Environmental Valuation & Cost-Benefit News

About This Report
A scarcity of clean, fresh water presents increasing risks to companies in many countries and many economic sectors. These risks are difficult for investors to assess, due both to poor information about the underlying supply conditions and to fragmentary or inadequate reporting by individual companies. As a result, market prices of securities are unlikely to accurately reflect the potential costs of water-related problems.

In this report, JPMorgan Global Environmental, Social, and Governance Research offers investors a framework for evaluating the impact of water scarcity and water pollution on individual sectors and companies. This is the first of a series of reports on transformational issues that they expect to offer investor clients and corporate managements over the course of 2008.

This report draws on the expertise of the World Resources Institute, which has helped us provide an overview of the issues from a global perspective. Then, with both our corporate and investor clients in mind, JPMorgan equity analysts from around the world lay out the water-related risks and opportunities they see facing companies in specific sectors. They provide criteria for examining these issues, which they hope will be of use to companies seeking to improve communication with investors about environmental issues as well as to investors themselves.

Here are the main points:
• Exposure to water scarcity and pollution is not limited to onsite production processes, and may actually be greater in companies’ supply chains than in their own operations.
• The power-generation, mining, semiconductor manufacturing, and food and beverage sectors are particularly exposed to waterrelated risks, in their view.
• In their opinion, corporate disclosure of water-related risks is seriously inadequate and is typically included in environmental statements prepared for public relations purposes rather than in the regulatory filings on which most investors rely.
• JP Morgan Chase recommends that investors assess the reliance of their portfolios on water resources and their vulnerability to problems of water availability and pollution.

Introduction
Water is increasingly scarce due to the confluence of population growth, urbanization, and climate change. Deteriorating water quality exacerbates the supply problems. These factors play out on a local basis, with some regions clearly more affected than others.

Wall Street appears well aware of the investment opportunities in water supply infrastructure, waste water treatment, and demand management technologies. Much less attention has been paid to those sectors that rely on clean water as an input into supply chains or production processes, or have waste water as an output. Water pollution impacts are as important, and diverse, as impacts due to water scarcity.

Importantly, risks differ between sectors and between countries and regions because of climatic conditions, water resources availability, and water use efficiencies. Regionally, areas such Northern California may well encounter more severe water-supply problems as climate reduces the Sierra Nevada snowpack.

Other areas, such as Northern Europe, may see more intense rainfall. Sectorally, while steel production everywhere may come under pressure as water supplies tighten, plants in China, which use four to nine times as much water per ton of steel as plants in the US or Japan, may face additional competitive burdens as a result.

The financial impact of water shortages on sectors and companies is unclear, because information on water use data and impacts is spotty and partial. The authors believe this will change as the consequences of water-supply shortfalls become more apparent.

• Increased publicity surrounding supply shortfalls can lead to increased government intervention, such as the recent restrictions on water use in the Atlanta area and in Australia, altering companies’ cost structures.
• In many situations, the risk of business interruption due to water scarcity appears to be on the rise, making contingency planning more important.
• As water becomes more precious, companies’ real and perceived behavior with respect to water consumption and discharge is also likely to have greater consequences in the marketplace, with an increased risk of consumer backlash against companies judged to be profligate or irresponsible.

The authors anticipate that companies will come under increasing pressure to provide detailed disclosure of water-related risks to investors, including potential changes in supply or treatment costs, regulations, and costs arising from supply chain disruptions.

This report represents an initial effort to outline these risks and to understand how they may affect various companies and industries in the coming years.

A World of Water Scarcity
The world has plenty of water, but 97.5% of it is saltwater. Mankind depends on the remaining 2.5%—of which only a fraction is accessible surface or groundwater — to serve a variety of functions: sustaining life, growing food, supporting various economic processes, and transporting and assimilating waste. Globally, there are increasing pressures on water supply. In many regions demand for water now outstrips renewable supplies. It is likely this gap will widen.

Moreover, water pollution is getting worse in many developing economies, which exacerbates the challenge of delivering sufficient water of the required quality.
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Table of Contents
About This Report ........................................3
Introduction .............................................5
A World of Water Scarcity ................................6
Water Risks in the Value Chain............................9
Sectoral Impacts.........................................12
Assessing Corporate Risks................................16
Water Risks: Six Case Studies............................20
Power Generation: Asia Plans for Water Shortage .........20
Manufacturing: Groundwater Risks in Taiwan...............26
Insurance: Shortage Means Opportunity ...................33
Semiconductors: Water Is Material........................37
Leisure: The Las Vegas Gamble ...........................39
Food Processing: Big Risks, Little Disclosure ...........43

by Marc Levinson, (212) 622-5552, marc.levinson@jpmorgan.com
J.P Morgan Chase www.jpmorgan.com
Economic Research Global Equity Research; Environmental, Social, and Governance Research
April, 2008
http://www.jpmorgan.com/cm/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1158484353549&ssbinary=true&blobheadername1=Content-disposition&blobheadervalue1=attachment;filename=Watching_Water:_A_guide_to_evaluating_corporate_risks_in_a_thirsty_world.pdf