5 Conclusion
ApplicationsThe CBWCR tool is applicable to both credit analysts and portfolio managers in the bond markets on both buy and sell sides.
Credit analysts can use the tool to cover mining, power and beverage companies or other industries heavily dependent on water with outstanding bonds. Analysts can source corporate location-specific water data and apply the tool to analyze specific companies, potentially extending or adjusting quantitative analysis. Results can be used for selecting companies or issues for engagement, or to follow up with further research on the company’s water management.
Other bond professionals in origination and syndication could use the tool to analyze the potential impact of water scarcity on the issuers. Rating agencies may use the tool to consider
A Model to Integrate Water Stress into Corporate Bond Credit Analysis
the potential impact of water stress on credit ratings, while credit risk managers can apply it to analyzing whole portfolios of bonds.
Environmental, Social and Governance (ESG) analysts can use the tool to identify and engage firms “at risk” from water stress by encouraging more disclosures and management practices on water. The model could provoke research into regulatory frameworks, water policies and infrastructure relevant to preparedness for water scarcity.
Companies themselves could use the tool to consider the potential impact of water stress on their own credit ratings. They should be able to source good data on water usage, the location of their operations, water prices, and data about capex responses to higher water prices.
Limitations and outlook
There are three basic limitations in the model’s current form. First, it only considers direct water usage. Because firms in the mining and power industries are heavy users of water, the model works well when analyzing these firms. But in other sector like retail, where direct water use levels are low, there is a significant reliance on water usage higher up the supply chain.
Currently the model does not take this type of indirect water usage into account.
A second limitation is that the model relies on firm providing information on the geographic locations of their main operating sites, and their annual water consumption. This information is difficult to find in some industries, such as data centers. Data centers can use significant power and water, but information on their location and water use can be difficult to obtain.
The third shortfall is that it only assumes firms are impacted by having to pay a higher price for water over time. However, in some extreme circumstances, firms could be denied access to water completely if there was a falling-out with the population around an operating site, or if water reserves became unavailable.
As the investment community becomes more aware of water as an issue of stewardship,12 there are more areas and aspects in which the methodology discussed in this article can be applied and improved.
12 A new investor initiative, named “Valuing Water Finance Task Force”, online at https://www.ceres.org/valuing-water-finance-task-force, was founded in early 2020 with the goal to engage with corporate leaders on sustainable water practices.
Bibliography
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Ethical Consumer, The water footprint of soft drinks, Sector Report on the Soft Drinks Industry, 2013 - Economic Accounting for Water
GIZ/NCD/VfU (2016) Integrating Water Stress in Corporate Bond Analysis, full report, available online at http://vfu-mediathek.de/mediathek/entry/2492/#gv-entry-reviews
GIZ/NCD/VfU (2016) Integrating Water Stress in Corporate Bond Analysis, full report, available online at http://vfu-mediathek.de/mediathek/entry/3527/#gv-entry-reviews
Ridley, M. and D. Boland (2015). "Integrating water stress into corporate bond credit analysis." German Federal Ministry for Economic Cooperation and Development (BMZ). https://vfu. de/ressourcen/publikationen/integrating-water-stress-report-summary_final.pdf
Global Water Intelligence (2014), Water for Mining in Latin America.
Water Footprint Network, http://temp.waterfootprint.org/?page=files/Softdrinks, accessed 23 June, 2020.
Water Valuing Finance Task Force, https://www.ceres.org/valuing-water-finance-task-force, accessed 23 June, 2020.
The World Bank Data Bank, online at http://data.worldbank.org/indicator/ER.H2O.FWTL.K3 Water Footprint Network, http://temp.waterfootprint.org/?page=files/Softdrinks accessed
23 June, 2020.
UN Department of Economic and Social Affairs, Statistics Division (2012), System of Environmental-Economic Accounting for Water.
A Model to Integrate Water Stress into Corporate Bond Credit Analysis
Disclaimer
The authors, editors and affiliates will not accept any liability for damage arising from the use of the report or Corporate Bonds Water Credit Risk Tool, and make no representation regarding the advisability or suitability of specific investment decisions. A decision to invest in any company or vehicle should not be made in reliance on any of the statements set forth in this article or the original report. The contents of this report do not constitute recommendations to buy, sell, or hold such security, nor are they considered to be investment advice. All market data included in this report are derived from third parties as at 1 July 2015.