Water Risk Modeling: Developing Risk-Return Management Techniques in Finance and Beyond

Acknowledgments
Contents
Notes on Contributors
List of Figures
List of Tables
Introduction
Water Risk-Return Modeling and Management: Threats and Opportunities
1 Water-Related Challenges
2 Interactions
3 Opportunities
4 Chapter Overview
References
Frameworks for Water Risk-Return Modeling and Management
Water Cycle Changes in a Warming World: The Scientific Background
1 Introduction
2 Historical Background to the Climate Science
2.1 Two Centuries of Climate Research
2.2 The First Comprehensive Theory of Climate Change
2.3 The Earth’s Warming Is Due to CO2 from Fossil Fuels
2.4 The Final Pieces
3 The State of the Science
3.1 Water in the Ecosystem
3.2 The Global Water Cycle
3.3 Thermodynamic Water Cycle Constraints
3.4 Rainfall Changes (Hydrological Sensitivity)
3.5 Uncertainties and Intensity of the Water Cycle Changes
3.6 Role of Different (Anthropogenic) Climate Drivers
3.7 Regional Changes in Precipitation
3.8 Regional Changes in the Water Balance
3.9 Seasonal Changes in the Water Balance
3.10 Regional Changes in Droughts and Groundwater Levels
4 Extreme Events and Water Risk
4.1 Processes Determining Rainfall Extremes
4.2 Extreme Events and Tropical Cyclones
4.3 Attribution of Extreme Rainfall Events
4.4 Review of Specific Events
5 Remaining Gaps and Challenges
References
Water: Textile’s Danger—Financial Risks, State of Practice and Moving Forward
1 Introduction: Water Risks and the Textile Industry
2 Water and Financial Risks in the Textile Sector
2.1 Water Usage and Risks Across the Textile Life Cycle
2.1.1 Threat of Water Depletion
2.1.2 Threat to Water Quality
2.2 External Factors Threatening Water Usage for the Textile Manufacturing Process
3 Analyzing the Financial Reporting Frameworks
3.1 Defining and Analyzing Reporting Frameworks for the Textile Sector
3.2 Comparative Analysis of Frameworks for Effective Disclosure Practices against Defined Parameters
3.2.1 Identification of Water-Related Risks
3.2.2 Measurement of Water-Related Risks
3.2.3 Management of Water Risks by the Company
3.2.4 Mitigation of Water Risks: Assessing Stewardship Actions
4 Case Studies of the Actual Disclosures Made by Textile Companies
4.1 Methodology for Selecting the Companies for Review
4.2 Case Studies of Fashion Brands
4.2.1 Hennes & Mauritz AB
4.2.2 Gap Inc.
4.2.3 Uniqlo
4.2.4 Zara
4.2.5 Nike
4.3 Reflections from Analyzing Disclosure Practices
5 Conclusion
References
Financial Risks Due to Residential Flooding: Incorporating Household Perceptions to Better Understand Behaviors
1 Introduction
2 Flood Risks, Homeowner Actions, and Implications for the Broader Economy
3 Survey Instrument and Data Collection
4 Empirical Methods
4.1 Perceived Risk Model
4.2 Mitigation Behavior Models
5 Results
5.1 Descriptive Statistics
5.2 Perceived Risk Model Results
5.3 In-Home Protective Action Model Results
5.4 Insurance Mitigation Model Results
6 Discussion and Conclusion
References
Water Stewardship—Bridging the Knowledge and the Financial Gaps
1 Introduction
2 Scanning the Landscape of Financial Mechanisms for Water
3 Overview of Water Stewardship Mechanisms
4 Discussion
4.1 Key Point 1: The Nature of Water Stewardships
4.2 Key Point 2: How Certifications and Alignment to Globally Accepted Frameworks Can Give a Boost to Water Stewardship?
4.3 Key Point 3: Financing Water Stewardship
4.4 Key Point 4: Positioning Water Stewardship Action for Overcoming Water Security Challenges
5 Conclusion
References
A Framework for Global Warming Induced Extreme Weather and Water Investment Risks
