WATER-RELATED RISKSAND CHALLENGESA QUANTITATIVE RESEARCH PERSPECTIVEEXECUTIVE SUMMARYMarch 2022
Aymen Karoui, Ph.D.
Director,
Methodology & Product Architecture

Liam Zerter, CFA
Quantitative Research Manager,
Methodology & Product ArchitectureBuilding a Case for Water Metric Reporting• The past two decades have seen a surge in interest in environmental issues, mainly climate change, global warming, andfossil fuels. Yet, another equally important dimension — water scarcity — has thus far remained largely unexamined and isnot given adequate importance in the economic development agendas of many countries.
• Water scarcity is a prominent concern for billions of people worldwide and has a significant impact at the firm and country
levels. Water scarcity is also an important type of physical water risk that portfolio managers and investors should
consider when building investment strategies.
• To address this gap, Sustainalytics suggests reviewing water reporting metrics on companies and countries. These
metrics offer a useful monitoring tool for firm executives, policymakers, governments, institutional and retail investors.

Water – An Increasing Operational Risk
Exhibit 1: Forecasted Absolute Change in Water Stress – 2002 to 2030
Decreasing
Stress-0.1

AbsoluteChange0.2
Powered by Bing
© Australian Bureau of Statistics, GeoNames, Microsoft, TomTomIncreasing
Stress

*2002 to 2017 and water withdrawals based on Aquastat data, with forward demand forecasts based on IFPRI Agriculture growth, IMF country GDP forecasts, ourworldindata.org Population Growth.i
Source: Aquastat, IFPRI, IMF, ourworldindata.org• Along with flooding and water quality, water scarcity is one of the main water-related challenges of the 21st century.
For most of the world’s population, Water Stress has risen considerably over the period 2002-2017 and is projected tocontinue to rise.
• Worldwide, from 2002 to 2017, water stress increased by 13%. Over the same period, Water Withdrawals increased by
4.9%, with the agricultural and municipal sectors increasing, respectively, by 15% and 13%. This surge in demand further
aggravates the uncertainty of water availability. By 2030, about 16 countries are expected to be withdrawing unsustainably
from non-replenishable aquifers and surface-level water sources at a national level.
• Exhibit 1 depicts forecasts by country of the change in water stress, showing that water stress has continued to worsenworldwide, especially in developing countries. However, these forecasts may understate the future levels of water stressas they do not consider the additional effects of climate change on renewable water supply.

Sustainalytics Water Metrics• Water metrics are a valuable tool for managers and policymakers to monitor the water-related risks that companies andindustries face. Sustainalytics’ water metrics, i.e., Water Withdrawal, Water Consumption, and Water Intensity, are tools
to gauge the risks related to companies’ water use. Within the ESG Risk Rating product, management indicators including
Water Risk Management, Water Management Programmes, Water Intensity, Water Intensity Trend, and Fresh Water
Intensity for Generators, directly assess companies’ management and preparedness in handling water-related risks.
• We expect the number of reporting companies to grow in the future due to increased awareness and the adoption of ESG
reporting frameworks. By reporting on water metrics, companies demonstrate more transparent practices in their water
management and reduce information asymmetry.

Water Metrics, Material ESG Issues (MEIs), and ESG Risk Rating• For each company, only a set of issues that are deemed Material ESG Issues (MEIs) are included in the computation.
These issues have the potential to cause a significant impact on the company. Each of these MEIs is itself made of a setof indicators and metrics that captures various dimensions. For example, the MEI “Resources” comprises the following
indicators and metrics: Water Intensity, Water Risk Management, Water Intensity Trend, etc. This set of indicators andmetrics is also specific to each company and subindustry.
• Naturally, all these metrics and indicators directly contribute to their respective MEI and ultimately to the ESG Risk Score.
This latter contribution depends on the relative importance of the indicator and MEI for the company or subindustry.
• Empirically, we computed the correlation between the Risk Score of the MEI Resource and Water Intensity Weighted Scoreand found it positive and equal to 27.7%. Next, the correlation between the Risk Score of the MEI Resource and the ESG
Risk Score is also strong and positive, 36.4%. Hence, the water-related metrics are an important determinant of the MEI
Resources which itself seems to have both significant direct and indirect impacts on the ESG Risk Score.

Putting the Metrics into Practice: Water Use by Sector• Water-related risks have material financial impacts. High water consumption is costly and can cause economic harm tosociety and environment. Companies with high water consumption and water intensity have potentially high exposure towater risk.

5010—0■ Average Water Intensity■ Average Water Consumption

INTE FORCH M
NO AT
LO ION
GY

Average Water Consumption m3 (in millions)

20

UT
ILI
TI
ES

100

M
ATERIALS30IN
DU
STRIALS150

TELSE ECO
RV M
IC M.
ES

40HE
AL
THCARE

200EN
ER
GY

50CON
ST SU
AP ME
LE R
S

250

REAL
ES
TA
TE

60

DI C
SC O
RE NS
TI UM
ON E
ER R
Y

300

FIN
ANCI
AL
S

Average Water Intensity m3 / million $ (in thousands)

Exhibit 2: Water Use by Sector• In Exhibit 2 (prior page), water intensity and water consumption (in total cubic meters) of sectors are presented. Utilities
takes a clear first place for water intensity as water is necessary for many electricity-generating activities, with theMaterials and Industrials sectors in second and third, respectively. For water consumption, the Materials sector is the
top consumer, driven by high water demanding steel producers and mining companies, with Utilities in second andEnergy in third, respectively.

