Water Insecurity and Climate Risk: Investment Impact of Floods and Droughts

Abstract

Concerns about water security often inform climate risk-related decisions made by environmentally focused investors (Porritt, The world in context: Beyond the business case for sustainable development. HRH The Prince of Wales’ Business and the Environment Programme, Cambridge Programme for Industry, 2001; Stern, Stern Review executive summary. New Economics Foundation, 2006). Yet, potential liabilities for damage caused by extreme flood and drought events linked to global warming present risks that are not always reflected in share prices (Krosinsky et al., Evolutions in sustainable investing: Strategies, funds and thought leadership. John Wiley & Sons, 2012). Considering the highly destructive nature of such events, we query whether companies, or specific sectors, could and should be held at least partially liable for their emission-releasing business activities. Recent articles (Rayer & Millar, Citywire Wealth Manager®, (429), p. 36, 2018a; Rayer et al., Ecological, societal, and technological risks and the financial sector, Palgrave Macmillan, pp. 39–68, 2020) estimate that under a hypothetical climate liability regime, North Atlantic hurricane seasons might increasingly generate 1–2% losses on market capitalizations (or share prices) for the top seven carbon-emitting, publicly listed companies. In this chapter, we extend the concept of the climate liability regime to estimate the impact of global flood- and drought-related damages on the share prices of nine fossil-fuel firms (including the seven mentioned by Rayer et al. [Ecological, societal, and technological risks and the financial sector, Palgrave Macmillan, pp. 39–68, 2020]). Following Rayer et al. (Global warming and extreme weather investment risks (abstract) [Conference session], 2019; Ecological, societal, and technological risks and the financial sector, Palgrave Macmillan, pp. 39–68, 2020), we use incremental climate impacts and historical corporate emissions to estimate that climate change-related global flood and drought damages for the period of 2012 to 2016 amount to approximately 2–3% of the top nine carbon-emitting companies’ market capitalizations. Quantifying impacts from extreme weather events increase salience and serve as an example of how science can identify and address the important business questions, pertinent to both investors and companies that arise from a changing climate.