Abstract
We find evidence that water stress of physical assets is an additional component of risk for investors. The World Resources Institute (WRI) found that 1 in 5 people are living in areas at high risk of water scarcity. Recently, the WRI Aqueduct 3.0 model provided new data and insights for measuring water stress globally. We leverage this framework to understand the connection between water risk exposure and financial risk using the global Real Estate Investment Trust (REIT) sector as a case study. We first develop a definition of water stress that incorporates changes in water supply and water demand. Next, we geolocate over 84,000 REIT properties and map them to over 590 publicly listed REITs. Finally, we study the impacts of water stress exposure on REIT financial measures. We find evidence that water stress is connected with market risk and financials of REITs. Using WRI water stress projections for 2030, we find that REITs will experience a substantial increase in exposure to water stress.
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