The Imperfect Science of Water Risks

By Piet Klop 7 June, 2010

Piet Klop of WRI debates whether companies are better off investing in water technologies than water disclosure frameworks., Piet Klop of WRI debates whether companies are better off investing in water technologies than water disclosure frameworks., Piet Klop of WRI debates whether companies are better off investing in water technologies than water disclosure frameworks.

Difficult to capture water risks in a single number – may conceal more than it reveals.
Disclosure does make investors and companies focus on water issues which otherwise would be ignored.
World Resource Institute developing a Water Risk Index.

Ed’s note: In Corporate water risk management will meet a dead end (May 27, 2010), Global Water Intelligence argues that because there is no easy way to assess water risk, companies are better off investing in water technologies than in frameworks to capture corporate exposure to water issues. Is there real value in complex statistical analyses that rate companies on a “water risk” scale of 1 to 10? China Water Risk asked Piet Klop of the World Resources Institute– currently working on a Water Risk Index– to weigh in.

GWI makes a good point that capturing various water risks into a single number may conceal more than it reveals about the water issues companies are facing. We know that aggregating data points relating to water availability, water quality regulations, and socio-economic drivers of water risk – “comparing apples and oranges” –is viewed with suspicion by environmentalists who really do appreciate the complexity of hydrological systems.

However, making the environment “easy” serves a purpose.  As things stand, very few companies and investors consider water issues in their operational or investment strategies at all. The key reason behind this is that there isn’t a tool yet that allows water risks to be compared between sectors and companies.

As an approach to quantify water risk, we would suggest that as long as the weighting and aggregation of indicators is perfectly transparent, and the resulting risk metrics can be disaggregated into their component drivers, no harm is being done.

In fact, I would go even farther in pushing for a methodology that standardises the quantification of geographically specific “ambient” water risk. The local context is what many investors feel is dearly missing from the disclosure of “water footprints” by the relatively few companies that do so. And while capturing that context will always be an imperfect science, it will help companies and their investors to better understand water risk (beyond “water behavior”).

This is the very aim of the Water Risk Index that we at the World Resources Institute (WRI) are developing, and which the author refers to. On the “downside” the Index can assist companies to prioritize investments in reducing water risk, perhaps targeting the concentration of operations or suppliers in high-risk areas rather than increasing water efficiency across its production facilities. Companies on the “upside” that sell, for example, water-efficient or water treatment technologies can target their marketing efforts with the Water Risk Index.

The Water Risk Index may also provide a useful platform for compaFnies and investors to engage with government agencies and competing water uses (irrigated agriculture) for policy reforms and public-private partnerships in water resources management that is dependable, sustainable, efficient and fair.

As the author rightly points out, monitoring the entire supply chain for the quantities of “embedded” water is very complex. And while a few companies have begun such water footprint assessments, we suggest that they would benefit as much, if not more so, from a more informed understanding of the hydrological, regulatory and socio-economic pressures impinging on their suppliers.

The Water Risk Index is not a magic measure of water risk. It may be imperfect, but it is transparent and – with better data and choice of indicators – will gradually improve over time. With better company water use data, it will ultimately provide investors with actionable information to shift capital towards more hydro-sustainable companies, geographies an technologies, possibly including that GE water reuse system.

Piet Klop
Author: Piet Klop
Piet Klop is a Senior Fellow with the World Resources Institute’s Capital Markets Research team. Piet’s research includes environmental considerations in investment decisions and portfolio management, as well as investments in clean energy, water and biodiversity. He also manages strategic relationships with European financial institutions, including banks and pension funds. Piet works at WRI on secondment from the Netherlands Ministry of Foreign Affairs, where he holds the position of Senior Economist in the Department of Environment and Water, with responsibility for developing new markets for climate, water and biodiversity services in partnership with the private sector. Piet has 20 years of experience with environmental issues and holds Masters degrees in Applied Environmental Economics and Land & Water Management.
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