integrating water risk in corporate bond valuation · corporate bond valuation henrik ohlsen, vfu...
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![Page 1: Integrating Water Risk in Corporate Bond Valuation · Corporate Bond Valuation Henrik Ohlsen, VfU UNEP FI /VfU Roundtable 2015, 29th October 2015 . Project Partners Project Partners](https://reader034.vdocuments.us/reader034/viewer/2022050508/5f99901b1d30c62fa51c8d97/html5/thumbnails/1.jpg)
Integrating Water Risk in Corporate Bond Valuation
Henrik Ohlsen, VfU UNEP FI /VfU Roundtable 2015, 29th October 2015
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Project Partners
Project Partners
Expert Council
(Examples)
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Focus on 3 sectors
that i) are impacted by water stress ii) have many bonds outstanding iii) for which there is good data
à Mining à Utilities (Power plants) à Food and Beverages
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Water Stress vs. Water Prices (I) Copenhagen $ 7.38/m³ (TEV: $3.99)
Mumbai $ 0.22/m³ (TEV: $13.58)
Mexico-City $ 0.95/m³ (TEV: $8.66)
Vancouver $ 2.22/m³ (TEV: $2.01)
Sao Paulo $ 1.28/m³ (TEV: $5.33)
à Gap between shadow price and current cost as measure for risk Our assumption à for companies Water CAPEX or OPEX costs rise towards shadow price or access becomes restricted (physical constraints or loss or water rights)
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Water Stress vs. Water Prices (II)
Financial Impact
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(Shadow Price)
6
Agricultural
values
Domestic
supply values
Human health impacts
Environmental impacts
Population weighting
Total Economic Value (TEV) Function
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Approach
Global data on water stress
(WRI)
Data on location of operations (Bloomberg)
Corporate credit Information
Combine Three Sources of Data
Calculate shadow prices
Combine company data with location-specific
price
adjust credit ratios by adding Water Stress
OPEX Cost
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What the model does
24 companies from three different sectors: à mining, utilities, food and beverage The Basic Model – One Sheet Per Company; Conventional Model • P&L, Cash Flow and Balance Sheet are linked • The model calculates four credit ratios Adding Water Stress Opex Costs; Novel Element • Enter locational information for all companies • Estimate water use at these locations • Enter shadow water price based on Total Economic Value (TEV) framework for
water valuations at all of these locations • Calculate blended shadow water costs for each company • Blended shadow water price x water consumption => ‘additional water opex’ Model Calculates Water-Risk Adjusted Credit Ratios
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Annual Water Use In thousand cubic meters; for 24 companies in three sectors
Glencore used nearly 1 billion m³ of water (Finland: 1.6)
No beverage firm used more than 65 million m³
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Blended Shadow Prices of Water USD per cubic meter
Sempra and Rio Tinto face average shadow prices >8 USD per cubic meter
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Highlighted Results: Mining
Rio Tinto: ratio rises by 200% to 2.96x in 2017
Vedanta: ratio rises to 4 in 2014 à non-investment grade?
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Highlighted Results: Power Sector
Eskom: already high leverage (>9) rises dramatically à Ba1/BBB-Neg rating under threat
Sempra Energy: ratio of 6.7 would be high for a utility à non-investment grade?
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Highlighted Results: Beverages
Femsa: leverage doubles to 2.27x
Beverage firm ratios do not change greatly (geographic diversification and comparatively low water consumption) Exception:
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Thank you!
Download the tool and report at: http://www.naturalcapitaldeclaration.org/ncdtools/