Investigating the impact of water risk on the creditworthiness and financial performance of companies in the food and beverage industry

Abstract

The purpose of this paper is to examine the effect of water risk on the financial metrics of companies in the global food and beverage industry. While prior research focused on overall climate risks or carbon emissions, this study aims to fil the gap and shift the attention to water risk, an often ignored but financially material factor. The main question addressed is ‘How does water risk affect a firm’s financial performance and creditworthiness?’, which then evolves to ‘How has the Paris Agreement affected this relationship?’. To answer these, a panel dataset of the current 50 leading multinational food and beverage companies, over a 20-year period (2004-2023) was constructed and analyzed using firm- and time-fixed effects regression models. The findings suggest that prior to the Paris Agreement, higher water intensity was associated with stronger cash flows and credit scores, implying that markets had not yet priced in the environmental costs. Contrastingly, after the Paris Agreement, firms with high water intensity were penalized by the market as they experienced stock price declines, indicating a shift in investor preferences and the growing financial materiality of water risk. Additionally, companies with water efficiency policies saw improved valuation, though sometimes faced greater scrutiny post-Paris Agreement. These findings highlight the fact that water risk is a possible emerging financial indicator, especially under the evolving global climate policy.