Water Intensity and Firm Characteristics
Exhibit 3: Correlations Between Firm Water Intensity and Firm Characteristic■ Correlations with Water Intensity
100%

Intensity

27%

ESG Risk Rating Score

10%Return
Alpha

1%

Standard Deviation

2%Downside Deviation

5%-16%

Market Cap. (mil)-10%

Revenue (mil)-2002040
Source: Morningstar, Sustainalytics

6080100• Using a global sample of 4,914 firms for the year 2020, our analysis shows that firms with high water intensity display
high ESG risk, high return, high standard deviation of returns, and high downside deviation of returns (see Exhibit 3).
Water intensity, however, weakly relates to risk-adjusted return.

Water Stress, Water Use Efficiency, and Country Characteristics
Exhibit 4 Correlations Between Water Metrics and Country Characteristics■ Correlations with Water Stress■ Correlations with Water Use Efficiency
100%Water Stress-21%-21%

Water Use Efficiency

100%
1%

Total Area of the Country

-25%
26%

Total Population

-23%
60%

% of Cultivated Land Irrigated

-31%
50%

Total Water Withdrawal per Capita

-36%
18%

GDP per Capita

68%
23%

Human Development Index (HDI)

60%

-40

-20

020
Source: Aquastat

406080100• Our country-level analysis reveals that water stress is inversely related to water use efficiency and is higher in countrieswith large populations, a high percentage of irrigated cultivated land, high water withdrawal per capita, and highdevelopment indicators (see Exhibit 4). Water efficiency is high in countries with small populations, a low Percentage
of Cultivated Land Irrigated, low Total Water Withdrawal per Capita, and high development indicators.

Top 5 Countries by Water Stress• Exhibit 5 reports the top 5 countries as sorted on their water stress. Unsurprisingly, all of these countries are located in thearid region of the Middle East. Fortunately, these countries have a high GDP per capita and a high HDI.

Exhibit 5: Top 5 Countries Sorted by Water Stress
WaterStress(%)

Water Use
Efficiency(US$/m3)

Total Area
(1000 ha)TotalPopulation(000’s)% ofCultivatedLand
Irrigated

Total Water
Withdrawal
per Capita(m3/year)

GDP perCapita(US$/inhab)

HumanDevelopment
Index
(HDI)

Kuwait

3,851%

102.4

1,780

4,056

100%

308

28,8970.8

United Arab Emirates

1,708%

92.8

7,102

9,487

67%

421

40,1800.9

Saudi Arabia

833%

28.3

214,969

33,101

26%

705

20,905

0.9

Libya

817%

3.8175,954

6,581

20%

886

3,941

0.7

Qatar

432%

191.6

1,149

2,725

66%

335

63,2490.8

Source: Aquastat

Top 5 Countries by Water Use Efficiency• Exhibit 6 reports the top 5 countries as sorted on their water use efficiency. All of these countries are located in Europe,and all have a high GDP per capita.

Exhibit 6: Top 5 Countries Sorted by Water Use Efficiency
Water
Stress(%)

Water Use
Efficiency(US$/m3)

Total Area
(1000 ha)TotalPopulation(000’s)% ofCultivatedLand
Irrigated

Total Water
Withdrawalper Capita(m3/year)

GDP per
Capita(US$/inhab)

Human
Development
Index(HDI)

Luxembourg

4%

1,221

259

592

0%

77

110,003

0.9

Switzerland

7%

391

4,129

8,456

9%

205

80,221

0.9

Denmark

20%

369

4,093

5,732

10%

129

57,4540.9

Ireland

4%

350

7,028

4,753

0%

181

70,4930.9

United Kingdom

14%

320

24,361

66,7272%

12640,2870.9

Source: Aquastat

Conclusions The Emergence of Water Risk: from Marginal to Systemic• Our study sheds light on the importance of water scarcity for firms and countries. It also shows that water stress is on therise in many regions of the world and is expected to become a critical issue. To address these challenges and better
monitor water-related risks, Sustainalytics has introduced several water metrics.
• We further found that water intensity is related to several firm characteristics and is positively related to ESG risk rating.
There is also high heterogeneity in water use across sectors. At the country level, we find that water stress and water use
efficiency are related to several country characteristics. In sum, we show that water stress has implications beyond theimmediate use of water as water stress affects all the aspects of the economy and well-being of society.

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i2030 Water Resources Group (2009); “Charting Our Water Future”; 2030 Water Resources Group ; accessed (04.05.2021) at: https://www.2030wrg.org/
wp-content/uploads/2012/06/Charting_Our_Water_Future_Final.pdf[© FAO] (2021); AQUASTAT Database; accessed (28.04.2021 18:25) at: http://www.fao.org/aquastat/statistics/query/index.html?lang=en
Our World in Data (2021); The Population Growth Rate by Country Database; accessed (28.04.2021) at: https://ourworldindata.org/future-populationgrowthInternational Food Policy Research Institute (2019); Source: IFPRI, IMPACT Model version 3.3, Latest update as of January 2019; accessed (28.04.2021) at:
https://www.ifpri.org/publication/impact-projections-food-production-consumption-and-hunger-2050-and-without-climate-0
International Monetary Fund (2021); Real GDP Growth; Database; accessed (28.04.2021) at: https://www.imf.org/external/datamapper/NGDP_RPCH@
WEO/OEMDC/ADVEC/WEOWORLD

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