The world’s first benchmark index to price financial water risk to equities has been launched on Bloomberg. According to the collaborators who will develop the Index, financial water risk will affect $145 trillion in global assets under management by 2025.

The LIMEYARD TSC Water Risk Index is designed to better inform asset owners and investment managers of the water risk embedded in equities in their financial portfolios.

As population pressures create competition for water, global groundwater supplies are declining and climate variability is increasing — leading to longer droughts and more intense flood events. All these factors pose risks to investment assets that are hard to ignore and challenging to quantify.

Rather than forcing asset managers to make their own interpretations of operational reports and resource management scenarios, the index translates the key metrics of water risk into financial measures that can be accurately and effectively incorporated into financial models.

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

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

• Understand corporate water dependency and localized water security
• Integrate water dependency and security data with financial accounting metrics
• Correlate temporal water events with short-term Value-at-Risk (VAR) metrics

The Index has been developed by the following organisations:

• LIMEYARD Ltd - a proprietary and non-proprietary benchmark provider, delivering rule-based, compliant traditional and smart-beta investable solutions to institutions on the sell and buy sides.
• Equarius Risk Analytics LLC - a data solutions provider focused on financial risk management in portfolios with assets exposed to water.
• Thomas Schumann Capital LLC – provider of financial products and services to public, private and philanthropic capital to advance a water-secure world.

A statement issued by the collaborators to launch the Water Risk Index said:

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