Corporate Water Risk: Investor Tolerance of the Status Quo

Alex Money

doi:10.5539/jms.v4n1p60

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 behaviour 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 cognisant of water risk than their disclosure implies.

Highlights

Investors appear to care more about water risk in their portfolio companies than at any time in the past
This paper considers corporate water risk disclosure from the perspective of professional investors
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 behaviour in the face of actual or perceived water risk

Summary

Introduction

Investors appear to care more about water risk in their portfolio companies than at any time in the past. The CDP’s publicity literature claims that investors are “requesting companies to disclose business critical water-related information to inform their decision making processes and drive strategic investment” (ibid). While there is a growing body of both academic and practitioner literature on the topic of corporate water risk (for a sample, see Larson et al, 2012; Hepworth, 2012; Sarni, 2011; Barton, 2010) there is almost no publically available information that suggests how investors use corporate water risk disclosure to inform decision making or drive strategic investment. This paper seeks to understand whether investors perceive that a gap exists between quantum of information that even the best-in-class companies disclose on water risk; and the value of this information to investors in evaluating this risk. If there is a perceived gap, why does it exist?

Methods

Findings

Discussion

Conclusion