v o r ep u l t m I t a V t Valentin Jouvenot University of ... · D o i n v e s t o r s v a l u e w...
46
D Does Water Management Improve Corporate Value? Valentin Jouvenot University of Geneva Summer School on Sustainable Finance July 2019
Transcript of v o r ep u l t m I t a V t Valentin Jouvenot University of ... · D o i n v e s t o r s v a l u e w...
DDo
es W
ater
M
anag
emen
t Im
pro
ve
Co
rpo
rate
Val
ue?
Vale
ntin
Jou
veno
tU
nive
rsity
of G
enev
a
Sum
mer
Sch
ool o
n Su
stai
nab
le F
inan
ceJu
ly 2
019
Appl
e de
velo
ped
a ne
w a
lloy
that
ena
bles
us
to u
se
100
perc
ent r
ecyc
led
alum
inum
with
out c
ompr
omis
ing
qual
ity.
Envi
ronm
enta
l Re
spon
sibi
lity
Repo
rt
2019
Pro
gres
s Re
port,
cov
erin
g fis
cal y
ear 2
018
Inve
stor
#1
Inve
stor
#2
This
pap
er
11.D
o in
vest
ors
val
ue c
orp
ora
te w
ater
man
agem
ent?
2. …
And
why
?
Bas
ed o
n p
ublic
ly a
vaila
ble
info
rmat
ion
U.S
. Man
ufac
turin
g in
dus
try
from
201
3 to
201
6 –
139
firm
s
MSC
I wat
er m
anag
emen
t sc
ores
Dro
ught
dat
a fr
om N
OA
A
Iden
tific
atio
n St
rate
gy
Iden
tific
atio
n St
rate
gy
Iden
tific
atio
n St
rate
gy
How
to
mea
sure
wat
er
man
agem
ent
Wei
ght
ed
aver
age
…M
inus
0-10
sc
ore
Ind
ustr
y-ad
just
ed
How
to
iden
tify
a d
roug
ht S
urp
rise
Dro
ught
sur
pris
e in
a g
iven
sta
te =
PD
SI a
ctua
l cha
nge
–PD
SI lo
ng-t
erm
ave
rag
e ch
ang
e
Dro
ught
: Pal
mer
Dro
ught
Sev
erity
Ind
ex fr
om (N
CEI
/NO
AA
) (D
ai a
nd Z
hao,
201
7)
Surp
rise
: Act
ual –
Exp
ecte
d = P
DSI
act
ual c
hang
e–
PDSI
long
-ter
m a
vera
ge
chan
ge
Incr
ease
= U
nexp
ecte
d d
roug
ht
Dec
reas
e =
Une
xpec
ted
wet
con
diti
ons
Mat
ch e
ach
stat
e-le
vel d
roug
ht s
urp
rise
with
the
loca
tion
of fi
rm’s
head
qua
rter
s
How
to
iden
tify
a d
roug
ht s
urp
rise
Dro
ught
sur
pris
es w
ith in
tens
ityth
ree=
cha
nge
in t
he P
DSI
is —
at le
ast—
thre
e tim
e hi
ghe
r th
an t
he P
DSI
long
-ter
m a
vera
ge
chan
ge
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Prim
a fa
cie
evid
ence
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Prim
a fa
cie
evid
ence
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Goo
d v
. Bad
~
0.7
2
Prim
a fa
cie
evid
ence
Prim
a fa
cie
evid
ence
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Prim
a fa
cie
evid
ence
is n
ot
enou
gh…
Size
Ind
ustr
y
Prof
itab
ility
Loca
lisat
ion
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
My
solu
