Valuing Water Risk for Businesses

University of Michigan Researchers Have Worked Out a Way to Measure How Water Risk Affects Stock Volatility

With water risk rising in some companies and basins as a more urgent problem than climate change, University of Michigan researchers have worked out a way to measure how it affects stock volatility.

Peter Adriaens, an entrepreneurship professor at the Zell Lurie Institute at the Ross School of Business, along with current and former students Kristine Sun and Ran Gao, wanted to know how the financial and operational risks can be quantified when a business faces water access constraints.

A series of stories in the Financial Times last month estimated that $84 billion was spent in the past three years to conserve, manage or obtain water.

And Moody's indicates that water scarcity has credit-negative implications in the mining industry.

Voluntary water risk disclosures are on the rise across all industry sectors.

Increasingly, methodologies are being developed to capture operational cost or policy risk to understand the magnitude of corporate water exposure.

Adriaens' research tests the hypothesis that water risk impacts revenue and the cost of doing business, asset risk and by inference, stock volatility, unless the company manages its risk appropriately.

He related stock volatility metrics and water risk exposures of four electric utilities in 2007-08, a two-year period that captured multiple drought events, commodity (coal) price fluctuations and systemic risk in the financial markets.

And Adriaens asked the question whether these asset risk pricing and stock sensitivity metrics can be used to make portfolio allocation decisions.

The opportunity then arises to extract market signals for corporate water sustainability.

The premise is that business water risk has a measurable and material impact on equity and portfolio volatility.

Source: University of Michigan

Read More Related Content On This Topic - Click Here

Media

Taxonomy

• Innovation
• Research