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The Water Credit Risk Tool and Corporate Sensitivity to the Shadow Price of Water

In: Water Risk Modeling

Author

Listed:
  • Dieter Gramlich

    (DHBW—Baden-Württemberg Cooperative State University)

  • Henrik Ohlsen

    (VfU—German Association for Environmental Management and Sustainability in Financial Institutions)

Abstract

Due to the rising demand for water and conflicting interests among stakeholders, the price of water will increase in the future. Higher costs and limited availability of water affect the profitability and liquidity of companies. The Water Credit Risk tool developed by the German Society for International Cooperation (GIZ), Natural Capital Declaration (NCD), and German Association for Environmental Management and Sustainability in Financial Institutions (VfU) assesses the shadow price of water (SPW) as the potential future cost of water and models its impact on a company’s income and cash flow. Examining the SPW and its implications for operational and capital expenses provides indications of the companies’ vulnerability to water risk. The effects on financial ratios highlight the need for companies to develop mitigation strategies, and they alert financial investors about opportunities and threats associated with water-related investments. The chapter addresses the SPW-related sensitivity of three selected companies from various industries with respect to changes in their operational structure across time, changes in the SPW between two different points in time, and projections of the SPW into the future. Depending on the company-specific calculation of the SPW and the firms’ business model, the results provide individual sensitivities to water challenges as well as individual potentials to respond.

Suggested Citation

  • Dieter Gramlich & Henrik Ohlsen, 2023. "The Water Credit Risk Tool and Corporate Sensitivity to the Shadow Price of Water," Springer Books, in: Dieter Gramlich & Thomas Walker & Maya Michaeli & Charlotte Esme Frank (ed.), Water Risk Modeling, pages 331-357, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-23811-6_12
    DOI: 10.1007/978-3-031-23811-6_12
    as

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