Water risks such as floods, scarcity and pollution are increasingly chipping into corporate bottom lines. The financial sector is taking notice – and taking action.
Calvert Investments asked HanesBrands to evaluate its losses from cotton-supply shortages due to the 2011 US drought, determining that the company lost $5.2bn. Trillium Asset Management is now asking companies in its portfolio to factor water risk into their financial projections. And Moody's Investor Service released warnings about risk to credit ratings in the mining industry, as companies spend more on infrastructure in response to growing water risks.
More and more investors are clamouring for sustainability reports and disclosure initiatives to identify corporate water risks, but the process of actually evaluating water supply risks is challenging. Definitions and interpretations of several key concepts have proven to be difficult to define and track in a consistent way. This hurdle was discussed earlier this month at Stockholm Water Week's UN Global Compact CEO Water Mandate meeting – and soon, there may be a solution.
A growing number of corporate assessment tools – such as the World Resources Institute's Aqueduct Water Risk Atlas, WWF Water Risk Filter, and WBCSD Global Water Tool – are available to help companies evaluate their water risks. The issue is that all of these tools were created using varying parameters, and their underlying methodologies continue to evolve. These differences have created a wide range of definitions and sometimes competing interpretations of terms such as water stress, scarcity and risk.
This is problematic because consistency in reporting methods and terminology are critical if investors are to adequately compare water risks among their portfolio companies. Companies also need to identify their water risks as accurately as possible. Reporting more or less risk than they actually face could be misleading to investors and other stakeholders. It could also lead companies to make poor decisions around where and how to respond to risks.
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