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The business of water risk

The business of water risk. Staying ahead of the curve by Piet Klop. Intro. forward looking, predictive close collaboration with (institutional) investors and corporations intelligence on environmental trends, policies, consumer preferences and their financial impact.

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The business of water risk

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  1. The business of water risk Staying ahead of the curve by Piet Klop

  2. Intro • forward looking, predictive • close collaboration with (institutional) investors and corporations • intelligence on environmental trends, policies, consumer preferences and their financial impact

  3. The business of water risk • Problem • Disclosure • Risk • Sector research • Tools • Market information • Response

  4. 1975 2025 2000 2003 Where is water getting scarce? m3/person/year Extreme Scarcity <500 Scarcity 500-1,000 Stress 1,000-1,700 Adequate 1,700-4,000 Abundant 4,000-10,000 Surplus >10,000 Ocean/ Inland Water No Data With permission from Coca Cola

  5. Water as economic good • undervalued overused underinvested

  6. Water as public good • open access externalities natural monopoly

  7. The business of water risk • Problem • Disclosure • Risk • Sector research • Tools • Market information • Response

  8. Irrelevant (for investors) “… many companies are not including material water risks and performance data in their financial filings, nor are they providing local-level water data, particularly in the context of facilities in water-stressed regions.”

  9. Footprint ≠ risk context matters: all water is local

  10. Behaviour (CSR)  risk (10K) • Life Cycle Analysis (water footprinting): necessary but not enough • Context: renewable water availability • Corporate water behaviour  corporate water risk • Risk: physical, regulatory, reputational • Shortages, disruption • Cost increases • Competition, growth restrictions • Production facilities + supply chain • Food & beverage (+ agriculture) impact on impact by

  11. The business of water risk • Problem • Footprinting • Risk • Sector research • Tools • Market information • Response

  12. Water risks and impacts Point of impact: Type of risk: Supply chain Production process Product use Physical Disruption in water supply Commodity price spikes Scarcity limiting sales Regulatory (+ litigation) Court settlement to scale back operations Insecure water rights Water quality standards constraining power generation Reputation Competition with social uses Profligate water use Multinationals’ suppliers singled out for violations

  13. Access (growth) availability competition

  14. Cost (capex, opex) prices quality standards

  15. Disruption (revenues) drought social

  16. The business of water risk • Problem • Footprinting • Risk • Sector research • Tools • Market information • Response

  17. Food & Beverage Weeding Risk: Climate Change & Water Scarcity Impacts on the F&B Sector

  18. Key value drivers

  19. Financial impacts

  20. Eg. Balrampur Chini Mills • Company Background • It is the 6th largest listed food and beverage company in India by market capitalization and the second largest sugar company by capacity (after Bajaj Hindustan). • Balrampur Chini also has distillery and cogeneration capacities Key Findings Evaluate Company Positioning Sensitivity analysis of raw material price and profits (FY08, 09)

  21. Power Over Heating: Water Constraints on Power Generation in Asia

  22. Key value drivers

  23. Regulatory risk

  24. Water dependency Range of Water Withdrawals and Consumption (US) Trends

  25. India’s water scarcity

  26. Plan(t)s without water • Includes thermal and hydro plants owned by NTPC, Tata Power, and Reliance Power.

  27. Financial impacts (1)

  28. Financial impacts (2) IRR sensitivity to loss in plant load factor (%) Revenues COGS Load losses Outages Project Execution Permitting Water allocations Financing Source: HSBC IRR sensitivity to delay in commercial operations (months) Growth Moratoriums New Regulations Financing Source: HSBC

  29. More sector research Mining, Oil & gas, …

  30. The business of water risk • Problem • Footprinting • Risk • Sector research • Tools • Market information • Response

  31. Water Index • Build standard for region-specific measurement of industries’ water-related risks (“contextualizing” water use) • Comprehensive: > quantity • Predictive: time-series • Transparent: aggregation & disaggregation • Publicly available data • Adaptable to other geographies, industries • Freely available • Prototype for thermal power in Yellow River basin

  32. Water Index • Set of quantified indicators for river basin, structured for impact on access, costs, disruption • Weights for industry (risk profile) • Risk levels benchmarked against basin, national averages

  33. Mapping tool • “Top-down” water scarcity model • Juxtaposing risk factors: risk hotspots

  34. Use & users • “Upside” companies: marketing • “Downside” companies: strategy, scenarios, disclosure • Investors: inform engagement/acquisition/ divestiture • Rating agencies, risk underwriters: “water cost of capital” • Market information providers: standard metrics • Government agencies: targeting investment, spatial planning, policy

  35. The business of water risk • Problem • Footprinting • Risk • Sector research • Tools • Market information • Response

  36. Initial corporate response: impact on the environment (“water footprint”) Actionable information + Investors want to know: potential impact by the environment (“water risk”) “… many companies are not including material water risks and performance data in their financial filings, nor are they providing local-level water data, particularly in the context of facilities in water-stressed regions.” = Actionable information that will drive investments to “water-winning” companies, geographies, technologies

  37. Driving demand Regulatory pressure Voluntary programs Emerging evidence Research Growing demand for actionable information that allows investors to sort winners from losers

  38. For example: Bloomberg %Δ in water stress - 2020

  39. Eg. access risk

  40. More & better context • Other risk drivers (> water quantity) • pollution, water quality standards, water prices, water rights, competition, disruption potential … • Other regions (> Southeast US) • Western US, Australia, Southern Europe, China, India … • Other sectors (> power) • food & beverage, manufacturing, mining, oil & gas … regions risk drivers sectors

  41. The business of water risk • Problem • Footprinting • Risk • Sector research • Tools • Market information • Response

  42. Water-efficient power • Alternatives • Fuel (eg. coal  gas) • Design (eg. CCS) • Renewables • Water management • Supply • Conservation • Geography • Siting, spatial planning • Cooling technology • Open or closed loop • Dry cooling • Wastewater reuse • Condensed water cooling • Ultra-super critical (USC) technology • Seawater use

  43. Water supply, conservation

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