AAA Spark Meeting of Regions

Impacts of Corporate Water Risk Disclosure on Cost of Capital: A U.S. Perspective

• In Event: Employee Competency and Diversity Impacts of Corporte Water Risk Disclosure on Cost of Capital

Abstract

By 2030, water demand is forecasted to outpace water supply by 56% with the industrial sector causing much of this water stress. Yet many U.S. corporations do not disclose their water risk exposure. The World Economic Forum recently released detailed metrics enabling companies to disclose meaningful information to stakeholders about their water risks. This study predicts that higher levels of water risk exposure lead to higher cost of capital. This hypothesis suggests that investors demand a higher rate of return for the increase in water risk as Capital Market Theory predicts. This study further hypothesizes that assurance of disclosures and strong corporate governance weaken the negative effect of water risk exposure on cost of capital likely by reducing agency costs for the firm. Finally, consistent with Signaling Theory in evaluating management’s choice to disclose, this study posits that firms that voluntarily disclose water risk exposure have lower cost of capital than firms that do not disclose. This suggests that firms that chose to disclose are signaling that they are better firms in that they have sufficient resources to accommodate the cost imposed by the signal. Overall, my study has implications to provide increased incentives for U.S. corporations to voluntarily disclose water risk and mitigation efforts to investors and other stakeholders.

Author

• Melissa A. Nelson, University of Wisconsin at Whitewater