When evaluating companies’ exposure to the environmental component of ESG risk, great emphasis is placed on the consideration of greenhouse gas emissions. However, we know that water risk can often be significant, as evidenced by the EUR 13 billion in water-related financial impacts reported by companies disclosing to CDP (formerly, Carbon Disclosure Project) in 2016. To better evaluate how portfolio companies might be impacted by worsening water security, we have developed a proprietary methodology to assess the extent to which companies are exposed.
According to a study by the Water Resources Group, the gap between supply and demand of water will reach 40% by 2030, taking into account demographic growth and assuming no advances are made in terms of efficiency. Companies that operate within sectors that are particularly water intensive, including Utilities, Mining, Beverages, and Oil and Gas, are increasingly exposed to a range of reputational, operational and regulatory water-related risks.
Our methodology uses information from public databases and company statements, including CDP data, to support analysis methods that have been developed internally.
Take the mining sector, where significant quantities of water are required during both the extraction process and for mineral processing. Increased resource depletion and frequency of extreme weather events are leading to growing uncertainty around future resource availability. To analyze companies’ exposure to this risk, we have developed an innovative analysis model that combines:
- Data from the World Resources Institute that examines the probability of extreme events (floods, drought), rainfall variability, and the level of competition between users, within river basins around the world; an
- GPS data for all the mining sites of the companies that we analyze.
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