Special Report  │  19 November 2020 
fitchratings.com 
1 
 
 
 
Sustainable Finance 
All Sectors 
Global 
ESG in Credit – Water Issues  
Relevance and Materiality of Water Issues for Economies and Entities

Special Report  │  19 November 2020 
fitchratings.com 
2 
 
 
 
Sustainable Finance 
All Sectors 
Global 
ESG in Credit – Water Issues 
Relevance and Materiality of Water Issues for Economies and Entities 
 
 
 
 
The ESG in Credit series of reports provides insights on the credit 
relevance and materiality of sector-specific environmental, social 
and governance (ESG) credit issues (see Part I) and offer guidance 
on investor approaches to evaluating ESG risk factors in investment 
analysis and decisions (see Part II).  
This report focuses on water issues – specifically, the two water-
related general issues within Fitch Ratings’ ESG Relevance Score 
Framework and scoring templates: water and wastewater 
management, and water resource and management. It explains how 
water issues can translate into relevant water-related credit issues 
and potentially materialise as credit risks.   
Water Risks Are Important to Investors 
Investors are assessing their portfolios and holdings for water risks. 
A survey by RBC Global Asset Management reported that two-
thirds of roughly 800 institutional investors in the US, Canada, 
Europe and Asia were factoring water risk into their investment 
decisions, placing water risk third behind cybersecurity and anti-
corruption in a list of the most important ESG considerations.  
The focus on water risk is likely to continue. Allianz Global 
Corporate & Specialty SE, the corporate insurance provider of 
Allianz SE, identifies water management as one of five main ESG 
issues that will affect businesses’ ESG footprints. 
Investor Analysis Is Increasing  
The credit analysis of issuers and transactions by investors is 
expanding to include water issues such as floods, droughts, 
competition, water quality and pollution, infrastructure, and supply 
chain disruption. Quantitative assessment – fundamental analysis, 
peer analysis and scenario analysis – of these issues is becoming 
more prevalent amongst investors. 
Core Water-Related Credit Issues 
Due to the essential nature of water for certain businesses and 
processes, investors prioritise water risk issues in exposed 
industries. Fitch has identified the most relevant sectors, which can 
be categorised under four core water-related credit issues: water 
usage in the manufacturing process; water usage of product; water 
usage in operations; and water supply in economic development.  
   
 
“Investors consider strong water and 
wastewater management as a credit strength 
for issuers that operate in water-stressed 
sectors or regions. Deeper analysis of water 
strategy, controls and initiatives is supporting 
investors as they work to identify downside 
risks.” 
Justin Sloggett, Sustainable Finance, Fitch Ratings 
Related Research 
Constraints to Growth in Water-Stressed Regions - Many More 
Regions Will Become Water-Stressed, Imposing Substantial 
Adjustment Costs (October 2020) 
Water Risk Relevance for Sovereign Ratings to Increase  
(September 2020) 
Increasing Water Risks in Metals and Mining - Low-Carbon 
Technology Supply Chains Face Growing Constraints 
(July 2020) 
Water Risk in the Agricultural Supply Chain (June 2020) 
 
Analysts 
Justin Sloggett, Director, Sustainable Finance 
+44 20 3530 2671 
justin.sloggett@fitchratings.com 
 
David McNeil, Associate Director, Sustainable 
Finance 
+44 20 3530 1942 
david.mcneil@fitchratings.com 
 
Andrew Steel, Managing Director, Sustainable 
Finance 
+44 20 3530 1596 
andrew.steel@fitchratings.com

Special Report  │  19 November 2020 
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Sustainable Finance 
All Sectors 
Global 
Defining Water-Related General Issues 
Water issues – floods, droughts, competition, quality and pollution, 
infrastructure, and supply chain issues – have physical, financial and 
economic impacts on borrowers. While the consequences of water 
issues can be clear (see table Water Issues and Their Physical, 
Financial and Economic Impacts on pages 3 and 4), it can be difficult 
to attribute an ESG impact to a specific water-related credit driver, 
as aspects of water risk are often linked to several different ESG 
credit issues.  
 
Water issues can materialise in and overlap with other ESG issues. 
Within Fitch’s ESG Relevance Score Framework and sector-
specific, scoring templates, we find connections between water-
related credit issues and the following general issues (see box Fitch’s 
ESG Relevance Score Framework and Scoring Templates above).  
Exposure to Environmental Impact: This addresses the issuer’s 
ability to manage risks associated with the physical effects of 
climate change, including rising sea levels, floods and droughts. 
These extreme weather events can cause infrastructure damage 
that can significantly affect the supply of water consumed in an 
economy. 
Human Rights, Community Relations, Access and Affordability: 
When residential and agricultural consumers require affordable 
water supplies and rely on the same water source as extractive, 
industry and power consumers, shortages and quality issues can 
cause community unrest. Large water users in these circumstances 
are often at risk of imposed rationing, which can impair local 
economic development.  
Management Strategy: The management strategy for water 
supply, consumption, development, efficiency, recycling and 
treatment can support a sustainable business model for issuers and 
generate a competitive advantage for water-intensive entities. The 
strategy should clearly link to both site-level and project-level 
management for issuers in sectors of high water-stress where 
water resource management planning is essential to avoid major 
operation disruptions.  
While water issues are interrelated to other general issues in our 
scoring temples, we only consider water issues to be credit-
relevant, and therefore a water-related credit issue, when water 
usage forms a key input to the economy, management strategy, 
product, manufacturing process, operation or project.  
Fitch’s Mining Scoring Template  
General issue 
Sector-specific issue 
GHG emissions and air quality 
Regulatory risk – emissions standards 
Energy management 
Energy use in operations 
Water and wastewater 
management 
Water usage in operations (including 
exposure to regions with water 
scarcity) 
Waste and hazardous materials 
management; ecological impacts 
Total amount of tailings and mineral 
processing waste produced; 
management of tailings dam 
Exposure to environmental impact Exposure to extreme weather events 
Human rights, community 
relations, access and affordability 
Relationships with local communities 
and/or land right holders 
Customer welfare – fair messaging, 
privacy and data security 
n.a. 
Labour relations & practices 
Impact of labour negotiations and 
employee (dis)satisfaction 
Employee wellbeing 
Worker safety and accident 
prevention 
Exposure to social impacts 
Social resistance to major projects or 
operations that leads to delays and 
cost increases 
Management strategy 
Strategy development and 
implementation 
Governance structure 
Board independence and 
effectiveness; ownership 
concentration 
Group structure 
Complexity, transparency and 
related-party transactions 
Financial transparency 
Quality and timing of financial 
disclosure 
Source: Fitch Ratings 
Fitch’s ESG Relevance Score Framework and Scoring 
Templates 
Fitch’s approach to sustainable finance and ESG integration is 
to provide transparency on ESG-related credit risks that 
influence credit ratings. In 2019 Fitch started producing ESG 
Relevance Scores, which have been fully integrated into Fitch’s 
existing research process across asset classes.  
ESG credit considerations are systematically evaluated by 
Fitch’s analysts using the ESG Relevance Score framework that 
extracts the issues from the relevant sector criteria. When 
assessing issuers and transactions, analysts refer to the asset-
class and sector ESG scoring templates to allocate individual 
and overall E, S and G Relevance Scores (see table Fitch’s Mining 
Scoring Template opposite for an example of an ESG scoring 
template).  
ESG Relevance Scores articulate the level of influence an 
environmental, social or governance issue has had on a credit 
rating decision. Each entity or transaction receives 14 or 15 
ESG Relevance Scores based on five environmental, five social 
and four or five governance general issues. Scores range from 
‘1’ to ‘5’ where an ESG Relevance Score of ‘1’ indicates no credit 
relevance at either a sector or entity level whilst an ESG 
Relevance 
Score 
of 
‘5’ 
indicates 
a 
single 
identified 
environmental, social or governance risk that is unambiguously 
causing a change to the current rating level.

Special Report  │  19 November 2020 
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Sustainable Finance 
All Sectors 
Global 
Water Issues and Their Physical, Financial and Economic Impacts 
Water issue 
Sector-specific ESG credit 
issues 
Physical impact 
Financial and economic impact 
Floods – One-off large 
volume of water causing 
agricultural, property and 
infrastructure damage 
• 
Water supply in 
economic development 
• 
Loss and delays to agricultural 
produce (crops, arable, cotton, 
leather, rubber and so forth) 
• 
Disruption to business operations 
and supply chains. 
• 
Damage to commercial, industrial 
and residential property 
• 
Damage to extractive assets 
(including mines, tailing dams, 
equipment) 
• 
Prolonged water and power outage 
due to damage to infrastructure 
 
• 
Lost income from ruined produce 
• 
Higher production costs 
• 
Rising insurance premiums 
• 
Large, one-off costs for repairs to infrastructure, 
including power lines, water pipes, dams, sea walls 
and property 
• 
Increased spending on flood protection including 
natural infrastructure (mangroves) and built 
infrastructure (sea walls) 
• 
Negative impact on local, regional or national 
economy and development 
 
Droughts – Prolonged dry 
weather causing water 
shortages that reduce 
agricultural, commercial 
and industrial production 
and economic output 
• 
Water usage in the 
manufacturing process 
• 
Water usage in 
operations 
• 
Water usage of product 
• 
Water supply in 
economic development 
 
