Water Risk and Its Impact on the Financial Markets and Society: New Developments in Risk Assessment and Management (Palgrave Studies in Sustainable Business In Association with Future Earth)

Water risks, including the lack of access to fresh water for personal and industrial use, droughts, floods, and water contamination, are problems that are not new, yet, they are amplifying in the face of climate change, population growth, and rapid economic development. Properly identifying, measuring, and managing these risks as well as taking advantage of related mitigation opportunities is essential for the future well-being of firms across various industries, investors who invest in these firms, local and federal governments, and ultimately our society as a whole. This edited book sheds light on this topic by examining the unique measurement and modelling challenges associated with either the scarcity or overabundance of water and their interaction with finance and society. Specifically, it explores approaches to assess and operationalize water risk, examines the vulnerability of institutions and markets, and discusses strategies for risk mitigation. Thomas Walker is Professor of Finance and Concordia University Research Chair in Emerging Risk Management at Concordia University, Montreal, Canada. Prior to academia, he worked for several years in the German consulting and industrial sector at Mercedes Benz, Utility Consultants International, Lahmeyer International, Telenet, and KPMG Peat Marwick. Dieter Gramlich is Professor of Banking & Finance at DHBW - Baden-Wuerttemberg Cooperative State University in Heidenheim, Germany, where he serves as Head of the Banking Department. He previously studied at the University of Mannheim and was an interim professor and Chair of Banking and Finance at the University of Halle in Germany. Kalima Vico is a research associate at the Emerging Risks Information Centre (ERIC) at Concordia University, Montreal, Canada. She previously worked for Concordia's David O'Brien Centre for Sustainable Enterprise. Adèle Dumont-Bergeron is an MA student in English literature and creative writing at Concordia University, Montreal, Canada. She currently serves as a research associate at the Emerging Risks Information Centre Acknowledgements Contents Notes on Contributors List of Figures List of Tables Introducing Water Risk: A Framework for (Integrated) Water Risk Assessment and Management 1 The Water Challenge 2 Defining Water Risk and Discussing Opportunities 3 Frameworks for Modeling Water Risk 4 Contributions to Water Risk Modeling References Assessing Water Risk: Frameworks, Models, and Tools Data for Water Risks: Current Trends in Reporting Frameworks, Shortcomings, and the Way Forward 1 Introduction 1.1 The Many Dimensions of Water and Financial Risks 2 At the Intersection of Water and Finance, a Complex and Fragmented Landscape of Data Stakeholders 2.1 The Water and Finance Risks Information Ecosystem 2.1.1 Overview 2.1.2 From Sustainability Reports/Corporate Disclosures to Actionable Financial Information 2.1.3 ESG Standards—The Guidelines for Sustainability Reports 2.1.4 The Quantitative Tools 2.2 Contextualization and Analysis of the Stakeholders Map 2.2.1 Climate Agreements, SDGs, and Financial Risks: A Narrow View of Water Risks 2.2.2 The Absence of National-Level Action on Water Finance 2.2.3 The Prominent Role of the Civil Society 3 ESG Disclosures and Investment Decisions 3.1 ESG Frameworks for Investors 3.2 Water Recommendations in ESG Frameworks 3.3 Challenges with ESG Reporting Compliance and Application in ESG Financial Performance 3.3.1 Context 3.3.2 Data Availability, Complexity, and Costs 3.3.3 Lack of Clarity, Standardization, and Relevance 3.3.4 Confusion in the Expectations of the Investment Community 4 Water Assessment Tools 4.1 Water Risk Tools 4.2 Water Valuation Tools 5 Recommendations 5.1 Reducing the Loss of Information 5.2 Blind Spots in Water and Financial Risks 5.2.1 Scarcity 5.2.2 Flood 5.2.3 Pollution 5.3 Developments for a Better Accounting of Water and Financial Risks 5.3.1 Data 5.3.2 Tools 5.3.3 Metrics and Frameworks: Beyond Baseline Assessments and Climate Change Projections References How Do Investors Assess Water Risks? 