Study finds stock investors price water use into company returns

Water use is showing up in stock prices, according to a new study, and that makes a company’s resource footprint more than an environmental footnote for investors. The finding suggests markets are paying attention not just to how much water a company uses directly, but also to the water embedded in its suppliers and operations.

A team of Dutch researchers analyzed global stock return data for 14,650 companies across 75 countries, according to a paper posted on SSRN by Alves et al. The researchers matched those companies with self-reported water-use data where it was available, then tested how water use related to market returns across industries and among companies in the same industry.

The paper looked at both direct water use and indirect water use. Direct water use means water a company uses in its own production or operations. Indirect water use means water consumed through the supply chain, including inputs such as power generation and cooling.

The researchers also considered water stress, which measures water use compared with available water supply. That distinction matters because using the same amount of water can carry different risk depending on whether a company operates in an area with abundant supply or tight availability.

Heavy water users face a higher premium

The study found that total water use, combining direct and indirect consumption, had the clearer link to stock returns. Companies and industries with higher total water use tended to carry a higher risk premium, according to the researchers.

A risk premium is the extra return investors demand to hold an asset they view as riskier. In this case, Alves et al. estimated that investors require an average annual premium of 2.15% for companies with high water use.

The finding applies across industries and inside them. The researchers found that industries with heavier total water use tend to have higher premiums than lower-use industries. They also found that, within a given industry, companies with greater water use tend to carry a higher premium than peers with lower use.

Utilities lead direct water use, tech’s exposure is less obvious

The study’s industry breakdown showed utilities using the most water directly. Paper and forest products, mining, and chemicals followed, according to Alves et al. Those businesses rely on large volumes of water in production processes.

Service and technology companies were at the low end for direct water use. The paper’s discussion points to a more complicated picture for technology, where indirect water use is growing. Data centers require large amounts of electricity and cooling, and both processes can be water-intensive.

That distinction helps explain why the researchers focused on total water use rather than only the water a company reports using inside its own facilities. For investors, a low direct footprint may not capture the full exposure if the business depends on water-heavy infrastructure or suppliers.

The premium grew after the Paris agreement

Alves et al. found that the water-use risk premium became larger after the Paris Climate Accord was signed. The paper links the change to a period when investors were paying more attention to climate and resource risks.

The dataset covers 2013 through 2024. The study does not answer whether the premium has changed as investor attention to environmental, social and governance issues, known as ESG, has shifted in recent years.

For retail investors, the takeaway is practical: water exposure may be part of how the market prices risk, even for companies that do not look like obvious heavy water users at first glance.

This story draws on original reporting from Klement on Investing.