• 
Reduced yields and loss of 
agricultural land and produce, such 
as crops, arable, cotton, leather, 
rubber 
• 
Less vegetation increases 
frequency of flooding 
• 
Delays and permanent shutdown of 
extractive assets. 
• 
Reduced production activity of 
businesses 
• 
Lower energy production from 
fossil-fuel, nuclear and 
hydroelectricity generators 
• 
Loss of revenue due to reduced productivity 
caused by less water availability 
• 
Increased operating costs due to higher water 
costs, including restricted allocations through 
water usage caps and water rationing 
• 
Increased costs to procure water from alternative 
sources or the relocation of operations 
• 
Higher energy prices due to reduced water 
availability for cooling and generation of 
hydroelectricity 
• 
Restricted residential and economic development 
in certain areas that have water availability 
guidelines 
• 
Negative impact on local, regional or national 
economy and development 
Competition – Agricultural, 
commercial, industrial, 
power and domestic 
consumers accessing the 
same water source causing 
unsustainable exploitation 
of groundwater and surface 
water that leads to water 
shortages, rationing, 
business disruption, loss of 
operating licences and 
conflicts 
• 
Water usage in the 
manufacturing process 
• 
Water usage in 
operations 
• 
Water usage of product 
• 
Water supply in 
economic development 
 
• 
Local community protests and 
associated bad press coverage, 
political intervention and 
regulatory pressure 
• 
Business shutdown, interruption, 
slowdown and relocation 
• 
Prioritisation of freshwater for 
domestic and agricultural over 
large companies 
• 
Risks to energy production 
• 
Lower revenue due to operating restrictions and 
rationing 
• 
Loss or refusal of licence to operate due to 
community unrest and political response 
• 
Increased competition for water is leading to 
higher water rates or rationing, or both 
• 
Relocation costs for plants 
• 
Higher energy costs and bills due to higher cost of 
electricity production 
• 
Lower economic activity due to less favourable 
business environments 
Quality and pollution – 
Inability to source or 
disruption to supply of 
high-quality water, and 
requirements and 
legislation to prevent water 
pollution 
• 
Water usage in the 
manufacturing process 
• 
Water usage in 
operations 
• 
Water usage of product 
• 
Water supply in 
economic development 
• 
Local community unrest due to 
limited access to clean water and 
sanitation 
• 
Water stress increases due to 
reduced levels of uncontaminated 
water 
• 
Bans on certain industries 
• 
Less attractive business 
environment due to high levels of 
low-quality water 
• 
Fines for water pollution, legal settlements and 
possible loss of operating licence 
• 
Shutdown and relocation costs to areas of high-
quality water 
• 
Increased production costs for extractive, 
industrial and power companies to remove 
contaminants from water and purchase 
purification equipment and chemicals 
• 
Increased costs on wastewater management to 
remove pollutants and achieve high grade of 
water 
• 
Restricted economic growth and business 
development due to limited freshwater resources

Special Report  │  19 November 2020 
fitchratings.com 
5 
 
 
 
Sustainable Finance 
All Sectors 
Global 
Water Issues and Their Physical, Financial and Economic Impacts (Cont.) 
Water issue 
Sector-specific ESG credit issues 
Physical impact 
Financial and economic impact 
Infrastructure – Insufficient 
and failing infrastructure that 
disrupts freshwater supply 
• 
Water usage in the 
manufacturing process 
• 
Water usage in operations 
• 
Water usage of product  
• 
Water supply in economic 
development 
• 
Interruption to water 
availability due to repairs to 
infrastructure 
• 
Transportation of freshwater 
over ground from distant water 
sources 
• 
Limited output due to 
insufficient infrastructure such 
as pipelines, water storage 
facilities and recycling 
processes 
• 
Inability to develop a 
substantial energy network for 
local or regional economic 
growth 
• 
Reduced revenue due to lower production or 
temporary shutdown 
• 
High investment requirements on failing and 
updating infrastructure 
• 
Higher operating costs due to importing 
water by trucks that increases with quantity 
and gradient 
• 
Capex requirements for desalination 
technologies and plants 
 
 
Supply chain – Disruption to 
reliable sourcing of 
ingredients and products 
produced in high-stress areas. 
• 
Water usage in product 
• 
Interruption of flow of 
materials, including raw 
materials and components 
• 
Loss revenue due to unreliable supply of 
materials and goods caused by water 
shortage negatively affecting suppliers 
• 
Higher cost of goods due to water risks 
affecting the cost of manufacture and 
therefore increasing raw material prices  
Source: Fitch Ratings

Special Report  │  19 November 2020 
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Sustainable Finance 
All Sectors 
Global 
Sector-Specific, Water-Related Credit Issues 
Fitch analysts evaluate whether a water issue is credit-relevant and 
material for all its rated issuers and transactions. Within their ESG 
scoring templates, Fitch analysts allocate a score between ‘1’ and ‘5’ 
for the general issue: 
• 
Water and wastewater management; or  
• 
Water resource and management (ESG scoring templates 
for local and regional governments, state and local 
governments, and sovereigns refer to water resource and 
management).   
Water and Wastewater Management 
 
The sector-specific ESG credit issues for water and wastewater 
management can be categorised into three core water-related 
credit issues: 
1. 
Water usage in the manufacturing process – where water is 
used for processing, fabricating, washing, cooling or 
transporting of a final product;  
2. 
Water usage of product – where water supply is either a key 
ingredient to the final product, such as is the case with the 
beverage and protein sectors, or is required for and used in 
products of water and sewer utilities;  
3. 
Water usage in operations – where water is: required to 
manufacture a raw material; used in the production of 
beauty, personal care and home care products; required to 
operate a service business; or required for or used in 
operations by water and sewer utilities, power utilities and 
regulated network utilities (water and sewer utilities 
features under both water usage of product and water usage 
in operations).  
Water Resource and Management 
There is one core water-related credit issue for sector-specific ESG 
credit issues for water resource and management: 
• 
Water supply in economic development – where water 
supply is required for national, regional and local economic 
growth. 
How Water Issues Relate to Credit Risks  
Water issues can affect any of the water-related credit issues and 
materialise as a single credit risk or a combination of credit risks 
(see flow chart of the transmission mechanism of water issues into 
credit risks).  
The first part of the report focuses on the four abovementioned 
core water-related credit issues. It provides insights and case 
studies on how these core issues affect issuers from several of the 
sectors (see table Water-Related Credit Issues and Their Associated 
Sectors on page 6). This is followed by guidance on how water issues 
and these water-related credit issues transpire as credit risks and 
can affect the creditworthiness of issuers.  
The second part of the report provides an overview on how investors 
analyse and integrate water issues and risks in to their investment 
decisions and provides guidance on water data and tools.  
Fitch’s Definition for Water and Wastewater 
Management 
The overarching definition of water and wastewater 
management for the ESG relevance scores is, “The category 
addresses an issuer's direct water use, water consumption, 
wastewater generation and other impacts of operations on 
water resources, which may be influenced by regional 
differences in the availability and quality of and competition for 
water resources. More specifically, it addresses management 
strategies including, but not limited to, water efficiency, supply, 
intensity and recycling.”.  
Fitch’s Definition for Water Resource and 
Management  
The overarching definition of water resource and management 
for the ESG relevance scores is, “This category addresses the 
relevance of water availability on the surrounding economy and 
the operations of the issuer. Where credit-relevant, this 
category may reflect an issuer's planning, development, and 
management of its water resources, in terms of both water 
quantity and quality, across all water uses. For sub-sovereign 
governments, it considers the approach to sustainably 
developing and managing its water resources and the 
enforcement of governmental and regulatory standards.”.  
Transmission Mechanism from Water Issue to Credit Risk
Water Issues
Water-related Credit Issues
ESG Relevance Score = 2
(Credit-relevant)
Credit Risks
ESG Relevance Score = 3, 4 or 5
(Credit-material)
Macroeconomic risk
Operational and cash flow risk
Profitability risk
Refinancing risk
Regulatory and litigation risk
Reputational risk
Water usage in the manufacturing 
process
Water usage of product
Water usage in operations
Water supply in economic development
Floods
Droughts
Competition
Quality & pollution
Infrastructure
Supply chain
Source: Fitch Ratings

Special Report  │  19 November 2020 
fitchratings.com 
7 
 
 
 
Sustainable Finance 
All Sectors 
Global 
 
 
 
 
 
 
Water-Related Credit Issues and Their Associated Sectors  
Water and wastewater management 
Water resource and 
management 
Water usage in the manufacturing 
process 
Water usage of product 
Water usage in operations 
Water supply in economic 
development 
• 
Auto suppliers 
• 
Aerospace & defense 
• 
Automotive manufacturers 
• 
Building materials 
• 
Building products 
• 
Chemicals 
• 
Commodity processing & trading 
• 
Diversified industrials & capital 
goods 
• 
Medical devices, diagnostics and 
products 
• 
Oil refining & marketing 
• 
Packaged food 
• 
Pharmaceuticals 
• 
Technology 
• 
Tobacco 
 