tion:
d
iffer
ence
-in-d
iffer
ence
s sp
ecifi
catio
n
Qijsb
t= 𝛼
+𝛽
1 D
rough
t(x) s
t+
𝛽2
Tre
ated
it+
𝛽3 D
rough
t(x) s
t×
Tre
ated
it+
𝛽4
Siz
e it
+𝛾
i+
𝜗jt
+𝜑
s +
𝛿 gt+
𝜀 ijs
bt
Dr
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Qijsb
t= 𝛼
+𝛽
1 D
rough
t(x) s
t+
𝛽2
Tre
ated
it+
𝛽3 D
rough
t(x) s
t×
Tre
ated
it+
𝛽4
Siz
e it
+𝛾
i+
𝜗jt
+𝜑
s +
𝛿 bt+
𝜀 ijs
bt
Goo
d w
ater
m
anag
emen
t fir
ms
My
solu
tion:
d
iffer
ence
-in-d
iffer
ence
s sp
ecifi
catio
n
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
1.52
2.53
3.5
Bad
WM
Good
WM
WM
WM
Dro
ught
Wet
Dro
ught
surp
rise
Firmvalue(Tobin’sq)
Qijsb
t= 𝛼
+𝛽
1 D
rough
t(x) s
t+
𝛽2
Tre
ated
it+
𝛽3 D
rough
t(x) s
t×
Tre
ated
it+
𝛽4
Siz
e it
+𝛾
i+
𝜗jt
+𝜑
s +
𝛿 bt+
𝜀 ijs
bt
Mea
sure
s th
e ch
ang
e in
val
ue b
etw
een
go
od
an
d b
ad f
irm
sw
hen
thei
r he
adq
uart
ers
are
imp
acte
d b
y a
giv
en d
roug
ht s
urp
rise
inte
nsity
𝜷3
My
solu
tion:
d
iffer
ence
-in-d
iffer
ence
s sp
ecifi
catio
n
Qijsb
t= 𝛼
+𝛽
1 D
rough
t(x) s
t+
𝛽2
Tre
ated
it+
𝛽3 D
rough
t(x) s
t×
Tre
ated
it+
𝛽4
Siz
e it
+𝛾
i+
𝜗jt
+𝜑
s +
𝛿 bt+
𝜀 ijs
bt
Fixe
d E
ffect
s
Con
trol
d
irect
ly fo
r si
ze
My
solu
tion:
d
iffer
ence
-in-d
iffer
ence
s sp
ecifi
catio
n
Do
inve
stor
s va
lue
corp
orat
e w
ater
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
Do
inve
stor
s va
lue
corp
orat
e w
ater
m
anag
emen
t?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
1. T
he v
alue
s of
goo
d
and
bad
firm
s ar
e vi
rtua
lly e
qui
vale
nt
Do
inve
stor
s va
lue
corp
orat
e w
ater
m
anag
emen
t?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
≤-4
≤-3
≤-2
≤-1
Avg.
Dis
trib
utio
nof
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
.1≤
2≤3≤
4≤
2. T
he d
iffer
entia
l in
valu
es in
crea
ses
dur
ing
un
exp
ecte
d d
roug
hts
1. T
he v
alue
s of
goo
d
and
bad
firm
s ar
e vi
rtua
lly e
qui
vale
nt
Do
inve
stor
s va
lue
corp
orat
e w
ater
m
anag
emen
t?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
13%
***
Do
inve
stor
s va
lue
corp
orat
e w
ater
m
anag
emen
t?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
~13
%**
*
Bad
firm
s v. n
on-
impa
cted
firm
s:
-5.7
2%
**
*
1111111≤≤≤≤≤≤≤≤22222222≤≤≤≤≤≤≤≤
3333333≤≤≤≤≤≤≤4444444≤≤≤≤≤≤≤≤
Dr
Dr
Dr
Dr
Dr
Dr
Dououoouououou
ghghghghghghghttttttt
rrrrrrrppppppprrrrrrriiiiiii
sssssssseeeeeee
Good
firm
s v. n
on-
impa
cted
firm
s:
5
.81
%*
**
Do
inve
stor
s va
lue
corp
orat
e w
ater
m
anag
emen
t?
