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What is Corporate and Investor Water Risk?

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The effects that changes in access to water will have on businesses will be nothing short of transformational to the global economy, creating winners (those that manage water well) and losers (those that mismanage water resources) - and in turn, creating significant investment opportunities. Increasingly, investors use water risk as a proxy for climate risk.

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What is Corporate and Investor Water Risk?

  1. 1. What is Corporate & Investor Water Risk? Thomas Schumann Capital®
  2. 2. The Climate Crisis is a Water Crisis The World Economic Forum considers the water crisis to be the top global risk. Water stress is projected to increase in every continent, escalating “liquidity risks of the H20 variety” according to the CFA institute. Water scarcity poses a variety of risks to businesses and investors.
  3. 3. Rising Economic Uncertainty in the Competition for Resources Climate change and the rising demand for freshwater puts greater pressure on existing water supplies and introduces additional uncertainty for companies that are dependent on freshwater. On average, 41% of assets owned by companies in the MSCI ACWI Index are located in high waster stress regions.
  4. 4. Water Drivers & Risks Affecting P&L Water Risk Drivers Business & Financial Risks Climate Change Growing Competition Weak Regulations Failing Infrastructure Water Pollution Market Risk Reputational Risk Regulatory & Litigation Risk Operational Risk
  5. 5. The Challenge: Water Risk Market Signaling Connecting water risk to share price performance
  6. 6. Corporate Water Risk Dashboard Source: www.ceres.org/investorwatertoolkit Businesses can calculate their individual water risk exposure by comparing their water needs to availability in the context of their industry, location, regulations, etc., to develop a water management strategy.
  7. 7. Index Water Risk Exposure Source: www.ceres.org/investorwatertoolkit Water risk is prevalent but unaccounted for in major indices. Investing in top high- exposure industries presents exceptional risks related to water that require monitoring and proper management.
  8. 8. Assessing Water Risk Water risk can be diversified away under portfolio theory if it is independently assessed!
  9. 9. Water Risk Metrics Water Withdrawal The total volume of water that is abstracted from the local environment and used by a company. Some percentage of this water may ultimately be returned to the same source in which it was drawn from. Water Consumption The total volume of water that is abstracted from the local environment but not returned to its original source in the same form. Consumed water can be derived from water that is integrated into the final product (food and beverage), evaporates in closed-loop cooling systems, or unintended leaks during transmission. Freshwater Withdrawal Freshwater withdrawal is the primary type of water used to calculate risk-adjusted water dependency when disclosed by the company. In cases when a breakdown by water source is not provided, the total water withdrawal figure is used. Freshwater includes municipal water, fresh surface water, and groundwater. Water Intensity This metric addresses the water efficiency of the index by measuring how much water consumption per dollar of sales is generated by the index constituents. Weighted Average Water Intensity This metric indicates the index’s exposure to water stress-related risks relative to the Parent Index.
  10. 10. Water as a Volatility Risk Premium Our methodology combines market volatility, corporate, and unstructured data risk assessments into a factor-based investment strategy. This strategy comprehensively assesses water risk to calculate the water volatility risk premium.
  11. 11. Factor Investment Strategy: Aligning Societal Values & Capital Market Risks The factor investment strategy utilizes factor models to convert company performance related to water-oriented societal goals such as SDG 6 into price premiums or discounts based on water risks and financial indicators. This method incorporates water risk into equity pricing, creating an index that protects investors while encouraging sustainable corporate water management.
  12. 12. Learn more about our solutions for capital markets to integrate water risk into investment decisions Thomas Schumann Water Risk Index®: https://www.thomasschumanncapital.com/

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