• 
ABS – oil vessel-backed 
• 
ABS – f uture flow receivables 
• 
ABS – sprint spectrum 
• 
ABS – timeshare loan 
• 
Alcoholic beverages 
• 
APAC regulated network utilities 
• 
Asia Pacific utilities 
• 
Diversified industrials & capital 
goods 
• 
EMEA regulated networks 
• 
EMEA utilities 
• 
GIG – hydro 
• 
GIG – water/wastewater 
• 
LATAM utilities 
• 
Non-alcoholic beverages 
• 
Protein 
• 
Regulated networks 
• 
US utilities 
• 
USPF – public power 
• 
USPF – water & sewer 
• 
ABS – Future flow receivables 
• 
ABS – oil vessel-backed 
• 
ABS – sprint spectrum 
• 
ABS – timeshare loan 
• 
APAC regulated network utilities 
• 
Asia Pacific utilities 
• 
Australia regulated networks 
• 
Consumer products 
• 
EMEA regulated networks 
• 
EMEA utilities 
• 
GIG – hydro 
• 
GIG – oil & gas production 
• 
GIG – solar/wind 
• 
GIG – thermal power 
• 
GIG – transportation 
• 
GIG – water/wastewater 
• 
IPF – GREs 
• 
LATAM utilities 
• 
Mining 
• 
Oil & gas production 
• 
Oilfield services 
• 
Restaurants 
• 
Shipping companies 
• 
Steel 
• 
US healthcare providers 
• 
US utilities 
• 
USPF – acute hospital and health 
systems 
• 
USPF – higher education 
• 
USPF – not-for-profit CCRC 
• 
USPF – public power 
• 
USPF – water & sewer 
• 
IPF-LRGs 
• 
Sovereigns 
• 
USPF – state and local 
government 
 
Note: ABS = asset-backed securities; GIG = Global Infrastructure Group; USPF = US Public Finance 
Source: Fitch Ratings

Special Report  │  19 November 2020 
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8 
 
 
 
Sustainable Finance 
All Sectors 
Global 
Part I: Relevance and Materiality of Sector-
Specific Water Issues  
Relevance of Core Water-Related Credit Issues to Key 
Sectors 
The sectors most relevant to the water-related general issues are 
found in the table Water-Related Credit Issues and Their Associated 
Sectors in the section How Water Issues Relate to Credit Risks and have 
been grouped by the core water-related credit issues: water usage 
in the manufacturing process; water usage of product; water usage 
in operations; and water supply in economic development.  
The following sections describe how these core water-related 
credit issues affect several sectors and drive the distribution of the 
ESG relevance scores across asset classes and sectors.  
Water Usage in the Manufacturing Process 
Water usage in the manufacturing process refers to water required 
for the manufacture of final products. Water is fed into processes 
for fabricating, processing, washing, cooling or transporting a final 
product. Sectors include automotive manufacturers, building 
materials 
and 
products, 
chemicals, 
pharmaceuticals 
and 
technology.   
Relevance to Sector 
Automotive manufacturers and auto suppliers use water-intensive 
processes. It is estimated that over 39,000 gallons of water are 
consumed to produce the average domestic vehicle due to the 
following production processes: surface treatment and coating; 
paint spray booths; washing, rinsing or hosing; cooling, air 
conditioning systems; and boilers1. It is not clear whether this figure 
will go up or down with the increase in production of electric 
vehicles. Water consumption will, however, probably remain high 
due to a requirement for metal-finishing operations and painting – 
both of which consume large quantities of water. 
Water has multiple applications in the manufacturing process. For 
construction material and products, water serves as a solvent, 
cleaning agent, lubricant, sealant, heat-transfer medium and for air 
pollution control. Cement consumes almost 10% of global industrial 
water – although it is better known for its contribution to global 
carbon emissions – and production facilities can often be located in 
water-stressed areas. It has been predicted that 75% of water for 
cement production is likely to come from water-stressed regions by 
20502.  
                                                                                       
1Water, water, everywhere in vehicle manufacturing. Automotive 
World, 
published 
6 
October 
2014, 
https://www.automotiveworld.com/articles/water-water-
everywhere-vehicle-manufacturing/ 
 
The chemicals industry is another large water consumer, although 
consumption varies within this diverse industry. The majority of the 
chemicals industry’s water consumption is for cooling due to the 
intense heat generated by chemical reactions. Investors will look at 
both the water consumption of chemicals companies and their 
wastewater management. They will also analyse the business lines 
of chemical companies to identify positive credit drivers derived 
from water treatment equipment and chemicals.       
For the pharmaceutical and semi-conductor sectors, pure water is 
vital for manufacturing. Pure water is used by pharmaceutical 
companies as a raw material, ingredient and solvent in the 
processing, formulation and manufacture of products. It is also used 
as a cleaning agent for rinsing vessels, equipment, and packaging 
materials. Pharmaceutical companies are concerned by the quality 
of wastewater and the ability to reuse it, and they therefore monitor 
the quality of inputted water. 
Semi-conductor companies with fabrication plants use pure water 
for cleaning and rinsing components throughout the manufacturing 
process, as well as for etching. Some fabrication plants are located 
in countries with highly variable rainfall, such as Taiwan. The 
reliance on an uninterrupted, high-quality water flow necessitates 
strong water and wastewater management to avoid disruption to 
operations. Significant operating costs and capital expenditure on 
water treatment and storage, and possibly on desalination plants, is 
essential to minimise regulatory and litigation risks. 
The technology industry is well known for the high water 
consumption of its data centres. Water and energy usage are large 
proportions of their operational costs. Data centres are often 
located in arid regions to take advantage of cheap solar energy but 
create pressure on water resources locally by consuming large 
quantities of water for cooling. The operators of data centres try to 
balance these trade-offs by developing and maintaining good 
relationships with local and state governments and by running 
initiatives to decrease water consumption and increase water 
reuse. 
Other Relevant Sectors for Investors  
Non-food retailing is not considered a relevant sector based on our 
analysis, and this is reflected in its ESG scoring template. However, 
Fitch and investors assess the water risks of the entities in the 
supply chain to non-food retailing, such as textiles industry, along 
with fair pay and safety standards. The textile industry is one of the 
2 Miller, S.A., Horvath, A. & Monteiro, P.J.M. Impacts of booming 
concrete production on water resources worldwide. Nat Sustain 1, 69–
76 (2018). https://doi.org/10.1038/s41893-017-0009-5  
Building Materials Company Reduces Production 
in Areas of High Water Stress  
LafargeHolcim Ltd is mitigating its water risk through various 
initiatives and targets, including by reducing the percentage of 
production sites in water-stressed areas. By 2019, 17% of 
LafargeHolcim’s cement production sites were in areas at risk 
of water shortage, down from 25% in 2013.

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9 
 
 
 
Sustainable Finance 
All Sectors 
Global 
most water-intensive industries due to the fabric-dyeing process. It 
is also exposed to profitability risks due to increasingly volatile 
cotton prices caused by water shortages. 
Investors look at water risks in the real estate and construction 
sectors. The manufacture of construction material and products 
requires large quantities of water. Water supply disruptions can 
affect the price of construction materials and products and 
therefore increase profitability risks for real-estate developers and 
construction 
companies. 
In 
addition, 
construction 
and 
homebuilding rely on water as a direct input into their operations. 
Distribution of ESG Relevance Scores - 
Manufacturing Process 
 
 
 
 
 
 
Scale 
1 
2 
3 
4 
5 
Irrelevant to 
the entity, 
transaction 
or 
programme 
rating and 
irrelevant to 
the sector 
Irrelevant to 
the entity, 
transaction 
or 
programme 
rating but 
relevant to 
the sector 
Minimally 
relevant to 
rating; 
either very 
low impact 
or actively 
managed 
resulting in 
no entity, 
transaction 
or 
programme 
rating 
impact 
Relevant to 
the entity, 
transaction 
or program 
rating but 
not a key 
driver – has 
a rating 
impact in 
combination 
with other 
factors 
Highly 
relevant, a 
key rating 
driver that 
has a 
significant 
impact on 
the entity, 
transaction 
or 
programme 
rating on an 
individual 
basis 
Aerospace and 
defence 
0 
17 
3 
0 
0 
Auto 
manufacturers 
0 
16 
0 
0 
0 
Auto suppliers 
0 
20 
0 
0 
0 
Building 
materials 
0 
11 
4 
0 
0 
Building 
products 
0 
10 
2 
0 
0 
Chemicals 
0 
0 
56 
0 
0 
Commodity 
processing and 
trading 
0 
10 
2 
0 
0 
Diversified 
industrials and 
cap. goods 
0 
63 
9 
0 
0 
Medical 
devices, 
diagnostics and 
products 
0 
11 
1 
0 
0 
Oil refining and  
marketing 
0 
0 
23 
0 
0 
Packaged food 
0 
0 
25 
0 
0 
Pharmaceuticals 
0 
0 
23 
0 
0 
Technology 
0 
9 
47 
0 
0 
Tobacco 
0 
5 
0 
0 
0 
As of 30 June 2020 
Note: A sector can appear under more than one core issue due to the categorisation 
of the water-related credit issues in the ESG scoring template 
Source: Fitch Ratings 
 
