The cost of doing nothing: Testing the benefits of water disposal risk reduction with water management Activism investing in Latin America

Abstract

Objective: This paper answers What would the performance of an investor be if she or he invested only in public companies with proper water management practices in Latin America (LATAM)? Methodology: The research uses the water-to-revenues (WTR) ratio to measure water management quality. It simulates the performance of an investor invested mainly in companies with the best WTR (from January 6th, 2005, to Abril 20, 2022). Results: Comparing the simulated portfolio’s performance against a broad market portfolio, the results suggest that both portfolios have similar performance in the short term. In the long term, the tests found that the WTR has a low systematic (market) risk (beta of 0.26), and its performance is more stable (mean-variance efficient) than the market portfolio. The tests also control the impact of some LATAM currencies’ depreciation. Conclusions: The results could be useful for investors to engage in water management activism through investing, motivate companies to engage in better water management practices, and reduce the future risk that water disposal represents to the world in years to come.