LIMEYARD, Equarius Risk Analytics and Thomas Schumann Capital launch the world’s first Water Risk Index

As population pressures create competition for water, global groundwater supplies are declining and climate variability is increasing — leading to longer droughts and more intense flood events. All these factors pose risks to investment assets that are hard to ignore and challenging to quantify. The integration of portfolio water footprinting in investment strategies is traditionally accomplished using a tilting approach based on unstructured SG data. To mainstream water risk- based core portfolio management, from the initial asset allocation strategies to the buy/sell decisions, environmental externalities need to be directly priced in performance characteristics relative to a benchmark.”

The world’s first benchmark index to price financial water risk to equities launched today on Bloomberg (Ticker Symbol: LYU5WRUG). LIMEYARD TSC Water Risk Index is designed to inform asset owners and investment managers of the water risk to equities in their financial portfolios through a portfolio theory-based risk model. The model, waterBeta, prices water risk as an unsystematic volatility metric, relative to industry-specific benchmarks. Rather than forcing asset managers to make their own interpretations of operational reports and resource management scenarios, the index translates the key metrics of water risk into financial measures that can be accurately and effectively incorporated into financial models.

Asset managers require transparency to make decisions. Our waterBeta is based on share pricing, curated corporate financial accounting, and voluntary disclosures of environmental risk attributes. Where data are unavailable, learning models are used to impute sector-specific values. The Water Risk Core Performance Index allows the asset manager to make allocation decisions based on probabilistic financial indicators of corporate and portfolio risk.

At the individual security level are three critical research steps to obtain a comprehensive picture of water risk pricing:

  1. Understand corporate water dependency and localized water security
  2. Integrate water dependency and security data with financial accounting metrics
  3. Correlate temporal water events with short-term Value-at-Risk (VaR) metrics

Water risk pricing of securities reverberates in cost of capital assumptions, corporate growth rates, cost of operations, and debt-to- EBITDA ratios, potentially affecting credit rating. A granular understanding of the probability of decreased valuations due to water-related risks creates an impetus for focused investor engagement strategies towards water sustainability.