The water crisis in Chennai at the beginning of 2019 increased the 
cost of construction as companies had to slow down their activities, 
purchase water from original sources and private companies at an 
increased price, and use tanker trucks to transport water from 
outside the city.  
The paper and pulp industry is one of the largest users of industrial 
water. Water is used across the whole process – including raw 
material processing, pulp washing, paper-making, equipment, 
cooling and cleaning. The industry also discharges a lot of water and 
therefore water and wastewater management is crucial to avoid 
fines and reduce reputational risks. Investors look at the water 
strategy, risk management and performance of paper and pulp 
entities. For example, when assessing the pulp business of UPM 
Kymmene Corporation in 2017, BNP Paribas Asset Management 
identified the location of their sites and reviewed their monitoring 
systems, initiatives and targets for reducing effluent loads and 
wastewater volumes. 
Water Usage of Product  
Water usage of product affects issuers that require water as an 
ingredient, such as those from the beverages and protein sectors. It 
is also highly relevant to water and sewer utilities, where water 
supply is required for and used in their operations. 
Relevance to Sector 
As water is a major input or output of these sectors, or both, water 
risks can negatively affect profitability or cash flow. Water is 
predominantly used by the food and beverage industry as an 
ingredient, used in production processes and for heating, and is 
needed for cleaning and refrigeration. To reduce consumption, 
improve water-use ratios, and ensure product safety, the food and 
beverage industry is integrating wastewater technologies, such as 
advanced filtration systems, within their production lines.  
Beverage and food issuers are also exposed to upstream water risks 
in the supply chain due to their purchasing of agricultural products. 
As agribusinesses consume huge quantities of freshwater and 
extreme weather events can wipe out harvests and reduce yields 
and outputs, raw material costs can be volatile and operations can 
be disrupted. Beverage and food companies are exposed to 
reputational risks where water stress, exacerbated by competition 
for freshwater, can cause local boycotts and loss of operating 
licences (see the Constellation Brands example on page 14).    
With the livestock sector expanding, water demand from animal 
protein production is likely to rise. Compared to other agricultural 
operations, animal agriculture is particularly water-intensive, with 
98% of water going towards feed production (meat processing also 
consumes water). Due to drought at the beginning of 2019, feed and 
transport expenses increased the half-year production costs for 
Australian Agricultural Company Ltd to AUD36 million from 
AUD11 million. 
Droughts and other water supply issues can increase operating 
costs and capital investment for water and sewer utilities. They also 
have wider social and economic implications on local and regional 
governments, especially when water use restrictions are in place. 
Such measures have significant operational impacts on water and 
sewer utilities, including the implementation of response planning 
and the sourcing of a supplementary water supply. Operating 
expenditures can rise if the utility needs to move to more expensive 
water resources – such as pumping from groundwater rather than

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reservoirs. Prolonged periods of dry weather can increase capital 
investments as well as operating costs. 
Water and sewer utilities with strong management of water and 
wastewater develop detailed, long-term plans to minimise the 
impact of water supply issues. Their strategies on water supply, 
quality and efficiency include investments in repairs and expansions 
of their storage and network infrastructure to meet current and 
projected customer demand. State and federal regulations place 
legal requirements on these capital investments. Regulators put 
targets in place to improve water supply and quality – such as those 
designed to reduce leakage, pollution incidents, sewer flooding and 
customer’s water usage.  
Water quality standards and targets contribute to increased water 
availability for residential, commercial and industrial customers and 
therefore towards local and regional economic activities. They 
impose capital costs, as does regulation on leakage (see Water 
Usage in Operations for more information). Large capital 
investments are spent on water and wastewater treatment systems 
and processes to meet regulatory standards and to assist 
businesses subject to product quality standards, such as 
pharmaceutical entities. These processes also have high running 
costs. 
Water quality standards are important to public health and carry 
regulatory, litigation and reputational risks. Fines and penalties are 
imposed on water and sewer utilities for delivery of unsafe drinking 
water and pollution incidents. Poor water quality can lead to poor 
public perception and customer complaints. The risk of litigation 
also rises.  
In 2014, the city of Flint, Michigan, switched its water supply to the 
Flint River, which was highly corrosive, to reduce costs. Due to 
inadequate water treatment and testing by the local utility and Flint 
officials, residents and businesses received water with high levels of 
lead. This caused ill health amongst the residents and resulted in 
court orders that increased the city’s financial burden through the 
replacement of lead pipes and compensation payments to affected 
residents.   
Water supply issues can substantially increase operating costs and 
capital investments for water and sewer utilities, but they tend to 
have only small effects on revenue due to the stable demand driven 
by the essential nature of water and sewer services. 
An exception is extreme weather events, which can contribute to 
demand variability, although this depends on the utility’s ability to 
adjust current and future rates to cover costs. For example, East 
Bay Municipal Utility District was able to cover the additional costs 
of purchasing, pumping and treating extra water by applying a 
temporary surcharge of 25% on all customer bills. In other 
regulatory frameworks, such as those in the UK, water rates are 
capped and therefore unforeseen costs and reduced revenue 
caused by extreme weather events negatively affect utilities’ 
financial performance. 
 
Distribution of ESG Relevance Scores – Product 
 
 
 
 
 
 
Scale 
1 
2 
3 
4 
5 
 
 
 
 
 
 
ABS - oil vessel - 
backed 
0 
0 
3 
0 
0 
APAC regulated 
network utilities 
6 
0 
0 
0 
0 
ABS - future flow 
receivables 
23 
0 
2 
0 
0 
ABS - timeshare 
loan 
37 
0 
0 
0 
0 
Alcoholic 
beverages 
0 
0 
11 
0 
0 
ABS - sprint 
spectrum 
1 
0 
0 
0 
0 
APAC utilities 
17 
22 
2 
0 
0 
Australian 
regulated network 
utilities 
2 
0 
0 
0 
0 
Diversified 
industrials and 
capital goods 
0 
63 
9 
0 
0 
EMEA regulated 
networks 
38 
0 
9 
5 
2 
EMEA utilities 
3 
48 
8 
0 
0 
GIG - hydro 
0 
0 
0 
0 
0 
GIG - water & 
wastewater 
0 
0 
2 
0 
0 
Latam utilities 
30 
22 
6 
0 
0 
Non-alcoholic 
beverages 
0 
0 
13 
0 
0 
Protein 
0 
0 
10 
0 
0 
US utilities 
70 
75 
6 
0 
0 
USPF-public 
power 
1 
11 
177 
0 
0 
USPF-water and 
sewer 
0 
0 
283 
6 
0 
As of 30 June 2020 
Note: Detailed descriptions of the scores can be found on the first heatmap, 
Distribution of ESG Relevance Scores - Manufacturing Process, on page 8. 
Note: A sector can appear under more than one core issue due to the categorisation 
of the water-related credit issues in the ESG scoring template 
Source: Fitch Ratings 
 
 
 
Capital Investment by Public Utility Leads to 
Sustainable Water Supplies 
After California’s drought in the 1980s, East Bay Municipal 
Utility District developed infrastructure that could deliver 
water supplies through drought periods. Due to its investment 
in a new pumping facility and additional storage capacity, the 
public utility has been able to continually provide a sustainable 
water supply – despite the multi-year drought from 2011. For 
example, it purchased and stored 19 billion gallons of water in 
2015.

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Water Usage in Operations 
Water usage in operations refers to where water is required: to 
manufacture a raw material; for the production of beauty, personal 
care and cleaning products; to operate a service business; or 
required for or used in operations by water utilities, power utilities 
and regulated network utilities. There is some overlap between 
water usage in manufacturing process and water usage in 
operations, especially when water is required to extract raw 
materials such as bauxite, gas or oil or when water is used in the 
production of beauty, personal care or home-care products. 
Issuers that require water to operate their business, including 
service companies such as healthcare providers, restaurants and 
transportation entities, are categorised under water usage in 
operations. This categorisation also includes power utilities and 
regulated network utilities, where water supply is required for or 
used in their operations, or both. Water and sewer utilities features 
under both water usage of product and water usage in operations.  
Relevance to Sector  
Mine disruption rates due to water issues rose in 2019 and are 
projected to increase further. Copper mine disruptions neared 6% 
in 2019, above the long-term average of 4.8%. CRU forecasts 
highlight a sharp increase in disruption rates in the coming years, 
with disruption from the coronavirus pandemic contributing to a 
projection of over 9% in 2020. Much of this has been driven by 
social unrest and strikes before the pandemic, but persistent low 
rainfall has also been a factor in restrictions on abstraction permits 
(see Alcoa Corporation example on page 13). 
Oil and gas entities require water abstraction licences and 
consume, remove and treat large volumes of water, as do mining 
entities. Water scarcity is a big concern, with water generally being 
transported to wells by trucks due to limited infrastructure. 
Significantly more water is required for operations with more 
horizontal wells and hydraulic fracturing than for operations with 
vertical wells. Water quality and pollution is also a relevant water-
related factor for the sector. Other investor concerns are the risk of 
water contamination and earthquakes affecting local communities 
due to hydraulic fracturing processes. 
Water is increasingly important for the consumer products sector. 
Large quantities of water are required in the production and of 
household cleaning and laundry products. Water is a key ingredient 
in beauty and personal care products – for instance, up to 95% of 
shower gels and shampoos contain water.  
While the sector is exposed to water stress within its operations, 
the consumer products entities focus their water-dependency 
considerations on product design to reduce end-user water 
consumption and pollution. 
Unilever NV claims that their “Home Care and Beauty & Personal 
Care divisions account for more than 90% of the water used in 
homes, from washing dishes to washing hair, skin and clothes”. In 
response, consumer product entities have been developing 
products that meet the demand of consumers concerned by their 
water consumption. These products include the use of greywater in 
suitable household products, laundry detergents that work on 
shorter wash cycles and products with fewer harmful, lab-
synthesised chemicals and more natural ingredients.   
The relevance of water issues in the day-to-day operations of 
service companies vary: restaurants require water for cooking, 
cleaning and dishwashing; healthcare providers consume lots of 
water for cleaning and sanitation, for the functioning and 
sterilisation of medical equipment, and for treating their 
wastewater for pharmaceutical residue; and transportation and 
shipping companies are concerned about water pollution.  
Poor water quality and pollution incidents also affect profitability 
and the credit profiles of water and sewer utilities, as discussed in 
Water Usage of Product. Regulators will impose fines for missed 
regulatory targets on water quality and efficiency in operations; 
they sometimes provide financial incentives for meeting or 
exceeding targets. In the worst case scenario, large fines can carry 
reputational risks due to low customer satisfaction, and could lead 
to the loss of operating licences.  
 
