The business of water risk

The business of water risk

Staying ahead of the curveby Piet Klop

• forward looking, predictive

• close collaboration with (institutional) investors and corporations

• intelligence on environmental trends, policies, consumer preferences and their financial impact

Intro


1. Problem2. Disclosure

3. Riska) Sector research

b) Tools

c) Market information

4. Response

Extreme Scarcity<500

Scarcity500-1,000

Stress1,000-1,700

Adequate1,700-4,000

Abundant4,000-10,000

Surplus>10,000

Ocean/Inland Water

No Datam3/person/year

19751975200020002025202520032003

With permission from Coca Cola

Where is water getting scarce?

Water as economic good

undervalued overused underinvested

Water as public good

open access externalities natural monopoly


1. Problem

2. Disclosure3. Risk

a) Sector research

b) Tools


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

• 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

• Production facilities + supply chain– Food & beverage (+ agriculture)

impact on impact by

Behaviour (CSR) risk (10K)


1. Problem

2. Footprinting


b) Tools


4. Response

Water risks and impacts

Reputation

Regulatory (+ litigation)

Physical

Product useProduction process

Supply chainPoint of impact:

Type of risk:

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

Multinationals’ suppliers singled out for violations

Competition with social uses Profligate water use

availability competition

Access (growth)

Cost (capex, opex)

prices quality standards

Disruption (revenues)

drought social


1. Problem

2. Footprinting

3. Risk

a) Sector researchb) Tools


4. Response

Weeding Risk: Climate Change & Water Scarcity Impacts on

the F&B Sector

Food & Beverage

18

Climate change and water scarcity increase the likelihood of a food safetyproblem that could result in lost revenues and recall costs from contaminatedor recalled foods and/or depressed consumer demand across entire productcategories.

Revenue

Increased temperatures and decreasing water quality increase the risk of foodand beverage contamination, creating a greater risk that F&B companies mayface legal exposure to distributors, importers, consumers and governments inthe event of food safety problems.

Cost

Food SafetyProblems

The increased frequency and severity of extreme weather events, such asstorms or droughts, increases the risk of short-term price volatility. Suchevents may require companies to switch suppliers, make raw materialsubstitutions with little notice and/or source ingredients from further away.

Cost

Climate change and water scarcity can affect the availability of key agriculturalinputs 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

Agricultural CropPrices

Reputation

OperatingEfficiency

Agricultural I nputs

Value Driver

Aquaculture, dairy, and poultry yields are especially vulnerable to climatechange and water scarcity impacts. These inputs are often raised directly bycompanies rather than sourced from suppliers. Impacts on revenues willdepend on supply/demand balance of market.

Revenue

Competition from local communities for valuable resources like clean water,especially in areas facing water scarcity, can create delays in obtainingpermits for new sites. In the most serious cases, policymakers may prohibit orrestrict industry activity in sensitive areas.

Growth

Water scarcity increases competition for water resources. Companies maysuffer reduced sales from reputational damage due to publicity from conflictswith local communities over rights to water.

Revenue

CommunityRelationsIssues

The interruption or decline of water supply (from a drought or water rightsissues) can create operational disruptions due to its role as a base ingredientand key production input in processing and in the supply chain.

Water scarcity can increase the cost of treating and accessing water.

CostProcessingCosts

AnimalYields

Business Risk

Climate change and water scarcity increase the likelihood of a food safetyproblem that could result in lost revenues and recall costs from contaminatedor recalled foods and/or depressed consumer demand across entire productcategories.

Revenue

Increased temperatures and decreasing water quality increase the risk of foodand beverage contamination, creating a greater risk that F&B companies mayface legal exposure to distributors, importers, consumers and governments inthe event of food safety problems.

Cost

Food SafetyProblems

The increased frequency and severity of extreme weather events, such asstorms or droughts, increases the risk of short-term price volatility. Suchevents may require companies to switch suppliers, make raw materialsubstitutions with little notice and/or source ingredients from further away.

Cost

Climate change and water scarcity can affect the availability of key agriculturalinputs 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

Agricultural CropPrices

Reputation

OperatingEfficiency

Agricultural I nputs

Value Driver

Aquaculture, dairy, and poultry yields are especially vulnerable to climatechange and water scarcity impacts. These inputs are often raised directly bycompanies rather than sourced from suppliers. Impacts on revenues willdepend on supply/demand balance of market.

Revenue

Competition from local communities for valuable resources like clean water,especially in areas facing water scarcity, can create delays in obtainingpermits for new sites. In the most serious cases, policymakers may prohibit orrestrict industry activity in sensitive areas.

Growth

Water scarcity increases competition for water resources. Companies maysuffer reduced sales from reputational damage due to publicity from conflictswith local communities over rights to water.