1 Introduction
2 Extreme Event Investment Risk Framework
2.1 Anthropogenic Climate Change and Extreme Events
2.1.1 The Water Cycle in a Warming World
2.2 Corporate Emissions and Responsibilities
2.3 Hypothetical Climate Liability
3 Attributing Damages from Extreme Climate Events
3.1 Climate Change Attribution
3.2 Financial Damage Estimation
3.3 Inflation Adjustment
3.4 Quantification of the Climate Change Fingerprint
3.5 Proportion of Damages Attributable to AGW
3.6 Event-Specific Damages
4 Assigning Corporate Responsibilities for Emissions
4.1 Who Are the Emitters?
4.2 Organizations’ Proportion of Total Emissions
4.3 Share of Climate Damages
4.4 Knowledge of Harms Caused
4.5 Producer Versus User Responsibility
4.6 Company Emissions Responsibility
5 Determining Hypothetical Climate Liability
5.1 Definition and Calculation of HCL
5.1.1 Definition of HCL
5.2 Presentation of HCL
5.3 Uses of HCL and Salience for Stakeholders
6 Conclusion
References
(Investment) Strategies for Water Risk-Return Modeling and Management
Measuring Water Risk: The Challenges for Passive Index Investment
1 Why Is Water so Important to Investment Decision-Making?
1.1 Water Informs Climate
1.2 Water Impacts Company Earnings Much More Than Carbon Emissions
2 Water Scarcity Portends Water Risk
2.1 What Is Water Risk?
2.2 How Is Water Risk Measured?
2.3 What Are the Main Determinants of Water Risk?
2.4 How Does Water Risk Differ from Water-Themed Investments?
2.5 Introducing the Water Footprint
3 Mitigating Water Risk in a Passive Investment Strategy
3.1 Calculating the First Component of Water Risk—Water Utilization
3.2 Creating the Second Component of Water Risk—Water Stewardship
3.3 One Last Sanity Check—Environmental Controversies
4 Constructing a Water Security Index
4.1 Determining the Selection Universe of Companies for Each Index
4.2 Measuring Water Risk and Determining Weighting Adjustments
4.3 Minor Modifications to the Weighting Scheme
5 Measuring the Performance of the Water Security Indices
5.1 TSC Water Security Indices Financial Characteristics Through December 31, 2021
5.2 TSC Water Security Indices Water and Carbon Footprints on December 31, 2021
5.3 TSC Water Security Indices Sector Exposure on December 31, 2021
6 Conclusion and Next Steps
6.1 Conclusion
6.2 Next Steps
References
Using the CWR APACCT 20 Index to Re-Calibrate Chronic Tail Risks and Re-Assess Long-Term Capital Allocation Decisions Given Rising Locked-In Coastal Threats
1 Introduction: The Current Policy Path Is Accelerating Global Warming and Sea Level Rise
2 The CWR APACCT 20 Index
2.1 Finance: Tail Risks Should Be Factored into Valuations
2.2 Building the Index
2.2.1 Physical Threat Factors and Proxy Indictors
2.2.2 Impacts Across Various Scenarios
2.2.3 Government Action
2.2.4 Cities Included
3 CWR APACCT20 Index—Results in Brief
3.1 Key Considerations
3.2 1.5 °C CWR APACCT 20 Index
3.3 4 °C CWR APACCT 20 Index
4 Challenges in Creating the CWR APACCT 20 Index
4.1 Determining SLR Exposure—Which Level of Locked-In SLR Should Be Used?
4.2 Flooding Methodology—Bathtub or Hydrological?
4.3 Mapping Granularities—Trade-Off Granularity for Consistency?
4.4 Storm Surge Projections—Simple Metrics vs. Expensive Modelling
4.5 Government Actions Are Inconsistent and Unique—What Proxy Indicators to Use?
5 Conclusion
References
Water Neutrality in Investment Portfolios
1 Relevance of Water Risks for Investors
2 Water Neutrality
2.1 Water Quantity
2.2 Water Quality
3 Measuring Risk and Impact
3.1 Measuring Progress: Water Risk Assessment
3.1.1 Water Footprinting
3.1.2 Extended Qualitative Assessment
3.2 Fostering Progress: Engagement
3.3 Increasing Positive Impacts
4 Main Challenges and Steps Ahead
4.1 Data Gaps and Inconsistencies
4.2 Contextual Nature
4.3 Relative versus Absolute Values
5 Conclusion
References
Making Water Count—Integrated Risk-Return and Knowledge-Based Models for Water Investments
1 Challenges of Sustainable Water Investments
2 Catalyzing Water Investments—The Innovative Approach of Aqua for All
3 Aqua for All’s Innovative Approach—Catalyzing Instruments
3.1 Overview
3.2 Selected Catalyzing Instruments
3.2.1 Business Acceleration and Technical Assistance
3.2.2 De-Risking
3.2.3 Impact-Linked Finance (Impact-Linked Fund for WASH)
3.2.4 Impact Measurement and Management
3.2.5 Mobilizing the Impact Investing Sector for WASH
4 Aqua for All Case Studies Kenya
4.1 Partnership with Sidian Bank Ltd in Kenya
4.1.1 Situation in Kenya
4.1.2 Engagement of Aqua for All in Kenya
4.1.3 Innovative WASH Loan Facility with Sidian Bank Ltd.
4.2 From a Guarantee to Naivasha Ushirika Water Project to Developing a WASH SME Loan Portfolio with Family Bank
4.2.1 The Naivasha Ushirika Water Project
4.2.2 Funding the Hybrid Solar Water Pumping System
4.2.3 Results from the Partnership Family Bank—Aqua for All
5 Conclusions
5.1 Further Directions
5.2 Accelerating Sector Transformation Toward Sustainability and Inclusion
References
Water Risk in Real Estate: An Introduction to the Climanomics Platform
1 Introduction
2 Water Risk in Real Estate
2.1 Increasing Water Cost of Real Estate
2.2 The Implications of Water Risk for Various Stakeholders
3 The Climanomics Platform
3.1 Introduction to Climanomics
3.2 Climanomics Methodology and Modeling
3.2.1 Hazard-Change Modeling
3.2.2 Vulnerability Modeling
3.2.3 Business Data, Risk Modeling and Climate-Change Scenarios
4 Case Study: Mapping the Water Risk Exposure of REITs
5 Conclusion
References
The Water Credit Risk Tool and Corporate Sensitivity to the Shadow Price of Water
1 Introduction
2 Valuation of Natural Capital—Total Economic Value and the Shadow Price of Water
2.1 The Rationale for the Shadow Price Approach
2.2 Using the Total Economic Value Formula to Calculate the Shadow Price
3 The GIZ/NCD/VfU Water Credit Risk (WCR) Tool
4 Sensitivity Analysis of Companies to the Shadow Price of Water (SPW)
4.1 Overview
4.2 Operational Sensitivity—Comparison Across Time Based on the SPW 2013
4.3 Price Sensitivity—Comparison of the Effects from SPW 2013 and SPW 2020
4.4 Sensitivity to Low and High Projections of the SPW 2040
5 Conclusion
References
Index