Efficiency targets such as those on leakage can increase operating 
costs and capital investment. To reduce leaks, water and sewer 
utilities incur: replacement and repair costs for pipes and other 
network infrastructure, expenses related to disruption to 
surrounding businesses, and sometimes indirect costs for the 
development of more water resources facilities and equipment. To 
avoid fines and improve water efficiency, water utilities are focused 
on projects that ensure a sustainable water supply over the long 
term. Artificial intelligence technologies are being trialled to 
forecast demand, weather, pump performance and pipe leaks. 
 
As is the case with water utilities, customer demand for power 
utilities and regulated network utilities is fairly stable. However, 
weather conditions such as temperature and seasonality can cause 
demand fluctuation. Power utilities and regulated network utilities 
also have to manage extreme weather events, such as flooding and 
storms, which can damage infrastructure and cut off supply. With 
rising variable weather patterns and more frequent extreme 
weather events, revenue volatility and capital expenditure is likely 
to increase if not managed appropriately.  
Fines Contribute to Lower Credit Quality for a Water 
Utility 
Due to inadequate service and poor water-leak management, 
Thames Water Utilities Limited received GBP230 million of 
regulatory performance fines between 2016 and 2020. At end-
2019, the regulator ordered it to return GBP100 million to 
customers for achieving the lowest customer satisfaction 
scores. These fines will probably lead to reduced cash flow and 
increased total expenditure and incentive penalties under the 
2020 price-control period put in place by the UK regulator.  
Public Utility’s Revenue Bonds Improves Availability 
and Treatment Systems 
Water system revenue bonds (5%; due 8 January 2046) issued 
by Aurora (CO) [Water] are designated to improve the water 
supply in times of drought. The proceeds were invested in 
riverbank filtration, a natural pre-treatment process, which 
achieved more efficient utilisation of water supplies and 
increased availability of water by 20%.

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Distribution of ESG Relevance Scores – Operations 
 
 
 
 
 
 
Scale 
1  
2 
3 
4 
5 
 
 
 
 
 
 
ABS - future flow 
receivables 
23 
0 
2 
0 
0 
ABS - oil vessel - 
backed 
0 
0 
3 
0 
0 
ABS - sprint 
spectrum 
1 
0 
0 
0 
0 
ABS - timeshare 
loan 
37 
0 
0 
0 
0 
APAC regulated 
network utilities 
6 
0 
0 
0 
0 
APAC utilities 
17 
22 
2 
0 
0 
Australian 
regulated 
networks utilities 
2 
0 
0 
0 
0 
Consumer 
products 
0 
11 
4 
0 
0 
EMEA regulated 
networks 
38 
0 
9 
5 
2 
EMEA utilities 
3 
48 
8 
0 
0 
GIG - hydro 
0 
0 
0 
0 
0 
GIG - oil & gas 
production 
1 
0 
1 
0 
0 
GIG - solar/wind 
1 
20 
0 
0 
0 
GIG - thermal 
power 
0 
0 
11 
0 
0 
GIG - 
transportation 
0 
11 
0 
0 
0 
GIG - water & 
wastewater 
0 
0 
3 
0 
0 
IPF - GRE 
0 
33 
191 
0 
0 
LATAM utilities 
30 
22 
6 
0 
0 
Mining 
0 
0 
50 
0 
0 
Oil and gas 
production 
0 
0 
86 
0 
0 
Oil field services 
0 
0 
9 
0 
0 
Restaurants 
0 
5 
0 
0 
0 
Shipping 
0 
0 
0 
0 
0 
Steel 
0 
0 
28 
0 
0 
US healthcare 
providers 
0 
6 
0 
0 
0 
US utilities 
70 
75 
6 
0 
0 
USPF - acute 
hospital and 
health systems 
0 
239 
0 
0 
0 
USPF - higher 
education 
0 
0 
118 
0 
0 
USPF - not-for-
profit CCRC 
0 
0 
20 
0 
0 
USPF - public 
power 
1 
11 
177 
0 
0 
USPF - water and 
sewer 
0 
0 
283 
6 
0 
As of 30 June 2020 
Note: Detailed descriptions of the scores can be found on the first heatmap, 
Distribution of ESG Relevance Scores - Manufacturing Process, on page 8. 
Note: A sector can appear under more than one core issue due to the categorisation 
of the water-related credit issues in the ESG scoring template 
Source: Fitch Ratings 
The operations of power utilities are dependent on a regular water 
supply: hydroelectricity generators use water directly and fossil-
fuel plants and nuclear reactors use water indirectly through 
cooling processes. Water shortages from droughts can reduce 
production 
of 
hydroelectricity 
generators. 
Hydroelectricity 
generators will then have reduced revenue – and profitability – if 
energy prices cannot be increased. Water shortages for 
hydroelectricity generators often lead to higher dependence on 
coal generation, particularly in regions such as central Africa. 
Nuclear reactors require more water than non-renewable energy 
sources do for cooling. According to the Nuclear Energy Institute, 
nuclear plants can consume up to 2725 litres of water per megawatt 
hour for cooling compared to the 2270 and 1200 litres required by 
coal and gas plants, respectively.  
An inadequate supply of water for cooling can have large economic 
implications for local, regional and national economies. According 
to a World Resource Institute study, 40% of India’s thermal power 
plants are located in areas facing high water stress and 14 of their 
20 largest thermal utilities had at least one shutdown between 
2013 and 2016 because of water shortages.   
Other Relevant Sectors for Investors 
Hotels and resorts are dependent on water for drinking water, 
cleaning, heating, swimming pools and irrigation. With many 
economies dependent on tourism, water shortages can have a large 
impact on employment and productivity. 
Water Supply in Economic Development 
Water supply in economic development refers to water supply 
being required for national, regional and local economic growth. 
This ESG credit issue is directly relevant to sovereigns, local and 
regional governments, and ultimately to all other issuers. 
Relevance to Sector  
Water supply issues can negatively affect national, regional and 
local economies, the public finances of governments, and 
businesses at all levels. In the case of prolonged or repeating 
drought situations, affected regions can experience economic 
decline – particularly if the area became unusable – and local and 
state, and sometimes federal, government expenditures can 
increase substantially. Long-term water supply issues for countries 
and regions could trigger businesses and residents to move to areas 
with a more abundant water supply, contributing to lower local 
economic development.  
The pressures on water supply arise from demographic growth, 
economic development, rising income levels, and increased 
urbanisation rates and consumption patterns. Many emerging-
market sovereigns are exposed to large increases in water demand 
due to demographic growth and larger potential gains in economic 
development. In particular, countries across the Mediterranean 
basin, central and southern Asia and parts of South America and 
sub-Saharan Africa are vulnerable to a growing demand for water. 
Supply-side factors, such as extreme weather events and rainfall 
variability, contribute to the worsening balance between water 
demand and supply. Infrastructure damage and water pollution also 
have adverse implications for water availability and quality.

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These demand-side and supply-side risk factors can vary in 
relevance. For example, Kuwait is exposed to high water stress and 
drought risk but low flood risk. Water risks also vary at the national 
and local level. According to WRI’s Water Risk Atlas Aqueduct, the 
United States is classified as having low to medium baseline water 
stress levels; however, the State of New Mexico faces extremely 
high levels of water stress due to constrained water supply. 
The composition of local and national economies can also influence 
the relevance of water issues. Water supply is particularly pertinent 
to exporting countries and regions with water-intensive industries. 
Those dependent on agricultural and natural resource exports are 
susceptible to water-related shocks to their public finances.  
To mitigate water supply risks, sovereign and sub-sovereign 
governments plan, develop and manage their water resources and 
develop and enforce governmental and regulatory standards to 
ensure the prosperity of local, regional and national governments 
and economies. 
Water quality standards that contribute to a safe water supply that 
meets the public and business needs and that protects humans and 
the environment is a crucial element of environmental regulation. 
Governments will impose fines, penalties and enforcement orders 
for pollution incidents as a deterrent and to protect the economy 
and business environment. 
 