Revenue

CommunityRelationsIssues

The interruption or decline of water supply (from a drought or water rightsissues) can create operational disruptions due to its role as a base ingredientand key production input in processing and in the supply chain.

Water scarcity can increase the cost of treating and accessing water.

CostProcessingCosts

AnimalYields

Business Risk

Key value drivers

19

Low

Mag

nit

ud

e o

f Fin

an

cia

l Im

pact

Likelihood of Occurrence High

Processing Costs

Agricultural Crop

Prices

CommunityRelations

I ssues

AnimalYields

Food SafetyProblems

Low

Hig

h

Agricultural Inputs

Operating Efficiency

Reputation

Value Driver:

Financial impacts

Aquaculture

Beverages

Dairy/ Poultry

Edible Oils

Sugar

Confectionary

Starch

Processing Costs

Food SafetyProblems

Agricultural Crop Prices

CommunityRelations

IssuesAnimalYields

Agricultural I nputsOperating Efficiency Reputation

Potential Magnitude of Financial I mpact

High

Medium

Low

Not Applicable

Note: Please refer to the appropriate sub sector discussion in this report for what products are considered under each of the categories

21

Eg. Balrampur Chini MillsE

va

lua

te C

om

pa

ny

Po

sit

ion

ing

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

Key Findings

Environmental Trend

Physical Impact Impact on BCML

Climate change

Decreased yield of sugarcane

Higher raw material priceSupply disruptionsDifficulty in meeting consumer demand and maintaining profitabilityWater Scarcity Decreased or

intermittent access to water for operations

YearSugar cycle Price change of raw

materialProfitability 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%

Sensitivity analysis of raw material price and profits (FY08, 09)

22

Power

Over Heating: Water Constraints on Power Generation in Asia

23

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

Risk

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

Low

- 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

Key value drivers

24

0

10

20

30

40

Regulated CompetitiveTariff

Captive Regulated-Merchant Hybrid

Merchant

Capacit

y in

GW

s

Existing Planned

Regulatory risk

25

Ran

ge o

f W

ate

r W

ith

dra

wals

an

d C

on

su

mp

tion

(U

S)

Tre

nd

s

Water dependency

0

1

2

3

4

Subcritical PulverizedCoal

SupercriticalPulverized Coal

IntegratedGasification

Combined Cycle

Natural GasCombined Cycle

Wate

r C

on

su

mpti

on

(m

3/M

Wh

) Without CCS With CCS

26

India’s water scarcity

270% 20% 40% 60% 80% 100%

Total

Existing

Planned

Percent of Total Capacity

Water Scarce Water Stressed Moderate Water Availability Water Abundant

•Includes thermal and hydro plants owned by NTPC, Tata Power, and Reliance Power.

Plan(t)s without water

29

Near-term

Ran

ge o

f Fin

an

cia

l Im

pact

Timeframe of Occurrence Long-term

GrowthConstraints

ProjectExecution

Delays

Low

Hig

h

Lost Revenues

HigherCAPEX

Increased COGS

Value Driver:


Capital Investments

Strategic Positioning

Near-term

Ran

ge o

f Fin

an

cia

l Im

pact

Timeframe of Occurrence Long-term

GrowthConstraints

ProjectExecution

Delays

Low

Hig

h

Lost Revenues

HigherCAPEX

Increased COGS

Value Driver:


Capital Investments

Strategic Positioning

Financial impacts (1)

30

RevenuesCOGS

Project Execution

Growth

Load lossesOutages

PermittingWater allocations

Financing

MoratoriumsNew Regulations

Financing

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

95% 90% Base

case

85%

80% 75% 70%

Equity IRR

IRR sensitivity to loss in plant load factor (%)

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

On time 3m 6m 9m 12m

Equity IRR

IRR sensitivity to delay in commercial operations (months)

Source: HSBC

Source: HSBC

Financial impacts (2)

31

More sector research

Mining, Oil & gas, …


1. Problem

2. Footprinting


b) Toolsc) Market

information

4. Response

• 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

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

35

Mapping tool

• “Top-down” water scarcity model

• Juxtaposing risk factors: risk hotspots

• “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

Use & users


1. Problem

2. Footprinting


b) Tools


4. Response

Investors want to know: potential impact by the environment (“water risk”)

Initial corporate response: impact on the environment (“water footprint”)

Actionable information

“… 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 “water-

winning” companies, geographies, technologies

Growing demand for actionable information that allows investors to sort winners from losers

Research Regulatory pressure

Voluntary programs

Emergingevidence

Driving demand

For example: Bloomberg

%Δ in water stress - 2020

Eg. access risk

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 …

More & better context

regions

sectors

risk drivers


1. Problem

2. Footprinting


b) Tools


4. Response

• 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-efficient power

Water supply, conservation

46

Documents

The business of water risk