Financial Services Value Chain

 

Motivation

Research Questions

Approach: Integrating Water Risk with VAR

  1. 1.How can business risk from water be translated into financial risk?

  2. 2.What is the role of the financial services industry in water risk management?

  3. 3.How does business water risk inform corporate strategy and investment decisions?

Publications

  1. 1. Larson, Freedman, Passinsky, Grubb and Adriaens. 2012.  Mitigating Corporate Water Risk: Financial Market Tools and Supply Management Strategies.  Water Alternatives 5(3): 582-602.  (pdf)

  2. 2.Adriaens et al. 2012.  Scaling up Payments for Ecosystem Services.  Erb Institute for Global Sustainable Enterprise.  In Press (book).

  3. 3.Rice et al. (2009).  Water Resource Risk and Technology Investment under Uncertainty.  MS Thesis.  University of Michigan.


Water scarcity is one of the defining challenges of the 21st century, and is starting to impose risks to the bottom line of companies. The complexity of water use and the importance of location makes it difficult to assess a company’s overall exposure to water risk and how it is managing those risks.


For any given company, the task of identifying and quantifying the financial impact of potential water risks across several sites and potentially thousands of suppliers is difficult. This task is magnified for portfolio managers, who need to understand the financial materiality of water risks for the companies they hold. 


Market drivers are increasingly influencing corporate water risk disclosures, and investors are looking for data to help interpret corporate sustainability from an environmental risk management and profitability perspective.

  Operational VAR


  1. BulletDefine confidence level at which unexpected losses need to be covered (capital or assets at risk);

  2. BulletIdentify frequency and severity distributions from (environmental) data;

  3. BulletCombine distributions to obtain an aggregate loss distribution;

  4. BulletObtain VAR - percentile of aggregate loss distribution at set confidence level.