Distribution of ESG Relevance Scores – Water 
Supply in Economic Development 
 
 
 
 
 
 
Scale 
1  
2 
3 
4 
5 
 
 
 
 
 
 
IPF-LRGs 
0 
0 
176 
1 
0 
Sovereigns 
0 
118 
2 
0 
0 
USPF - state and 
local government 
0 
0 
961 
0 
0 
As of 30 June 2020 
Note: Detailed descriptions of the scores can be found on the first heatmap, 
Distribution of ESG Relevance Scores - Manufacturing Process, on page 8. 
Note: A sector can appear under more than one core issue due to the categorisation 
of the water-related credit issues in the ESG scoring template 
Source: Fitch Ratings 
Effect on Credit 
Water issues can translate in to relevant water-related credit issues 
and potentially materialise in several forms of risks. Water risk is 
most commonly classified into physical risk, regulatory risk and 
reputation risk. This report discusses the six main water-related, 
risk factors detailed in the ESG scoring templates: macroeconomic, 
operational and cash flow, profitability, refinancing, regulatory and 
litigation, and reputational. These six water risks can transpire to 
varying degrees across all four of the core water-related credit 
issues. 
Macroeconomic Risks 
Floods and droughts impede economic development as water 
resources are needed by all businesses and residents and because 
people will not build or live where there is risk of drought or 
repetitive flooding. When water supply is plentiful or scarce, local 
and regional economic activity can be hampered through 
infrastructure damage and water use restrictions to commercial 
and industrial consumers. In severe circumstances, insufficient 
water availability can force power utilities to impose electricity 
rationing or can cause power outages, which reduces the 
productivity of businesses.  
Local, regional and national economies reliant on agricultural and 
natural resource exports are exposed to variable weather patterns 
and water availability. Floods wipe out harvests and can affect 
mining activities. Prolonged droughts reduce crop yields and can 
cause the extractive industry to have lower production. The smaller 
output of the agricultural and mining sectors reduces companies’ 
revenue and subsequently negatively affects local, regional and 
national economic growth.  
Operational and Cash Flow Risk 
Water risks can disrupt the day-to-day running of a business and 
reduce production. They can also increase capital expenditure 
through the requirement for new infrastructure and alternative 
logistics arrangements – such as transporting freshwater in trucks 
– and relocation costs due to stranded assets.  
 
Drought Causes Shock to Sovereign Credit 
Argentina had an unusually long drought in 2017 and 2018, 
which caused a large drop in agricultural production and export 
revenue, exacerbating its existing debt and negatively affecting 
balance of payments. 
Despite some improvements to the political and governance 
environment of Argentina during the earlier years of former 
president Mauricio Macri’s time in office, the economy could 
not absorb another shock and the drought contributed to the 
country’s IMF bailout in 2018, causing a further decline in the 
peso’s exchange rate. 
Storm Adds to Cash Flow Concerns for Water and 
Sewer Utility 
At the end of 2017, Hurricane Maria caused serious damage to 
Puerto Rico’s already-deteriorating water infrastructure. The 
storm highlighted the need to invest in a more resilient water 
and wastewater system to minimise the disruption to water 
supplies from further extreme weather events. 
Puerto Rico Aqueducts and Sewers Authority had insufficient 
net cash receipts and existing funds to meet long-term working 
capital, debt service and other funding requirements. The 
additional spending required in the aftermath of Hurricane 
Maria has exacerbated their weak cash flow position.

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Sustainable Finance 
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Due to water stress, it is increasingly likely that sectoral water 
recycling and desalination requirements – such as the 2020 EU 
Water Recycling Regulation – will appear in many regions. This will 
require very substantial amounts of capex to safeguard supply. 
There are huge differences in quality standards for wastewater 
recycling between countries. For example, Italy mostly requires a 
near-potable standard regardless of applications, which creates 
high compliance costs. The overall cost implication of recycling and 
desalination requirements will differ as technology used for water 
and wastewater management can vary between countries. 
 
Profitability Risk 
Profitability risk refers to the impact the water issues can have on 
the costs of materials and end products. Water scarcity and 
droughts can reduce crop yields and increase the price of 
agricultural ingredients. Mine outage, be it temporary or 
permanent, can have a significant impact on commodity prices, 
particularly where production of commodities is highly localised. 
Water shortages can also cause power rationing and higher water 
prices, especially in countries that rely heavily on hydroelectricity. 
 
Refinancing Risk 
The rising popularity of ESG investing across all regions will reduce 
some issuers’ access to financial markets and therefore their ability 
to raise funds. Investors who believe that water risks may materially 
negatively affect an issuer’s corporate performance, and pose an 
existential threat, may wish to avoid rolling their bonds or may only 
purchase short-dated bonds.    
Regulatory and Litigation Risk 
A weak regulatory environment can lead to an increase in water 
scarcity and stress, whereas a strong government policy and 
regulatory environment may prioritise groups such as residential 
and agriculture consumers and disadvantage industrial and power 
consumers. Issuers monitor potential changes to policy, especially 
those governed by stringent environmental regulations. Water and 
sewer utilities are overseen by regulators, standards and targets 
that have a significant impact on their capital programmes and 
operations and they will scrutinise and plan for new policies and 
regulation as they undertake compliance efforts. 
Governments can be highly reactive to short-term unrest and 
negative media coverage. This can lead to operational disruption if 
issuers fail to anticipate future government action – such as 
reallocation of water rights or increased rates. In Australia, some 
gold miners have had high-security water rights rescinded by 
regulators in response to drought conditions and pressure to 
safeguard domestic supplies.  
Poor Municipality Infrastructure Increases Poultry 
Producer’s Operating Costs 
Astral Foods Limited experienced water shortages at its Goldi 
operation in Standerton, South Africa, in 1H19 due to the local 
municipality 
failing to adequately maintain 
its water 
infrastructure. 
Consequently, production was reduced by 50% of the 
scheduled capacity and the South African poultry producer was 
forced to seek assistance from the government and the courts 
to secure the quantity of water required to run its Standerton 
facility. Simultaneously, a drought in Zambia reduced crop 
yields and consequently increased feed costs for Astral’s 
poultry operations across the continent outside of South Africa. 
Desalination Plant Investment Is Crucial for Extractive 
Entities 
Droughts in central Chile have led to local community unrest 
and threats of regulation on water sourcing. These actions and 
the impact on production – 2019 droughts led to a 28% fall in 
Chilean copper production and a worsening balance of 
payments – has encouraged extractive issuers to spend money 
on desalination plants. 
A joint venture by BHP Billiton plc and Rio Tinto plc to build a 
desalination plant on the west coast of Chile has cost the firms 
USD3.4 billion over the past 10 years. Smaller sites may 
struggle to meet these capital requirements and other factors 
such as mine topography can also affect the viability of 
desalination. 
Droughts Cause Production Loss and Missed Revenue 
Forecasts for Aluminium Producer 
The 2014 drought in Brazil caused hydropower reservoirs to 
dry up, energy prices to rise, blackouts, water rationing in 19 
cities and animosity between states vying for water resources. 
Businesses have had to absorb the effects of higher energy 
prices. 
For instance, Alcoa Corporation was forced to reduce its local 
aluminium production by 147,000 tonnes due to increased 
costs. The company then moved into energy trading to generate 
cash from its hydropower dams and take advantage of the 
higher energy prices. 
However, water shortages in 2018 prevented Alcoa from 
achieving its revenue and earnings forecasts. Profits from its 
hydropower business were affected and restricted aluminium 
production meant the company couldn’t profit from the higher 
aluminium prices.

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Sustainable Finance 
All Sectors 
Global 
 
Beverage companies have made strong efforts to increase their 
product water use efficiency in recent years so as to pre-empt 
anticipated regulatory restrictions. For example, the Indian 
government may introduce targeted taxes on sugary drinks to 
address water supply concerns. Production by global beverage 
companies such as The Coca-Cola Company and PepsiCo, Inc. in 
India have been subject to heightened controversy in recent years 
due to growing pressure on aquifers, the high water intensity of 
sugar cane production, and boycotts by local traders over 
associated water risks. 
Reputational Risk 
Issuers are increasingly concerned by customer perceptions, 
especially as social media offers an open venue for consumers to 
express their views. Entities are spending more time on protecting 
their brand and ensuring their conduct is perceived positively – 
negative publicity can be detrimental to branding and sales, and 
could result in a boycott or legal action. The Vale S.A. case study 
below shows how reputational risks can bring additional regulatory 
and litigation risks. The incident led to multiple legal actions, 
including a judge partially granting an injunction in May 2020, 
forcing Vale to set aside USD1.5 billion for potential fines.   
 
Mining Assets Stranded by Tightening Regulation 
Community engagement and local resistance relating to water 
resources are likely to become increasingly material for 
corporates and investors as competition for resources 
increases. This increases the risk of stranded assets as a result 
of local opposition and related regulatory tightening. 
For example, Canadian miner Barrick Gold Corporation 
invested USD5 billion into its Pascua-Lama open-pit mining 
project that straddled the border between Chile and Argentina. 
The project was under sustained pressure from local 
communities due to the risk it poses to local groundwater 
resources, prompting the Chilean regulator to withdraw its 
water abstraction licence – and forcing Barrick to suspend the 
project and effectively stranding these assets. Fitch expects 
these isolated examples to increase in frequency as water stress 
shifts from a localised issue to an increasingly widespread 
phenomenon in the coming decade. 
Alcoholic Beverage Entity’s Water Permit Rescinded 
due to Local Community Resistance 
Constellation Brands Inc. was subject to a surprise community 
vote in March 2020, where 76% of the voters chose to oppose 
the completion of a USD1.4 billion brewery that was already 
under construction in the Mexican city of Mexicali. Residents in 
the city were concerned that the alcoholic beverage company 
would deplete their water supplies, and that it would consume 
25% of the water reserves and more water than all the 
industrial users in Melcali combined. Despite less than 5% of a 
population of 1 million voting, the result of the plebiscite 
organised by the government caused Constellation Brands to 
lose its water permits and absorb associated capex losses of up 
to USD1 billion. 
Tailings Dam Collapse Sparks Investor Engagement 
and Divestment of Mining Entity 
The collapse of Vale’s tailings dam in the Brazilian region of 
Brumadinho in January 2019 is an example of reputational risks 
intersecting with refinancing risk. Despite the site representing 
just 2% of all iron ore produced by the company, Vale (alongside 
725 other extractive entities) is under pressure from investors 
to respond appropriately and to disclose more information on 
their environmental and social management. 
A group of 100 investors with USD12.5 trillion in assets under 
management formed soon after the disaster to engage with 
Vale and to gather information on global tailings facilities. In 
June 2019, MP Pension (Pensionskassen for Magistre & 
Psykologer) announced that it will divest its equity and 
corporate bond holdings in Vale after discussions failed when 
trying to reach an agreement on issues related to Vale’s mining 
activities in Brazil and to the Moatize mine in Mozambique.

