The world’s first benchmark index to price financial water risk to equities has been launched on Bloomberg – the index is designed to better inform asset owners and investment managers of the water risk to equities in their financial portfolios.
According to the collaborators who will develop the Index, financial water risk will affect $145 trillion in global assets under management by 2025.
The Index has been developed by the following organisations:
- LIMEYARD Ltd – a proprietary and non-proprietary benchmark provider, delivering rule-based, compliant traditional and smart-beta investable solutions to institutions on the sell and buy sides.
- Equarius Risk Analytics LLC – a data solutions provider focused on financial risk management in portfolios with assets exposed to water.
- Thomas Schumann Capital LLC – provider of financial products and services to public, private and philanthropic capital to advance a water-secure world.
As population pressures create competition for water, global groundwater supplies are declining and climate variability is increasing — leading to longer droughts and more intense flood events. According to the collaborators, all these factors pose risks to investment assets that are hard to ignore and challenging to quantify.
Rather than forcing asset managers to make their own interpretations of operational reports and resource management scenarios, the index translates the key metrics of water risk into financial measures that can be accurately and effectively incorporated into financial models.
The waterBeta model is based on share pricing, curated corporate financial accounting, and voluntary disclosures of environmental risk attributes.
Where data are unavailable, learning models are used to impute sector-specific values. The Water Risk Index will allow the asset managers to make allocation decisions based on probabilistic financial indicators of corporate and portfolio risk.
At the individual security level are three critical research steps to obtain a comprehensive picture of water risk pricing:
- Understand corporate water dependency and localized water security
- Integrate water dependency and security data with financial accounting metrics
- Correlate temporal water events with short-term Value-at-Risk (VAR) metrics
A statement issued by the collaborators to launch the Water Risk Index said:
“Water risk pricing of securities reverberates in cost of capital assumptions, corporate growth rates, cost of operations, and debt-to- EBITDA ratios, potentially affecting credit rating. A granular understanding of the probability of decreased valuations due to water- related risks creates an impetus for focused investor engagement strategies towards water sustainability.”