6. Preliminary conclusion on analysis of water risks of individual stocks and portfolios The past four chapters have illustrated the two water risk methodologies that have been developed by South Pole and its results based on a sample analysis: the water risk analysis of equity portfolios and the water risk analysis of individual stocks. These two methodologies differ strongly in terms of the approach and the results. They can be applied individually or complimentary. The approach developed in this report has the aim of providing the basis for investors to either engage with companies on individual water risks or aligning their investment portfolios with global water targets and goals. The suggested approach can be seen in Figure 12 and is described in detail below. •
Step 1: Water risk analysis of equity portfolios South Pole has developed the first methodology which is able to connect geographical water risks information with equity portfolios. The portfolio water risk analysis combines top-down industry-based analysis starting from the SASB materiality analysis with bottom up geographical risk information and makes an important contribution to converge both approaches. Nevertheless, it is not yet able to integrate more granular data due to issues of data availability and the disclosure of individual companies. This methodology does, however, give investors a first overview on where, in terms of individual stocks and geographies, water risks should be analysed more closely.
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Step 2: Water risk analysis of individual stocks Through the analysis of water risks of individual stocks, a great depth of information is made available to an investor. The analysis provides an investor with a comprehensive risk assessment by combining the risks that a company is exposed to, due to its operations and its location, with its water management strategy. While achieving this granularity is time-consuming, this information is highly relevant in order to understand how a specific company performs on all three risk drivers and can be used by investors as a basis for engagement. The methodology further also highlights supply chain water risks, even though this analysis has proven to be even more challenging in terms of data availability.
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Step 3: Engagement with portfolio companies The results from the water risks analysis of individual stocks builds the basis for an investor to form investment decisions on holistic and comprehensive data. Due to the depth of information, this methodology can also be applied to develop water-aligned strategies
The development of these methodologies has shown that there is no right or wrong in water risk assessments. Different methodologies serve different needs and it ultimately depends on
Step 1
Step 2
Step 3
Water risk analysis of equity portfolios
Water risk analysis of individual stocks
Engagement with portfolio companies
Prioritising portfolio companies based on their water risks
Detailed water risk assessment of prioritised companies
Engaging with analysed companies to align companies to global water goals
Figure 12: 3-Step approach for engaging with portfolio companies on water risks
Methodological development of water risk analysis of equity investment portfolios | 33
