBeta
Quarters
Duke Energy WaterBeta Trend
Quarterly WaterBeta Average WaterBeta
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
WaterBeta
Quarters
Conagra WaterBeta Trend
Quarterly WaterBeta Average WaterBeta
waterBeta® Trends

20
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Duke Energy Southern
Company
Exelon Con Edison DTE Energy
Utility WaterBeta Vs. Industry WaterBeta (10 Years
Average)
Utility Average WateBeta Utilities Industry Average WaterBeta
0
0.1
0.2
0.3
0.4
0.5
Company
Utility WaterBeta Vs. Industry
WaterBeta (First 5 Years Average)
Utility Average WaterBeta Utilities Industry Average WaterBeta
0
0.2
0.4
0.6
0.8
Company
Utility WaterBeta Vs. Industry
WaterBeta (Last 5 Years Average)
Utility Average WaterBeta Utilities Industry Average WaterBeta
Industry-Specific waterBeta® Trends:
Utilities

21
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
General Mills Kellogg Tyson Foods Conagra Ingredion
Company WaterBeta Vs. Industry
WaterBeta (10 Years Average)
Company Average WaterBeta Food Industry Average WaterBeta
0
0.1
0.2
0.3
0.4
0.5
WaterBeta (First 5 Years Average)
Company Average WaterBeta
Food Industry Average WaterBeta
0
0.1
0.2
0.3
WaterBeta (Last 5 Years Average)
Company Average WaterBeta
Food Industry Average WaterBeta
Industry-Specific waterBeta® Trends:
Food

22
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Utilities Industry Semiconductors
Industry
Household Products
Industry
Food Industry Beverages Industry
Industry WaterBeta against the Benchmark (10 Years
Average)
Industry Average WaterBeta Benchmark WaterBeta
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Company WaterBeta Vs. Industry WaterBeta (10 Years Average)
Company Average WaterBeta Benchmark WaterBeta
Cross-Industry waterBeta® Trends

23
Financial Beta - waterBeta® Quadrants

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Conclusions
1. waterBeta® is an extension of portfolio theory with applicability to portfolio
management across industry verticals
2. After filtering out systemic market risk, waterBeta® is an idiosyncratic market
risk metric with seasonal attributes that measures embedded water risk in stocks
relative to the industry benchmark over a 90 day trading period (63 trading days)
3. Asset managers can incorporate waterBeta® in the cost of equity, which drives
asset allocations in portfolios, to achieve increased returns and reduced volatility
(‘water alpha’)
4. Capital market signals can be used to design policies that value industry-specific
water impacts, and incentivize corporate investment and sustainable
management of water resources
5. It is important to distinguish between water risk in the weather and climate
context, and its derivative – capital markets risk, to understand financial and
risk:return impacts on companies

Thank you!
Questions?
25

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