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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
The business of water risk
1. Problem
2. Disclosure
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
Where is water getting scarce?
2003
2025
2000
1975
m3/person/year
Extreme Scarcity Scarcity
<500
500-1,000
Stress
1,000-1,700
Adequate
Abundant
1,700-4,000 4,000-10,000
Surplus
>10,000
Ocean/
Inland Water
No Data
With permission from Coca Cola
Water as economic good
undervalued
overused
underinvested
Water as public good
open access
externalities
natural monopoly
The business of water risk
1. Problem
2. Disclosure
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
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.”
Footprint ≠ risk
context matters: all water is local
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
impact on
• Production facilities + supply chain
– Food & beverage (+ agriculture)
impact by
The business of water risk
1. Problem
2. Footprinting
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
Water risks and impacts
Point of impact:
Supply chain
Type of risk:
Production
process
Product use
Physical
Commodity price spikes
Disruption in water supply
Scarcity limiting sales
Water quality standards
constraining power generation
Court settlement to scale back
operations
Insecure water rights
Competition with social uses
Profligate water use
Regulatory
(+ litigation)
Reputation
Multinationals’ suppliers singled
out for violations
Access (growth)
availability
competition
Cost (capex, opex)
prices
quality standards
Disruption (revenues)
drought
social
The business of water risk
1. Problem
2. Footprinting
3. Risk
a) Sector research
b) Tools
c) Market information
4. Response
Food & Beverage
Weeding Risk: Climate Change & Water Scarcity Impacts on the F&B Sector
Key value drivers
Value Driver
Agricultural
Inputs
Business Risk
Cost
Climate change and water scarcity can affect the availability of key agricultural
inputs and result in price changes over the medium to long-term. These price
changes can also affect companies with animal-based products through
increased feed prices.
Cost
The increased frequency and severity of extreme weather events, such as
storms or droughts, increases the risk of short-term price volatility. Such
events may require companies to switch suppliers, make raw material
substitutions with little notice and/or source ingredients from further away.
Revenue
Aquaculture, dairy, and poultry yields are especially vulnerable to climate
change and water scarcity impacts. These inputs are often raised directly by
companies rather than sourced from suppliers. Impacts on revenues will
depend on supply/demand balance of market.
Agricultural
Crop
Prices
Animal
Yields
Water scarcity can increase the cost of treating and accessing water.
Operating
Efficiency
Processing
Costs
Cost
Cost
Increased temperatures and decreasing water quality increase the risk of food
and beverage contamination, creating a greater risk that F&B companies may
face legal exposure to distributors, importers, consumers and governments in
the event of food safety problems.
Revenue
Climate change and water scarcity increase the likelihood of a food safety
problem that could result in lost revenues and recall costs from contaminated
or recalled foods and/or depressed consumer demand across entire product
categories.
Revenue
Water scarcity increases competition for water resources. Companies may
suffer reduced sales from reputational damage due to publicity from conflicts
with local communities over rights to water.
Growth
Competition from local communities for valuable resources like clean water,
especially in areas facing water scarcity, can create delays in obtaining
permits for new sites. In the most serious cases, policymakers may prohibit or
restrict industry activity in sensitive areas.
Food
Safety
Problems
Reputation
Community
Relations
Issues
The interruption or decline of water supply (from a drought or water rights
issues) can create operational disruptions due to its role as a base ingredient
and key production input in processing and in the supply chain.
18
High
Financial impacts
Magnitude of Financial Impact
Agricultural
Crop
Prices
Animal
Yields
Food Safety
Problems
Processing
Costs
Agricultural Inputs
Community
Relations
Issues
Agricultural
Crop Prices
Operating
Efficiency
Animal
Yields
Processing
Costs
Reputation
Food Safety
Problems
Community
Relations
Issues
Aquaculture
Beverages
Confectionary
Low
Dairy/Poultry
Edible Oils
Low
Value Driver:
Starch
Likelihood of Occurrence
High
Sugar
Potential Magnitude of Financial Impact
High
Agricultural Inputs
Operating Efficiency
Medium
Reputation
Not Applicable
Low
19
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
Evaluate Company Positioning
Key Findings
Environment
al Trend
Physical Impact
Impact on BCML
Climate
change
Decreased yield of
sugarcane
Water Scarcity
Decreased or
intermittent access to
water for operations
Higher raw material price
Supply disruptions
Difficulty in meeting consumer demand and
maintaining profitability
Sensitivity analysis of raw material price and profits (FY08, 09)
Sugar cycle
Price change of raw
material
Profitability
change
FY08
Down cycle (high sugar production
and low sugar prices)
+/- 1%
-/+10%
FY09
Up cycle( low sugar production and
high sugar prices)
+/-1%
-/+3%
Year
21
Power
Over Heating: Water Constraints on Power Generation in Asia
22
Key value drivers
Regulatory
Water Dependency
Water Security
Are shareholder returns
protected from risks?