Non-
impa
cted
firm
s( B
ench
mar
k)
11.D
o in
vest
ors
val
ue w
ater
man
agem
ent
?In
vest
ors
valu
e co
rpor
ate
wat
er m
anag
emen
t d
urin
g u
nexp
ecte
d d
roug
hts
Cau
sal i
mp
act
of w
ater
man
agem
ent
on fi
rm v
alue
:o
Inve
stor
s p
enal
ize
bad
firm
s as
muc
h as
the
y p
ositi
vely
val
ue g
ood
firm
s (~
6%)
Not
exp
lain
by:
oTi
me-
inva
riant
diff
eren
ces
bet
wee
n fir
ms
(e.g
., g
over
nanc
e)
oTi
me-
inva
riant
diff
eren
ces
acro
ss s
tate
s(e
.g.,
stat
es’ e
cono
mic
at
trac
tivity
, clim
ate,
pol
itics
, etc
)
oD
iffer
ence
s ac
ross
ind
ustr
ies
(e.g
., w
ater
con
sum
ptio
n, s
hock
s to
ene
rgy
mar
kets
)
oO
r an
y tim
e-va
riant
diff
eren
ces
bet
wee
n g
oo
d a
nd b
ad fi
rms
(e.g
., fo
reig
n sa
les,
lab
or p
rod
uctiv
ity, p
rofit
abili
ty,…
)
Summary
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)1. W
ater
man
agem
ent
imp
lies
fixed
cos
tsp
<0.
05
p<
0.1
p<
0.1
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Wt
Dis
trib
utio
nof
Dis
trib
utio
nof
Dro
ught
sur
Dro
ught
sur
Dro
1. W
ater
man
agem
ent
imp
lies
fixed
cos
ts
-4.4
0%**
*
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Wt
Dis
trib
utio
nof
Dis
trib
utio
nof
Dro
ught
sur
Dro
ught
sur
Dro
1. W
ater
man
agem
ent
imp
lies
fixed
cos
ts
-4.4
0%**
*
Bad
firm
s v. n
on-
impa
cted
firm
s:
+1
.56
%*
**
Good
firm
s v. n
on-
impa
cted
firm
s:-0
.23
%*
*
Non-
impa
cted
firm
s( B
ench
mar
k)
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)1. W
ater
man
agem
ent
imp
lies
fixed
cos
ts
2. …
but
allo
ws
firm
s to
offs
et
the
cost
s of
une
xpec
ted
d
roug
hts
-4.4
0%**
*
Why
do
inve
stor
s va
lue
wat
er
man
agem
ent?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)1. W
ater
man
agem
ent
imp
lies
fixed
cos
ts
2. …
but
allo
ws
firm
s to
of
fset
the
cos
ts o
f un
exp
ecte
d d
roug
hts
3. C
osts
=B
enef
its
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
1.B
ecau
se w
ater
man
agem
ent
acts
as
an in
sura
nce
agai
nst
unex
pec
ted
dro
ught
s, it
is a
n at
trac
tive
inve
stm
ent
opp
ortu
nity
fo
r in
vest
ors
Why
do
inve
stor
s va
lue
wat
er m
anag
emen
t ?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
Long
-ter
mSh
ort-
term
1.B
ecau
se w
ater
man
agem
ent
acts
as
an in
sura
nce
agai
nst
unex
pec
ted
dro
ught
s, it
is a
n at
trac
tive
inve
stm
ent
opp
ortu
nity
fo
r in
vest
ors
Why
do
inve
stor
s va
lue
wat
er m
anag
emen
t ?
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.0
6
-0.0
4
-0.0
20
0.02
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinoperatingexpenses(qt+1)
≤-4
≤-3
≤-2
≤-1
Avg.
