Do Investors Care About Water Scarcity?

Global warming, a growing world population, and inefficient water use have put pressure on water availability across the globe. The United Nations Sustainable Development Goals address the issue of increasing water scarcity, and recent droughts have shown the potential effects on profitability of companies when the well runs dry, but do investors care? The findings of this study suggest that they do, but selectively. In this study, I measure the effect of corporate water scarcity risk exposure on stock returns and find that companies with a higher water scarcity risk exposure generate higher returns than companies with a lower exposure, although the results  depend on the metrics used to determine water scarcity risk. The findings suggest investors require a ‘water scarcity premium’, providing support for the ‘doing good but not well’ hypothesis.