The Evolution of Water-Related Risk-Assessment Tools

The “Natural Capital Risks and Opportunities” workshop held on Oct. 26, hosted by Citi and Natural Capital Declaration (NCD), unveiled a new water-risk-analysis demonstration tool intended for use by corporations and financial institutions.

This coastal photo is by Art Pokzaner.

The Water Risk Valuation Tool 1.0 (WRVT) joins the ranks of several other water-risk-analysis tools developed in partnership with the nonprofit sector for use in the private sector. Despite the proclaimed utility of such tools, adoption rates by the private sector are low, suggesting the gap between environmental sustainability and financial valuation is still large.

The workshop focused on how to incorporate water risks into financial analyses. Participants from banks, credit institutions, and environmental nonprofits were in attendance to discuss opportunities for greater collaboration among the different sectors.

The emergence of these types of associations, including Ceres and the World Business Council on Sustainable Development, suggest an urgent need and desire to cross-pollinate expertise among environmentalists and financial analysts to improve risk analyses in business operations.

One of the many challenges for these types of collaborations is the lack of a common language or framework. These water-risk-demonstration tools, however, serve as important communication bridges.

The WRVT demonstration tool, developed in cooperation with Bloomberg, LP and NCD, is one of the first risk analysis tools that utilizes the financial-valuation methodologies to incorporate water-scarcity risks.

It was modeled after Bloomberg’s Carbon Risk Valuation Tool released in 2013, which demonstrates five scenarios that allow conventional assets to become ‘stranded assets.’ Stranded assets are ones that are prematurely devalued or converted to liabilities due to climate change or other problems.

Similarly, this water-risk tool visually demonstrates the impact of water-scarcity risk on gold and copper mines by modeling the future cash flows using the commonly used discounted cash flow (DCF) methodology. 

While the tool appears to bridge the divide between environmental risk and financial-valuation methodologies, it is still limited in its scope. Due to data constraints and the complexity of other industrial sectors, the tool focuses only on scenarios for the gold- and copper-mining industry.

To date, the adoption rate of the WRVT tool into risk analysis for the mining industry and financial institutions remains unclear. This lack of data is a common issue shared by many of the water-related risk-analysis tools.

One encouraging aspect of the project, however, is its coordination with and reliance on another corporate water-risk-analysis tool; the WRVT was built using data provided by World Resource’s Institute’s (WRI) Aquaduct

Aquaduct is a publicly available, interactive tool that visually demonstrates water-related risks in terms of geography.

In addition to illustrating water-scarcity risks, Aquaduct includes water-quality, climate change, and freshwater-demand characteristics.

Intended for use by a range of actors, including corporations, governments, and non-governmental organizations for decision-making, Aquaduct translates global hydrological data into an interactive map that compares water-related risks globally. While the scope of the project is quite large, it still lacks the ease-of-use to directly incorporate these types of indicators into financial valuations.

It is clear that more work needs to be done in order to fully capture the true impact of water-related risks into financial decision-making. However, the WRVT demonstration project, built from the foundation of the Aquaduct, suggests that we are coming closer to bridging the gap between finance and sustainability.

Note: World Business Council on Sustainable Development is a partner of Yale Center for Business and the Environment. Donors and partners outside CBEY and CFN do not review our articles or editorial calendar, but interviewees can review their quotes and Q&As.

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