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Bloomberg LP: The Water Risk Valuation Tool

The Water Risk Valuation tool is unique in its ability to model the potential impact on earnings and share price from water-constrained mining operations. The open-source tool can be used not only by financial and industry analysts but by corporate staff to help identify water risks and opportunities, and act on them appropriately.

To address water risk in the investor community, Bloomberg LP, the Natural Capital Declaration, and the UN Environment Programme Finance Initiative created a quantitative Water Risk Valuation Tool or WRVT for short. This tool demonstrates the feasibility of environmental, social and governance integration in the context of water risk, using familiar financial valuation approaches.

The WRVT provides a standard methodological approach for integrating water risk in financial valuations. Paired with data from the World Resources Institute’s Aqueduct database, the tool allows users to examine how water risk might impact valuations for gold and copper mining companies. It models potential asset stranding based on conditions of future physical water scarcity, and estimates the effects of this water risk factor on earnings and share price.

Utilizing financial and operating data on the Bloomberg Terminal, the WRVT provides three unique outputs to users. One is the water risk exposure of a company’s production on both the overall enterprise-level and the individual mine asset level. Another output is a comparison of discounted cash flow model share prices with — and without — incorporating water risk considerations. The third output is cost analysis allowing incorporation of a so-called “shadow price” of water derived from a Total Economic Value framework, which captures a wider variety of factors such as health and ecological ones that represent the value of water supplies to other users.

The WRVT’s open-source methodology approach allows for a variety of user-types. Users do not need to possess any prior knowledge or data on the issues or companies observed. Other data-driven water risk tools take a close look at capital and operational expenditures, but they are geared for the corporate user and do not roll the risk exposure up to company valuation impacts, Bloomberg LP says. In addition, other tools require users to provide key data elements in order to run them.

The Water Risk Valuation Tool received very positive feedback, Bloomberg LP says. The tool also received invitations to present privately and at numerous forums throughout 2015, including the UNEP FI Annual General Meeting in Paris and the World Forum on Natural Capital in Edinburgh. Since its launch, the tool received increased interest and requests. Its page is one of the highest hit sites on Bloomberg’s Sustainability webpage, the company reported. The WRVT has been integrated into the environmental risk assessment process at major financial institutions. It has the potential to be expanded and adapted to other sectors.