Corporate Water Risk: Investor Tolerance of the Status Quo

Abstract

This paper considers corporate water risk disclosure from the perspective of professional investors. An empirical study, it draws on findings from detailed interviews conducted with Chief Investment Officers and other senior investment professionals at fund management firms in Australia, South Africa, the UK and the USA. It establishes that investors generally regard extant corporate water risk disclosure as unfit for purpose, and explains why investors nonetheless tolerate the status quo. The study draws on a conceptual framework of stakeholder salience, myopia and proximity to describe a 'predictability discount' that exists in terms of investor decision making behavior in the face of actual or perceived water risk. The extent of this discount is shaped by four temporal conditions: the near past; the distant past; the near future; and the distant future. The research also finds that investors assume companies are more cognizant of water risk than their disclosure implies.

Keywords: water risk, stakeholder theory, myopia, proximity, chief investment officer, investor, tolerance