Homework answers / question archive / The Economist January 9th 2021 Finance & economics 67 From a small o?ce in Montreal an arti-?cial-intelligence business, Aquantix,plays sleuth for faraway investors worried about water risk

The Economist January 9th 2021 Finance & economics 67 From a small o?ce in Montreal an arti-?cial-intelligence business, Aquantix,plays sleuth for faraway investors worried about water risk

Business

Share With

---

The Economist January 9th 2021 Finance & economics 67 From a small o?ce in Montreal an arti-?cial-intelligence business, Aquantix,plays sleuth for faraway investors worried about water risk. Its model combines high-resolution satellite imagery, weather-sta-tion data and regulatory documents scraped from the internet. It estimates not only how much water a business uses at its various sites but its water bill, the chances of drought or ?ooding in surrounding areas and the ?nancial impact such disasters

could have—all without contacting the

company in question.

Firms like Aquantix are proving useful

toinvestorswakinguptowaterrisk.Atcur-

rent rates of consumption, the demand for

water worldwide will be 40% greater than

its supply by 2030, according to the un.

Portfolio managers are realising that phys-

ical, reputational and regulatory water risk

could hurt their investments, particularly

in thirsty industries such as food, mining,

textiles and utilities.

One worry is that shocks to supply

could drown or dry out a company’s assets.

In recent years Coca-Cola has been forced

to close plants in India because of drought.

In2019?oodsinAmerica’sMidwestcaused

disruptions at the facilities of two food

giants, Cargill and Tyson Foods. A survey

bycdp,anon-pro?t?rm,foundthat783big

listedcompanieshadfacedatotalof$40bn

of water-related losses in 2018.

Anotherconcernisthatthepriceacom-

pany pays for water could rocket. The mar-

ket price of water does not re?ect the envi-

ronmental and social costs of using it.

Government subsidies also mean that

companies often do not pay for its true

cost. As aquifers are depleted, though, sub-

sidies could become more costly and un-

popular, forcing governments to retract

them. s&p Global Trucost, a data provider,

reckons that if Fortune 500 companies

paid the true cost of water, based on esti-

mates of scarcity, rather than current

prices, their pro?t margins would shrink

by a tenth. Margins for food, drink and to-

bacco ?rms would fall by three-quarters.

Disclosures of water risk are even

patchier than those of greenhouse-gas

emissions. In part, that is because it is

moredi?culttomeasure.Emittingatonne

of carbon dioxide in the Sahara or in Lon-

don has the same environmental impact.

Using a gallon of water does not. Place-spe-

ci?c data can be commercially sensitive

and di?cult to aggregate. So businesses re-

sort to vague global estimates instead.

Unlike emissions, however, water can

beobserved,andthird-partydataproviders

can have a crack at estimating a company’s

water use. Established names like Bloom-

berg and s&p Global are plugging the gap,

asarestartups.Theresult,saysTobyMessi-

er, co-founder of Aquantix, is that inves-

tors can approach management armed

with data rather than questions. “We are

getting rid of the black box that companies

hide in,” he says.

Investors can turn to a range of new

methods. Some want a simple score to plug

into a model. Ceres, a non-pro?t ?rm,

scores businesses on everything from di-

rect water management to risks in the sup-

ply chain. Those seeking more detail can

use visual tools, such as Bloomberg’s

“maps” function, which plots a company’s

facilities over a heat map based on water

stress. (California is the same colour as

swathes of sub-Saharan Africa; far-eastern

Russia looks a lot like western Europe.)

Firms like Aquantix go further, and try to

predict the ?nancial cost of water risk.

The accuracy of such forecasts is not yet

proven. For Andrew Mason of Aberdeen

Standard Investments, though, they are

still useful. They show companies that in-

vestors care about water risk and encour-

age them to share data. “This is where car-

bon was ten or15 years ago,” he says. 7

Whizzy methods help investors spot water risk

Divining water risk

An expanding pool

Navigating risky waters

Like many Chinese companies on the

stockmarket, Gangtai Holding, a jewel-

lery-to-property conglomerate, ?aunts its

listing. It displays its ticker number,

600687, prominently on its website and in

itsads.Butnotformuchlonger.OnJanuary

7th Gangtai began a 30-day period almost

certain to end with its ejection from the

Shanghai Stock Exchange. It is one of a

growing number of Chinese companies to

face delisting at home.

In recent months all the delisting talk

has been about the removal—or not—of

Chinese companies from American ex-

changes (see Business section). Within

China, though, a potentially more impor-

tant kind of delisting is on the agenda: reg-

ulators have made it easier to strip lousy

?rmsoftheirlistingstatus.Itisthelatestin

an array of reforms aimed at modernising

the stockmarket, long seen more as a casi-

no than an e?cient allocator of capital.

Delistings are a staple of healthy stock

exchanges, a mechanism for clearing out

the dross. In America a few dozen compa-

nies are typically forced o? its exchanges

everyyear,oftenbecauseoflowmarketval-

ues. In the early 2000s, after the dotcom

bust, annual delistings climbed to nearly

400.China,bycontrast,hasaveragedseven

delistings a year over the past decade, de-

spite having more than 4,000 listed com-

panies, nearly as many as America.

SHANGHAI

China wants to clear the dross from its

stock exchanges

China’s stockmarket

Bring out your

dead