by , 21 October 2010
There’s an article in the Times today about risks that utilities face due to water shortages. The story is based on a new report from Ceres and PricewaterhouseCoopers which claims that bond ratings agencies haven’t adequately incorporated these risks into their ratings, causing an over-valuation of bonds issued by cities and public utilities. Ceres and PwC base their analyses on future projections of water supply and demand, which in turn are predicted from demographic and climate predictions.
Water risks extend far beyond the utility sector, though, and they extend beyond shrinking water supply to more subtle issues such as water quality, infrastructure maintenance and local water governance, especially for companies working in the developing world.
I’ve had the chance to preview new tool from the World Resources Institute that looks at these broader issues. The Water Risk Index (WRI’s WRI!), developed with Goldman Sachs’ Center for Environmental Markets, incorporates incorporates a variety of metrics into an index to measure water-related financial risk.
Two aspects of the WRI make it particularly useful. First, it’s local. Water risks are quite specific to location of companies or projects, and require data at the watershed level to provide any real insight. The drawback to this, of course, is that one requires lots of local-level data. As such, the WRI pilot project is currently only fully parameterized for the Yellow River Basin in China.
Secondly, it’s integrated. Most environmental, social, and governance metrics deal with these issues separately and then combine scores at a company level. However, performance in these areas are related at much finer scale, and WRI’s index analyzes interactions between variables such as drought probability and the capacity of local government to identify risk.
I’m encouraged by this work. Both Ceres’ and WRI’s indicators are steps towards more subtle and useful ways of looking at the relationship between water and company’s decisions. These and other new tools (like RiskMetrics’ Carbon Beta) can help bring the real costs and values of environmental externalities into financial decision-making.
If you want to play around with the water risk index, the pilot web tool is available here. (Google Chrome is recommended due to the large data requirements.)