F.ROM A SMALL Montreal office Aquantix, an artificial intelligence company, is starring for distant investors worried about water risk. The model combines high-resolution satellite images, weather station data and regulatory documents from the Internet. Not only does it estimate how much water a company uses in its various locations, but also its water bill, the likelihood of drought or flooding in the surrounding areas, and the financial impact of such disasters – all without contacting the company.
Firms like Aquantix are proving useful for investors waking up to water risk. At current consumption rates, global water demand will be 40% higher than supply by 2030 U.N.. Portfolio managers recognize that physical, reputational, and regulatory water risk could affect their investments, especially in thirsty industries like food, mining, textiles, and utilities.
One concern is that supply shocks could drown out or dry up a company’s assets. In recent years, drought has forced Coca-Cola to close plants in India. In 2019, floods in the American Midwest caused disruption to the facilities of two food giants, Cargill and Tyson Foods. A survey by CDPThe nonprofit found that 783 large publicly traded companies suffered a total of $ 40 billion in losses to water in 2018.
Another problem is that the price a company pays for water could skyrocket. The market price for water does not reflect the environmental and social costs of its use. Government subsidies also mean that companies often do not pay for their actual costs. However, as the aquifers are depleted, subsidies could become more expensive and unpopular, forcing governments to withdraw them. S.&P. Global Trucost, a data provider, estimates that if Fortune 500 companies paid the actual cost of water, profit margins would decrease by a tenth, based on estimates of scarcity rather than current prices. Margins for food, beverage and tobacco companies would drop by three quarters.
The information on water risk is even more inconsistent than that of greenhouse gas emissions. This is partly because it is more difficult to measure. One tonne of carbon dioxide emissions in the Sahara or in London have the same impact on the environment. Not with a gallon of water. Location-specific data can be commercially sensitive and difficult to aggregate. As a result, companies use vague global estimates instead.
However, unlike emissions, water can be observed and third-party data providers can have a rift in estimating a company’s water usage. Established names like Bloomberg and S.&P. Global closes the gap, as does startups. According to Toby Messier, co-founder of Aquantix, investors are more likely to reach out to management with data than questions. “We’re getting rid of the black box in which companies hide,” he says.
Investors can turn to a number of new methods. Some would like a simple score to be inserted into a model. Ceres, a not-for-profit company, ranks companies in everything from direct water management to supply chain risks. Those looking for more detail can use visual tools such as Bloomberg’s Maps feature, which shows a company’s facilities on a heat map based on water stress. (California is the same color as parts of sub-Saharan Africa; Far Eastern Russia is very similar to Western Europe.) Companies like Aquantix go further and try to predict the financial cost of water risk.
The accuracy of such forecasts has not yet been proven. However, they are still useful to Andrew Mason of Aberdeen Standard Investments. They show companies that investors care about water risk and encourage them to share data. “This was where carbon was ten or 15 years ago,” he says. ■
This article appeared in the Finance & Economics section of the print edition under the heading “An Expanding Pool”.