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Part II: Investor Practices and Data Usage  
Investor Practices 
Investors are analysing water issues and factoring water risks in to 
their investment decisions. Investors have traditionally focused on 
water scarcity and availability, but other inter-related water issues, 
such as floods, droughts, water quality and pollution, are becoming 
individual factors in their credit analysis. 
Due to the nature of water issues, they allocate different water 
issues to different sectors across their ESG materiality frameworks. 
The Sustainability Accounting Standards Board (SASB) is an 
organisation that has developed voluntary sustainability standards 
based around materiality. The SASB Materiality Map is aligned with 
the way in which many investors consider risks across different 
sectors. In producing our ESG scoring templates we sought to 
ensure that at the general issue level our broad categories for ESG 
risks were aligned with these approaches.   
The SASB Materiality Map highlights industries where water and 
wastewater management and other ESG issues are a material issue 
– and industries where they are not. In the extractive and minerals 
processing sector, water and wastewater management is material 
for all industries except the “oil and gas – midstream” industry. The 
key performance indicators (KPIs) for sectors and subsectors can 
also differ. The KPIs for the “oil and gas – services” industry cover 
water consumption and recycling whereas the KPIs for the “oil and 
gas – exploration and production” industry cover total freshwater 
withdrawn and consumed as a percentage of high and extremely 
high baseline water stress.  
Integrating into Portfolio and Issuer or Transaction Analysis 
At the portfolio level, leading investors such as the Florida State 
Board of Administration are creating heatmaps to specifically 
analyse their portfolios’ exposures to water risk. Other investors 
are quantifying the water footprints of their investment funds to 
identify issuers to engage with and to ultimately reduce their water 
risk exposure over time. ACTIAM N.V., an asset manager based in 
the Netherlands, calculates portfolio-level water footprints by 
multiplying the water consumption of business activities in areas of 
high water stress by the percentage of company value owned by the 
portfolio.  
However, most investors will analyse water risks at the issuer or 
transaction level, including by conducting a review of issuers’ water 
strategy, initiatives, withdrawal, consumption, treatment and 
recycling. Water and wastewater management is considered a key 
driver of credit strength for beverage companies as water is a key 
ingredient and water shortages can increase the cost of ingredients 
due to its effects on crop yields and prices. Beverage companies that 
collaborate with their suppliers to increase water efficiency in high-
risk areas are considered by investors to have a competitive edge. 
Investors will make qualitative and quantitative assessments of the 
impact of water issues on an issuer’s operations and supply chain. 
Investors make a buy or sell decision based on the probability of 
operating licences being revoked or fines being allocated, or both. 
An example could be a mining company that is exposed to local 
community concerns about water availability and quality. If it is a 
diversified mining company, investors may calculate the probability 
and financial losses from revoked operating licences to form a 
quantitative assessment of the implications to revenues and cash 
flows. 
 
Another quantitative approach is where investors will calculate the 
future water-intensity ratios – total litres of water used for one litre 
of a product – of beverage companies to forecast future operating 
costs. Some investors are factoring in water stress influence over 
raw material costs and manufacturing costs and are therefore 
adjusting the cost of goods sold from textile companies. 
 
Water Opportunities 
Investors are assessing water opportunities to identify relative, 
future financial and investment performance patterns amongst 
peer groups. Water opportunities materialise in two forms: best-in-
class water and wastewater management, and water solutions. 
Best-in-Class Water and Wastewater Management 
This is where issuers are assessed to have strong controls and 
procedures in place to monitor their exposure to water risks. These 
controls and procedures can include boardroom-level authority and 
senior management level responsibility, water metrics and targets, 
operations and supply-chain traceability systems, and codes of 
practice for, and initiatives with, suppliers.  
Investors Conduct Peer Analysis of Beverage Entities  
Sector and peer analysis of water risks are conducted by asset 
managers. Some investors will rank industry groups within 
sectors, which can affect overall security valuations and 
portfolio weighting decisions. 
The peer analysis undertaken by MFS Investment Management 
in 2018 analysed six Chinese entities. They identified one 
beverage entity with poor governance and that had almost 80% 
of its facilities located in areas of high water stress or scarcity. 
The research analysts were concerned that the entity’s water 
supply was unsustainable and that, due to the high water stress, 
local community protests were likely. Due to the inadequate 
initial response from the entity, MFS Investment Management 
maintained their valuation discount and planned further 
engagement to emphasise their concerns regarding the 
management of water issues within the communities in which 
they operate. 
Analysing Debt Ratios Through Water Scenario 
Analysis 
Investors such as Robeco Institutional Asset Management B.V. 
are conducting scenario analyses that quantify corporate 
exposure to water stress. They calculate a net debt/EBITDA 
ratio that includes the impact of the economic value of water – 
also known as a shadow water price – on an issuer’s financial 
performance. 
Their Corporate Bonds Water Credit Risk Tool is a component 
of the credit analysis of issuers in water-intensive sectors.

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Water Solutions 
Water solutions refer to companies that generate revenue from the 
sale of products and services that help the consumer to manage 
water usage, quality and accessibility. These products and services 
can include mechanical equipment (pipes, energy-efficient pumps, 
valves, meters), digital technologies (smart metering, sensors, 
remote controls, weather forecasts, data processing, augmented 
reality and process optimisation) and chemical solutions for water 
treatment. 
 
 
Water Data Sources 
Investors repeatedly express that water risks cannot be measured 
from one dataset. For example, regional and local data on drainage 
basins do not fully capture water shortage and quality risks. This is 
because sites may meet water consumption requirements through 
transporting water from other drainage basins or through the 
installation of highly efficient water recycling facilities. 
Investing in the Green Bond Market and Water 
Revenue Bonds 
In 2019, the proportion of green bonds used to finance water 
projects accounted for 9% of global green bond issuance based 
on data from the Green Bonds Database of Climate Bonds 
Initiative (compared to 32% for energy projects, 20% for 
transport and 30% for buildings). A 2019 survey of 48 European 
fixed-income managers by the same not-for-profit organisation 
suggests that this percentage could rise. The survey revealed 
that 77% of these asset managers would like to invest in bonds 
where the proceeds finance water- and wastewater-
management projects.  
Green bond investing is also increasing in the US. Breckinridge 
Capital Advisors, Inc. purchases green bonds across all 
investment strategies – both traditional and sustainable 
strategies. Their approach to assessing the credit quality of 
green issuances is identical to non-green issuances and 
therefore they consider sustainability, risk and returns of both 
green bonds and their standard equivalent before deciding 
which bond to invest in. 
Due to the lack of standardisation of what qualifies as “green”, 
investors will develop their own framework to identify green 
bonds that have a genuine positive environmental and social 
impact. Sage Advisory Services, Ltd. Co. has developed an ESG 
tax-exempt framework to assess the ESG credentials of 
municipal debt securities. The Green Bond Principles are used 
in the environmental framework to determine the use of 
proceeds and the associated environmental impacts. Each 
security is also assessed on the intensity of impact that the 
funding has on the local community under the social framework 
and five governance metrics: fiscal health, demographic and 
economic makeup of the city or county, pension obligations, 
poverty rates, and median household income.     
Sage Advisory Services applied their framework to the Fitch-
rated water system revenue bonds (5%; due 8 January 2046) 
issued by Aurora (CO) [Water], detailed on page 10. As is the 
case with Breckinridge Capital Advisors, portfolio managers 
and analysts at Sage Advisory Services analyse the fundamental 
financial risk and ESG characteristics of securities and the 
overall portfolio before making an investment decision. They 
gave Aurora (CO) [Water] an environmental framework score 
of 62.5 out of 100 for its green bond, which was largely driven 
by a score of 100 for high environmental impact and a score of 
25 for the absence of an independent third-party evaluation of 
the project.   
Investors Allocating Capital Towards SDG 6 – Clean 
Water and Sanitation 
With sustainable finance and ESG integration now a 
mainstream practice, investors are reviewing their strategies 
and portfolios to understand to what extent they contribute to 
the UN Sustainable Development Goals (SDGs) – the 17 goals 
and 169 targets of the 2030 Agenda for Sustainable 
Development, adopted and signed by 193 countries.   
Investors are developing tools – SDG frameworks and scores – 
to map their existing portfolios to the SDGs. Robeco’s 
proprietary SDG measurement framework creates an SDG 
score based on an assessment of: 1) the negative or positive 
contributions of the entity’s products and services to the SDGs; 
2) the operations and conduct of entities; and 3) the number and 
responses to one-off or structural controversies. Actis LLP and 
Actis GP LLP, a UK investment manager, create Actis Impact 
Scores that incorporates the abovementioned assessments and 
an evaluation of whether the positive outcome would have been 
achieved without their investment, and if there is a risk that the 
intended positive impact might not happen.  
Investors can use their proprietary SDG scoring systems to screen 
out issuers that do not support the achievement of the SDGs and 
their targets – especially portfolio managers who run SDG-aligned 
portfolios. Investors also use their SDG scores and research during 
engagement with issuers to: lobby for and encourage alignment to 
the SDGs; improve SDG impact measurements and reporting; 
mutually agree targets that contribute to the SDGs; and impose 
ESG covenants before investing. 
Some investors will actively reallocate capital to investment 
opportunities that support the SDGs. Federated Hermes, Inc. 
invested in a global leader of water and sanitation solutions due 
to its contribution to the SDG 6 goal of clean water and 
sanitation. Others are at the early stages of incorporating SDGs 
in their portfolio construction decisions and tools, affecting 
strategic asset allocation. Caisse des dépôts et consignations 
uses its SDG scorecards to increase its thematic allocation to 
investments that align or commit to SDG targets. The SDG-
related strategies of Allianz Global Investors rank entities and 
weight the portfolios towards entities with the highest SDG 
rankings. For instance, entities that provide clean water, such as 
water utilities and manufacturers of water filtration systems, 
may receive a greater weight. 
Investors 
remain 
primarily 
concerned 
with 
the 
creditworthiness of entities and the risk/return profile of debt 
securities. They will therefore incorporate one or more of the 
above investment practices within their existing investment 
process to contribute positively to the SDGs.

