Multi-dimensional and Interacting Water and Climate Risks and Pricing Them in the Industry Context

Extreme weather events can leave a lasting impact on financial markets and our society; however, the probability of their occurrence and the ensuing damage is rarely quantified. In this chapter, we focus on the mining sector as a case study on how a data-driven analysis of extreme events related to water can be applied across industries. We examine the impact of climate variability and change on a decadal time scale across geographies at the individual asset level using daily rainfall data. Our approach identifies the stakeholders most exposed to extreme rainfall events based on both incidence and likely damage. We build on an index we have previously developed for financial exposure of climatic extremes aggregated across company assets using recent data on production stoppages, care, and maintenance costs and permanent impairment for mining companies impacted by the COVID-19 pandemic. We draw inferences around the likely impact to broader financial and commodity markets in simulated scenarios depending on how widespread the ramifications of any such event are likely to be. We highlight the externalities that influence water-related decision-making processes and discuss how companies can incorporate environmental, climate change, legal, social, political, and reputational factors into their existing valuation models.