1 Water: The Investor Perspective 1.1 Water and the Responsible Investor 2 Assessing Water Risk 2.1 Water Needs 2.2 Water Risks Classification 2.2.1 Physical Risks 2.2.2 Transition Risks 2.2.3 Operational Risks 2.2.4 Regulatory Risks 2.2.5 Financial Risks 2.2.6 Reputational Risks 3 Risks and Issues 3.1 Global Water Issues 3.1.1 Ocean Plastics 3.1.2 Biodiversity 3.1.3 Ocean Heating 3.2 Climate Change and the Canadian Context 3.2.1 Changes in Snow, Ice, and Permafrost and Changes in Freshwater Availability 4 Sector-Specific Water Risks 4.1 Agriculture 4.2 Food and Beverage 4.3 Consumer Goods 4.4 Cannabis 4.5 Energy and Utilities 4.6 Mining and Extractives 4.7 Oil Sands 4.8 Real Estate 4.9 Technology and Electronics 4.10 Tourism and Leisure 5 Assessing Water Information 5.1 The CEO Water Mandate 5.2 The Alliance for Water Stewardship 5.3 Ceres Investor Water Toolkit 5.4 Climate Disclosure Project (CDP)—Water 5.5 Metrics and Qualitative Judgement 6 Considerations of Water in Investments 6.1 Water in Equity Portfolios 6.2 Private Equity 6.3 Fixed Income 7 Assessing Water Risk 7.1 Stress Testing 7.2 Scenario Analysis 7.3 Impact Measurement 8 Investor Engagement and Corporate Water Stewardship 8.1 The Importance of Corporate Water Stewardship 9 Resilience and Opportunity 9.1 Circular Economy 9.2 Smart Water Networks 9.3 The Concept of “Blue” Investments 10 Conclusion References The Developing Field of Water Risk Valuation for the Financial Industry 1 Water Availability Impacts on the Profitability of the Coal and Power Sectors 2 Shadow Price Model 2.1 Impacts on Profitability 2.2 Shadow Water Prices: Wide-Ranging Values 2.3 Water for Coal: Data Gaps Bring Uncertainty 2.4 Water for Power: Bottom-up Approach 2.5 Challenges 3 Balance Sheet Exposure 3.1 Coal Mining Companies: Up to 100% Exposure to Water Stress 3.2 Thermal Power Generation: Spread Out but Still Exposed 3.3 Challenges 4 Conclusion References Financial Implications of Parched Power: Insights from an Analysis of Indian Thermal Power Companies 1 Introduction 2 Approach 2.1 Process and Scope 2.2 Data Sources 2.3 Methodology 2.3.1 Historical Analysis 2.3.2 Forward-Looking Analysis 2.4 Assumptions and Limitations 2.4.1 Historical Analysis 2.4.2 Forward-Looking Analysis 3 Analysis 3.1 Historical Analysis 3.2 Forward-Looking Analysis 3.2.1 The Relationship Between Drought and Water Shortage-Induced Outages 3.2.2 Estimating Future Impacts 4 Conclusion References Water Insecurity and Climate Risk: Investment Impact of Floods and Droughts 1 Introduction 2 Economic Impact of Floods and Droughts 2.1 Heatwaves 2.2 Floods 2.3 Droughts 3 Global Economic Impact 4 The Emitters 5 Attributable Financial Contribution to Climate Damages 6 Critique 6.1 Pre-industrial Baseline 6.2 Producer-Versus-User Responsibility 6.3 Combination of Flood and Drought Baseline and Producer Responsibility 7 How Should Investors React? 8 Conclusions References Chronic Coastal Water Threats Warrant a Valuation Re-Think 1 Introduction: New Risk Landscape Will Cause Reassessment of Valuations 2 Changing Physical and Regulatory Landscapes 2.1 Sea Level Rise Is Accelerating 2.2 Central Banks and Regulators Starting to Recognize Risks 3 A Case for Accounting for Chronic Risks Today 3.1 Clustered Assets and People Lead to Increased Risks 3.2 Negative Finance Feedback Loop Will Continue if Valuations Do Not Include Such Risks 3.3 Adjust the Terminal Value to Incorporate Chronic Coastal Threats into Valuations 4 How to Assess Coastal Threats 4.1 A Coastal Risk Index for Risk Assessment 4.2 Absolute and Relative Risk Assessment 4.3 Understanding Government Action 4.4 Dealing with Hotspots 5 Challenges 6 Conclusion 6.1 Preparing for the Financial Evolution 6.2 Next Steps References Managing Water Risk: Investing in the Future Water Risks, Conflicts, and Sustainable Water Investments: A Case Study of Ontario, Canada 1 Introduction 2 Background 2.1 Theoretical Background on Risk Assessment and Management 2.2 Corporate Water Risk Assessment and Management 2.3 Financial Sector and Water Risks 2.4 Gaps and Opportunities in Water Risk Assessment 3 Case Study: The Province of Ontario, Canada 3.1 Water Management and Governance Landscape for Ontario 3.2 Sub-Watershed Based Physical Risks 3.3 Federal, Provincial, and Municipal Regulatory Risks 3.4 Reputational Risks, Conflicts, and Legacy Issues 4 Opportunities for Sustainable Water Investments 5 Conclusion References Forward Pricing of Embedded Water: A Step Toward Sustainable Development in Agriculture 1 Introduction 2 The Indian Context 2.1 Water Governance: A Miss in India 2.2 The Situation of Water Scarcity in India 3 Research Methodology 3.1 Climate Classification 3.2 The Model 3.3 The Model Assumptions 4 Analysis 4.1 One-Crop Model 4.2 Many-Crop Model 5 Impact of Forward Pricing of Embedded Water 5.1 For Farmers 5.2 For Government 5.3 The Challenges 6 Conclusion and Recommendations References Misbehaving Drinking Water Systems: Risk and the Complex Nature of Failure 1 Introduction 2 Features of Water Distribution Networks 3 Failure Types 4 Propagating Failures 5 Competing Modes of Failure: Hydraulics and Water Quality 6 Benefits of Failure 7 Need for Risk Analysis 8 Summary and Conclusions References Multi-dimensional and Interacting Water and Climate Risks and Pricing Them in the Industry Context 1 Introduction 1.1 Climate-Induced Tail Risk 1.2 Importance of Incorporating Climatic Extremes into Risk Models 2 Likelihood of Extreme Climate Events 2.1 Choosing Climate Data to Quantify Impacts Across Space and Time 2.2 Defining an Extreme Event 2.3 Calculating Climate Exposure—Basic Algorithm 3 Quantifying Financial Impact of Extreme Climate Events (Application to the Mining Industry) 3.1 Metrics to Quantify Loss/Damage 3.1.1 Overview 3.1.2 Temporary Impact 3.1.3 Permanent Impact 3.2 Quantifying the Portfolio Impact 3.3 Relative Risk and Indexing Across Portfolios 3.4 Parallels with the COVID-19 Crisis 4 Summary Annex 1: Extreme Value Theory Applied to Extreme Rainfall References Water Risk: An Overview and Inspiration for Future Work Index Water risks, including the lack of access to fresh water for personal and industrial use, droughts, floods, and water contamination, are problems that are not new, yet, they are amplifying in the face of climate change, population growth, and rapid economic development. Properly identifying, measuring, and managing these risks as well as taking advantage of related mitigation opportunities is essential for the future well-being of firms across various industries, investors who invest in these firms, local and federal governments, and ultimately our society as a whole. This edited book sheds light on this topic by examining the unique measurement and modelling challenges associated with either the scarcity or overabundance of water and their interaction with finance and society. Specifically, it explores approaches to assess and operationalize water risk, examines the vulnerability of institutions and markets, and discusses strategies for risk mitigation. Thomas Walker is Professor of Finance and Concordia University Research Chair in Emerging Risk Management at Concordia University, Montreal, Canada. Prior to academia, he worked for several years in the German consulting and industrial sector at Mercedes Benz, Utility Consultants International, Lahmeyer International, Telenet, and KPMG Peat Marwick. Dieter Gramlich is Professor of Banking & Finance at DHBW - Baden-Wuerttemberg Cooperative State University in Heidenheim, Germany, where he serves as Head of the Banking Department. He previously studied at the University of Mannheim and was an interim professor and Chair of Banking and Finance at the University of Halle in Germany. Kalima Vico is a research associate at the Emerging Risks Information Centre (ERIC) at Concordia University, Montreal, Canada. She previously worked for Concordia's David O'Brien Centre for Sustainable Enterprise. Adèle Dumont-Bergeron is an MA student in English literature and creative writing at Concordia University, Montreal, Canada. She currently serves as a research associate at the Emerging Risks Information Centre