Mitigating Corporate Water Risk: Financial Market Tools and Supply Management Strategies

21 Pages Posted: 9 Oct 2012

See all articles by Wendy Larson

Wendy Larson

LimnoTech

Paul Freedman

LimnoTech

Viktor Passinsky

The Stephen M. Ross School of Business at the University of Michigan

Edward Grubb

The Stephen M. Ross School of Business at the University of Michigan

Peter Adriaens

The Stephen M. Ross School of Business at the University of Michigan

Date Written: September 1, 2012

Abstract

A decision framework for business water-risk response is proposed that considers financial instruments and supply management strategies. Based on available and emergent programmes, companies in the agricultural, commodities, and energy sectors may choose to hedge against financial risks by purchasing futures contracts or insurance products. These strategies address financial impacts such as revenue protection due to scarcity and disruption of direct operations or in the supply chain, but they do not directly serve to maintain available supplies to continue production. In contrast, companies can undertake actions in the watershed to enhance supply reliability and/or they can reduce demand to mitigate risk. Intermediate strategies such as purchasing of water rights or water trading involving financial transactions change the allocation of water but do not reduce overall watershed demand or increase water supply. The financial services industry is playing an increasingly important role, by considering how water risks impact decision making on corporate growth and market valuation, corporate creditworthiness, and bond rating. Risk assessment informed by Conditional Value-at-Risk (CVaR) measures is described, and the role of the financial services industry is characterised. A corporate decision framework is discussed in the context of water resources management strategies under complex uncertainties.

Keywords: Water scarcity, opportunity cost, financial services

JEL Classification: G31

Suggested Citation

Larson, Wendy and Freedman, Paul and Passinsky, Viktor and Grubb, Edward and Adriaens, Peter, Mitigating Corporate Water Risk: Financial Market Tools and Supply Management Strategies (September 1, 2012). Ross School of Business Paper No. 1178. Available at SSRN: https://ssrn.com/abstract=2159370 or http://dx.doi.org/10.2139/ssrn.2159370

Wendy Larson (Contact Author)

LimnoTech ( email )

501 Avis Drive
Ann Arbor, MI 48108
United States

Paul Freedman

LimnoTech ( email )

501 Avis Drive
Ann Arbor, MI 48108
United States

Viktor Passinsky

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Edward Grubb

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Peter Adriaens

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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