Water Risk in Corporate Bond Analysis
Extreme weather events such as droughts are becoming more frequent and severe worldwide. Given the related detrimental effects on economic activity, water risks are already considered by rating agencies such as S&P and Moody’s as a significant factor impacting the creditworthiness of companies.
In order to better quantify and assess such water risks in fixed income markets, this initiative developed an innovative model and complementary open source tool, which provide finance professionals with a systematic and practical approach to integrate corporate exposure to water scarcity into standard financial models used in corporate bond credit valuation.
The pilot initiative was accomplished in cooperation with seven financial institutions from the Americas and Europe:
- Bancolombia (Colombia)
- Banorte (Mexico)
- Calvert Investments (U.S.)
- J. Safra Sarasin (Switzerland)
- PAX World Investments (U.S.)
- RobecoSAM (Switzerland) and
- UBS (Switzerland/U.S.),
as well as our implementation partners, the Natural Capital Declaration (NCD, represented by United Nations Environment Programme Finance Initiative (UNEP FI) and the Global Canopy Programme) and the German Association for Environmental Management and Sustainability in Financial Institutions (VfU).
- Report: Integrating Water Stress Into Corporate Bond Credit Risk Analysis – Benchmarking Companies in Three Sectors. Supplementing the tool, the report provides an understanding of the underlying methodology, illustrated by the application of the tool to 24 companies in three water-intensive sectors (beverages, mining and power).
- Tool: Corporate Bond Water Risk Tool – By combining data on the quantity of corporate water use per production location with newly available data from the World Resources Institute on water stress at any location globally, the excel-based, open source tool enables financial analysts to integrate a company’s exposure to water stress into standard financial models of corporate bond credit analysis.
- Partner Workshop I: Embedding Water Risk Factors into Corporate Bond Analysis (8 Dec 2014, London)
- Concept Note: Analysis
- Concept Note: Valuation
- Partner Workshop II (10 Mar 2015, Frankfurt)
- NCD Webinar: New Corporate Bonds Water Credit Risk Tool – Bringing water into financial risk analysis (Sep 2015)
- Launch of the Report: Integrating Water Stress Into Corporate Bond Credit Risk Analysis (8-9 Sep 2015, London)
- NCD Webinar: Drought – Preparing for Current and Future Water Security Challenges (14 Jul 2016)