How much water required
to maintain loads?
How secure are the
plant’s water supplies?
Business Model
Plant Type/Cooling System
Water Scarcity &
Water Contracts
High
- Merchant
- Open-loop thermal
- Run-of-the-river hydro
- Water scarce or stressed area
- History of water-related events
Medium
- Hybrid (Regulated/ Merchant)
- Regulated (high utilization rate
required)
- Closed-loop thermal
- Reservoir hydro
- Supercritical coal
- Combined cycle gas
- Reservoir with irrigation
commitments
- Dependence on seasonal
precipitation
- Regulated (no risk from falling
output)
- Captive
- Competitive tariff
- Renewables (excluding
biomass and concentrated
solar thermal)
- Seawater cooling
- Wastewater cooling
- Air cooling
- Water abundant area
- Long term water contract
Risk
Low
23
Regulatory risk
Capacity in GWs
40
Existing
Planned
30
20
10
0
Regulated
Competitive
Tariff
Captive
RegulatedMerchant Hybrid
Merchant
24
Water dependency
Water Consumption (m3/MWh)
Range of Water Withdrawals and Consumption (US)
Trends
4
Without CCS
With CCS
3
2
1
0
Subcritical Pulverized
Coal
Supercritical
Pulverized Coal
Integrated
Gasification
Combined Cycle
Natural Gas
Combined Cycle
25
India’s water scarcity
26
Plan(t)s without water
Water Scarce
Water Stressed
Moderate Water Availability
Water Abundant
•Includes thermal and hydro plants owned by NTPC, Tata Power, and Reliance Power.
Planned
Existing
Total
0%
20%
40%
60%
Percent of Total Capacity
80%
100%
27
Near-term
Ti
Financial impacts (1)
High
Value Driver:
Operating Efficiency
Capital Investments
Range of Financial Impact
Project
Execution
Delays
Lost Revenues
Strategic Positioning
Growth
Constraints
Higher
CAPEX
Low
Increased COGS
Near-term
Timeframe of Occurrence
Long-term
29
Financial impacts (2)
IRR sensitivity to loss in plant load factor (%)
17.0%
Load losses
Outages
Revenues
COGS
16.0%
15.0%
14.0%
13.0%
12.0%
95%
Permitting
Water allocations
Financing
Project
Execution
90%
Base
80%
75%
70%
case
85%
Equity IRR
Source: HSBC
IRR sensitivity to delay in commercial operations
(months)
14.5%
Moratoriums
New Regulations
Financing
14.0%
Growth
13.5%
13.0%
12.5%
12.0%
On time
Source: HSBC
3m
6m
Equity IRR
9m
12m
30
More sector research
Mining, Oil & gas, …
31
The business of water risk
1. Problem
2. Footprinting
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
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
33
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
Mapping tool
• “Top-down” water
scarcity model
• Juxtaposing risk factors:
risk hotspots
35
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
36
The business of water risk
1. Problem
2. Footprinting
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
Actionable information
Initial corporate response: impact on the environment (“water footprint”)
+
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 “waterwinning” companies, geographies, technologies
Driving demand
Research
Regulatory
pressure
Voluntary
programs
Growing demand for actionable information that
allows investors to sort winners from losers
Emerging
evidence
For example: Bloomberg
%Δ in water stress - 2020
Eg. access risk
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 …
The business of water risk
1. Problem
2. Footprinting
3. Risk
a) Sector research
b) Tools
c) Market
information
4. Response
Water-efficient power
• Geography
– Siting, spatial planning
• Cooling technology
–
–
–
–
Open or closed loop
Dry cooling
Wastewater reuse
Condensed water
cooling
– Ultra-super critical
(USC) technology
– Seawater use
• Alternatives
– Fuel (eg. coal  gas)
– Design (eg. CCS)
– Renewables
• Water
management
– Supply
– Conservation
44
Water supply, conservation
46