California’s drought poses a resource crisis on a scale that has not been seen in the US for several decades. Experts forecast the drought, now in its third year, will continue at least through 2016, and the lack of rain, combined with a record low water table beneath the Central Valley, may be a “new normal.”

As the most productive agricultural state in the US—one in which agriculture has typically consumed 80% of available water—the prospect of long-term, structural water scarcity could have significant economic impact on companies that operate in or source water-dependent inputs from California, as well as companies that supply California farmers. Unfortunately for investors, there is a dearth of information on water usage at the corporate level, making it nearly impossible to quantify the current or potential impact of drought on companies’ bottom lines.

In the absence of hard data, it seems highly probable to us that public company valuations are not fully reflecting the risks of the situation. The lack of transparency into companies’ water use and the existing water supply system is compounded by the uncertainty surrounding California’s regulatory response.

To begin peeling back the layers of uncertainty, this report approaches the challenge from several angles:

  • Assess current and potential regulatory responses, using Australia as a case study.
  • Identify known likely supply-chain impacts and key players in that chain. We cite specific examples of impact where possible.
  • Correlate corporate disclosure with water usage: We posit that companies with strong corporate governance are more likely to have solid strategic responses planned for different scenarios.
  • Identify the key questions that shareholders should be putting to corporates as part of their due diligence on this issue, as well as the information needed to fill current knowledge gaps.

For more information about this report, please contact Tanya.Khotin@cornerstonecapinc.com or Alice.Petrofsky@cornerstonecapinc.com.

Please see the attached document for important disclosures.

 

John Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Inc.  Prior to Cornerstone, he was the Director of Corporate Governance at TIAA-CREF and the Director of Socially Responsible Investing at the Christian Brothers Investment Services. He is also an Adjunct Assistant Professor at the Columbia University Graduate School of Business.

Sebastian Vanderzeil is a Research Analyst at Cornerstone Capital Group and a Dean’s Scholar at NYU’s Stern School of Business currently completing an MBA. Previously, Sebastian worked as an economic consultant with global technical services group, AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia.