Consider these three recent developments: California emerged from drought in April 2017, fewer companies reported impacts associated with water scarcity[1], and the average freshwater intensity of companies in the MSCI ACWI Index dropped by 15 percent between 2015 and 2016[2]. While these are positive short term signals for investors concerned with water scarcity, 2017 was also the most costly in U.S. history for natural disasters[3]. This underscored the thinking behind a key trend that MSCI ESG Research identified in the beginning of 2017[4]: institutional investors are shifting their portfolio analysis from the measurement of regulatory risks, such as the U.S. withdrawal from the Paris Agreement, to physical risks, such as exposure to coastal flooding along the U.S. Gulf Coast.
Measuring Water Risk at the Company and Fund Level
MSCI ESG Research assesses risk from water scarcity based on two key variables: how much water a company needs, and how secure is the supply. By way of example, consider two U.S. utilities: Ameren Corporation and Xcel Energy. In 2016, both companies required more than 200,000 cubic meters of freshwater for every USD $1 million in revenue (as of June 30, 2017 based on MSCI ESG Research analysis). While both Ameren and Xcel need large volumes of water to produce power, they face different physical limitations based on the location of their operations. Ameren mostly draws water from states with a relatively high level of water security, such as Missouri and Illinois. Xcel, on the other hand, has most of its operations located in Texas and Colorado, where water resources are already stressed and competition for water is likely to intensify between industrial and agricultural users[5].
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Image: This is Cyrus Lotfipour. (Credit: Green Money Journal)