Water Risk Valuation Tool
This tool incorporates water risk in equity valuation process in the mining sector
Water availability is increasingly recognised as a material risk for many businesses. Water shortages have already shown to significantly impact the performance of companies operating in water-stressed regions. With competition for water expected to increase as a result of population growth, demographic trends and climate change, investors are increasingly seeking a better understanding of the strategic, operating and financial implications of water risk in their portfolios.
A Water Risk Valuation Tool released by Bloomberg LP and the Natural Capital Declaration enables analysts to incorporate water risks into company valuations across copper and gold mining companies. The new excel-based tool is fully available for Bloomberg Professional service subscribers using Bloomberg API data, but both the tool framework and white paper can be requested and accessed by the general public here.
The methodology developed combines operational data with science-based scarcity projections and allows users to customize inputs within a discounted cash flow valuation model. The customizable tool provides a quantitative approach to evaluate how water risk factors can be incorporated into company valuations using a DCF model. The adjustable water stranding scenario setup directly links water risk to revenue, while an optional social cost of water (“total economic value” or shadow price) can be accounted for in operating expenses.
The tool builds on Bloomberg’s Carbon Risk Valuation Tool and maps specific mine asset locations and production volumes against water stress indicators provided by the World Resources Institutes (WRI) Aqueduct water database.
The Water Risk Valuation Tool (WRVT) was developed through a joint initiative between Bloomberg LP and the Natural Capital Declaration (co-convened by the Global Canopy Programme and the UNEP Finance Initiative), with support from Bloomberg Philanthropies and the GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit).
An open-source version will be made accessible on the Natural Capital Declaration website, where users without access to the Bloomberg terminal can either enter in operational and financial data manually, or test the tool’s functionality and methodology using pre-populated example data.