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Investors therefore typically source multiple data types from 
several providers to create a complete picture of the water risks 
that affect issuers and their portfolios. They use a combination of 
data including: publicly disclosed and third-party, entity and non-
profit, regulatory and controversy (including fines), and entity-, 
regional- and site-level data. 
Publicly Disclosed and Third-Party Data 
Water metrics, targets and risk-management and strategy 
information about entities is sourced by investors to understand 
how companies perform, both over time and in comparison to their 
peers. 
The main metrics are the raw, percentage and normalised (revenue) 
data on water withdrawal, consumption and recycling. Investors 
calculate a company’s water footprint (the direct and indirect use of 
water in goods and services) and monitor the quality of their 
wastewater. They also make a qualitative assessment on the 
issuer’s procedures, controls and strategy for water and 
wastewater management. As there can be gaps in datasets and 
information made public by entities, and because there is no 
standard format for water metrics, investors often resort to 
purchasing third-party ESG data and scores to create proprietary 
sector-specific water scores.  
Entity and Non-Profit Data 
Entity disclosure can provide insights on the water and wastewater 
management of an issuer and how well it performs against its 
targets. However, it does not provide a complete view on the future 
water risks that entities are exposed to. Supply-side water data 
expands on the demand-side data offered through entity disclosure, 
providing a fuller picture of overall risks. Supply-side water data 
covers drainage basin water figures on availability, consumption, 
competition, quality, pollution, variability, floods, and droughts. 
Investors use these resources to generate shadow water prices and 
costs that can be incorporated as water risks into financial forecasts 
and to generate potential scenarios. One approach to shadow 
pricing is to calculate a total economic value to water based on 
water scarcity and population pressures, which subsequently 
affects operating costs and capital expenditure. 
 
Regulation and Controversies Data 
Residential, commercial agricultural, and industrial consumers – 
and countries – are often dependent on a freshwater source. Due to 
its necessity for life, environment and the economy, water is highly 
regulated, brings political risks and can cause conflicts between 
consumers and countries. Investors analyse demand-side and 
supply-side data alongside current and potential regulation. Water 
quality and pollution regulations can lead to large fines for 
companies – particularly those who have polluted large diverse 
areas. 
BP plc’s Deepwater Horizon oil spill led to USD5.5 billion in fines 
under the US Clean Water Act, and PJSC MMC Norilsk Nickel’s 
diesel spill in 1H20 received a record USD2.1 billion fine from the 
Russian regulators. Water shortages can also lead to rationing and 
allocations with agricultural and residential consumers prioritised 
over industrial needs. As well as monitoring new regulation, 
investors will monitor media coverage for any controversies that 
will heighten water risks through reputational damage.  
Entity-, Regional- and Site-Level Data 
Gathering water data at the entity level and segment level 
ascertains how the whole business is performing and whether there 
is entity-wide and board-level commitment to water and 
wastewater management. However, the site-level and supply-chain 
data are crucial for understanding the vulnerability to operations 
and supply chains. It is possible that an entity may source all its 
water from low-water-stress regions and therefore water risks are 
not material. 
However, if a large proportion of an operation or supply chain is 
located in high-water stress regions, water and wastewater 
management and mapping becomes a source of credit strength for 
the issuer, especially those with a high water footprint. Cargill, 
Incorporated have identified priority watersheds at 81 facilities 
that account for more than 80% of their total operational water use. 
These facilities are subject to context-based water targets and are 
part of their water stewardship programme. 
There is very little detail publically available on entities’ sites and 
supply chains, which makes it difficult to develop a complete picture 
of the disruption of water risks to businesses. Tools such as the 
WWF’s Water Risk Filter and WRI’s Aqueduct assist entities with 
mapping out their water risks and with reporting to their capital 
providers. In addition, service providers are using alternative data 
sources to entity disclosures – such as geospatial analysis and 
regional statistics – that develop ESG data and scores that provide 
micro-level detail.  
The amount of information on water risks is constantly increasing. 
However, investors are constrained by incomparable datasets, 
limited site-level data and a lack of information on an issuer’s 
exposure to water risks within their supply chain. As water risk 
becomes more important for investors, there could be an explosion 
of real-time water data on companies, their sites and their supply 
chains – especially with the development of new technology such as 
satellite and drone remote sensing. 
 
 
Sources of Supply-Side Water Data 
The main providers of supply-side water data are the non-profit 
organisations World Resources Institute (WRI) and World 
Wide Fund for Nature (WWF). 
The Aqueduct tool by WRI offers the Aqueduct Water Risk 
Atlas that “ranks water stress, drought risk, and riverine flood 
risk across 189 countries and their sub-national regions, like 
states and provinces”. It provides historical monthly and annual 
data and forecasted data for 2030 and 2040 under three 
scenarios. 
The Water Risk Filter by WWF provides similar functionality, 
offering data at basin level. The Water Risk Filter also provides 
water risk analysis at the entity level.

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Examples of Water Data Sources and Tools 
Data/tool 
Description 
Source examples 
Entity water disclosure 
Publicly available qualitative and quantitative information, 
metrics and targets on an entity's policies, initiatives, 
strategies, risk management, withdrawal, consumption, 
reuse and treatment 
Public disclosure in reports and financial 
filings, e.g. annual reports; sustainability 
reports; TCFD reports; CDP Water; GRI 
303-Water and effluents; for project 
finance – The Equator Principles and IFC 
Performance Standards 
Aggregate and individual water/ESG/SDG scores 
Company profile scores that provide an assessment on the 
current water/ESG/SDG credentials of entities relative to 
their sector peers 
Bloomberg; Vigeo Eiris (Moody's 
Corporation); MSCI; Refinitiv; 
Sustainalytics; Trucost (S&P Global) 
Sentiment-based data and ESG controversies 
Scores that are based on either positive, news flow, 
negative news flow, or number of reported water-related 
controversial incidents such as pollution incidents or fines 
Bloomberg; Factset; RepRisk; Truvalue 
Labs 
Supply-side water data 
Supply-side water data covering drainage basin water 
figures on availability, consumption, competition, quality, 
pollution, variability, floods, droughts, penalties, incidents, 
tariffs, etc 
Natural Capital Finance Alliance’s 
ENCORE; WRI’s Aqueduct; WWF Water 
Risk Filter; 
regional and national water or 
environmental regulators such as UK’s 
Ofwat 
ESG credit scores 
Scores that articulate the level of influence a water-related 
issue has on a credit rating decision. 
Fitch's ESG Relevance Scores 
Materiality frameworks 
Sector-specific or regional frameworks that identify 
relevant water-related risk factor 
Fitch's ESG Dashboards; Fitch's 
Relevance Maps; SASB Materiality Map 
Water-related indices 
Thematic indices based on a water theme. The 
constituents can contain water utilities and manufacturers 
of water and wastewater solutions 
Benchmark providers; ETF providers; 
index providers 
Water footprinting and water risk integration in 
entity and portfolio analysis 
Tools that measure the water consumption of entities and 
portfolios 
CDP Water (Supply Chain); Ceres’ 
Investor Water Toolkit; Natural Capital 
Finance Alliance’s ENCORE; WRI’s 
Aqueduct;  WWF Water Risk Filter 
Pricing and investment data 
Muncipal tariff surveys, water related capital and 
operational spending data 
Global Water Intelligence, DesalData, 
International Water Association 
Valuation tools 
Shadow pricing, probablistic value adjustment, value at 
risk, financial impact disclosure, scenario analysis 
Bloomberg; Columbia Water Center; 
South Pole; Veolia's True Cost of Water 
tools; WRI’s Aqueduct; WWF Water Risk 
Filter 
Source: Fitch Ratings

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