1≤2≤
3≤4≤
-0.4
-0.20
0.2
0.4
Dro
ught
Wet
Dis
trib
utio
nof
Dro
ught
surp
rise
Dro
ught
surp
rise
Differenceinfirmvalue(Tobin’sq)
1≤2≤
3≤4≤
i≤
-3≤
-2≤
-1
utio
nof
utio
nof
Dro
ught
surp
rD
roug
htsu
rpr
D
Long
-ter
mSh
ort-
term
.1≤
2≤3≤
4≤
surp
rise
≤-3
≤-2
≤-1
D
utio
nof
utio
nof
Dro
ught
surp
rD
roug
htsu
rpr
1.B
ecau
se w
ater
man
agem
ent
acts
as
an in
sura
nce
agai
nst
unex
pec
ted
dro
ught
s, it
is a
n at
trac
tive
inve
stm
ent
opp
ortu
nity
fo
r in
vest
ors
2.In
vest
ors
bel
ieve
tha
t th
e oc
curr
ence
of u
nexp
ecte
d d
roug
hts
will
incr
ease
Why
do
inve
stor
s va
lue
wat
er m
anag
emen
t ?
Ad
diti
onal
resu
ltsD
isen
tang
le t
he d
eman
d
(op
erat
ing
exp
ense
s) a
nd
sup
ply
cha
nnel
(sal
es)
Doe
s w
ater
man
agem
ent
show
s up
in s
tock
pric
es ?
Wha
t is
the
val
ue o
f wat
er
man
agem
ent
for
U.S
. no
n-m
anuf
actu
ring
firm
s?
The
effe
ct o
f wat
er p
rices
Sale
s ar
e no
t im
pac
ted
b
y d
roug
ht s
urp
rises
Wat
er p
rices
incr
ease
fo
llow
ing
a d
roug
ht
surp
rise
(~2%
)
In a
vera
ge,
wat
er
man
agem
ent
doe
s no
t p
rovi
de
ben
efits
any
for
non-
man
ufac
turin
g fi
rms.
In
vest
ors
neg
ativ
ely
valu
e “b
est-
firm
s”
Ave
rag
e B
HA
R of
8%
for
goo
d fi
rms
rela
tive
to
bad
firm
s
Rob
ustn
ess
test
sD
o w
ater
sup
ply
fric
tions
real
ly
exis
t?
To w
hat
exte
nd t
he M
SCI w
ater
m
anag
emen
t is
a g
ood
pro
xy o
f co
rpor
ate
wat
er m
anag
emen
t ?
Any
pre
-per
iod
diff
eren
ces
bet
wee
n g
ood
and
bad
firm
s?
(par
alle
l tre
nd a
ssum
ptio
n)
Surv
ey e
vid
ence
sho
ws
that
the
m
ain
wat
er-r
elat
ed r
isk
fact
or fo
r U
.S fi
rms
is d
roug
ht (
40%
)A
ll re
spon
den
ts im
pac
ted
by
dro
ught
s re
por
t hi
ghe
r op
erat
ing
ex
pen
ses
Cro
ss-v
alid
atio
n of
MSC
I w
ater
man
agem
ent
scor
es u
sing
al
tern
ativ
e d
atas
ets
(Ass
et4
and
C
DP) Goo
d a
nd b
ad fi
rms
are
stat
istic
ally
eq
uiva
lent
bef
ore
dro
ught
sur
pris
es
Con
clus
ion
Sour
ce: E
urop
ean
Uni
on, F
acts
heet
: Fin
anci
ng s
usta
inab
le g
row
th (2
019)
Inve
stor
s va
lue
corp
orat
e w
ater
man
agem
ent
dur
ing
une
xpec
ted
d
roug
hts
oC
ausa
l im
pac
t of
wat
er m
anag
emen
t on
firm
val
ue
Inve
stor
s ra
tiona
lly v
alue
goo
d w
ater
man
agem
ent
bec
ause
it a
llow
s fir
ms
to o
ffset
the
cos
t of
une
xpec
ted
dro
ught
so
Wat
er m
anag
emen
t m
ay b
e vi
ew a
s an
ad
apta
tion
stra
teg
y
The
resu
lts s
ugg
est
that
inve
stor
s le
arn
abou
t th
e ch
ang
es in
cl
imat
es o
ver
time
oIn
vest
ors
adju
st t
he v
alue
of w
ater
man
agem
ent
only
dur
ing
une
xpec
ted
dro
ught
so
They
bel
ieve
une
xpec
ted
dro
ught
s to
be
mor
e fr
eque
nt in
the
futu
re
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