Liquid Assets: Impact Investing in the Water Sector
By Marta Maretich
Water is a hot issue in investing circles these days. Once considered a free natural resource, water is increasingly a focus for finance and speculation; hardly surprising in a world where water stress is a reality, global demand for water is on the increase and investment in water-related infrastructure is urgently needed, according to sector-watchers such as the World Bank-sponsored 2030 Water Resources Group.
There are a number of well-known “tailwinds” pushing this trend. Population growth, uneven distribution of resources, increasing urbanization and new government regulations are some of the factors influencing the rise in demand for water. Pollution, deforestation and climate change are taking a toll on supply, with many dry regions, like California and Australia, experiencing the longest droughts in their history.
Large international development organizations like the UN, the WEC and the WHO have been vocal about the need for more water investment and cross-national cooperation and now key players, like China and the US, are waking up to the urgent need to invest in infrastructure and water security. Collecting water data will be part of this. Earlier this month the US launched a climate data collection initiative to “stimulate innovation and private-sector entrepreneurship in support of national climate-change preparedness.” The results will certainly influence future government spending on water-related issues, and probably increase it. In drought-hit states, like California, the spending has already begun and the trend toward more state investment activity is likely to continue, spurring overall market growth in the water sector.
Doing good and preventing harm
All these factors are coming together to produce what some commentators have called a “blue gold rush“; a sharp rise in interest in water investing among mainstream investors that clearly holds opportunities for impact investors, too. The reasons for this are obvious: Clean, plentiful water is necessary to all forms of life on the planet. Animals, plants, ecosystems and habitats all require adequate water to thrive. Human societies need water, too, for health, agriculture, industry and economic development. Investing in water is clearly a way to create a whole range of positive impacts.
There’s another compelling reason for impact investors to get involved now: Preventing harm. Water sector investment is undergoing a boom and, if the right safeguards aren’t applied, social and environmental concerns could fall by the wayside. Water that serves people has to come from somewhere, for example, and irresponsible extraction or dam building can lead to destruction of habitats and communities. Polluted water; such as agricultural runoff, which is often full of nitrates; can devastate whole ecosystems and destroy species. Competition for water can mean the poor and marginalized are denied fair access. Water grabs, linked to land grabs, are becoming more common in places where resources are scarce. Pricing is an issue in a sector where many analysts agree that consumers have not been paying enough for the water they consume; a situation that is set to change as water becomes more market-oriented.
Addressing the risks of privatization
As business becomes more involved in the supply and management of water, there’s concern about negative consequences of treating water as a commodity. Water hoarding and monopolizing, and the exploitation of water rights, could all be harmful to human communities, to the environment and even to world peace.
There are certainly wrong; as well as bizarre; ways to invest in water. And some business leaders have shown a distinct lack of understanding of the complex issues surrounding water. Yet there are moves in many parts of the business community to manage the risks of privatization. Ceres, a US nonprofit that encourages sustainability, works with businesses to identify and address negative water impacts across their operations. The CPD, a UK charity, works with investors and companies to uncover risk and catalyze corporate water stewardship. It holds the largest collection of self-reported climate change, forestry and water risk data in the world.
Water activist Maude Barlow takes a different tack. Starting from the premise that water is a human right, she recommends limits to its commoditization and calls for businesses and governments to adopt a new “water ethic“:
“Water must never be bought, hoarded, sold or traded as a commodity on the open market,” she writes, “and governments must maintain the water commons for the public good, not private gain. While private businesses have a role in helping find solutions to our water crisis, they shouldn’t be allowed to determine access to this basic public service. The public good trumps the corporate drive to make profits when it comes to water.”
Building robust impact portfolios with water
Whatever one’s stance on the commercialization of water, it’s clear that the water sector is now at a turning point and this means impact investors have a golden opportunity to shape its future. What’s more, water investments may be the ideal basis for building robust, profitable impact portfolios. In the words of Steve Falci, head of strategy development: sustainable investments, for Kleinwort Benson Investors, “Water is probably the biggest win-win of all the sectors in terms of delivering reliable financial returns and positive impact.”
In a recent white paper, Integrating Publicly Traded Water and Agribusiness Equities Into Impact Investor Portfolios, impact advocate Jed Emerson and Falci explore the potential of including water sector investments in impact portfolios. Water, the paper argues, has much to offer impact in financial terms. First, it’s a huge sector that boasts a wide range of investment opportunities in companies that provide the operations, equipment, chemicals, and services that make water available for municipal, industrial, and agricultural markets worldwide. These include:
-Water waste and water utilities: Companies managing infrastructure and delivery of water and or treating wastewater or reuse and safe remediation back into the environment
-Water infrastructure: Companies providing pipes, filters, pumps, seals, valves, water purification and desalination equipment, design engineering and construction services
-Water technology: Companies providing filtration, disinfection, test and measurement products and metering.
Next, not only does the water sector offer a vast array of different companies to invest in, it also offers a complete spectrum of different types of investments to choose from.
Without straying from the water sector, investors can elect to place their money in seed stage businesses, mid-sized growth businesses or large, established corporations. They can combine investments from different asset classes, each carrying a different level of risk and reward, and choose defensive and cyclical holdings to create a solid portfolio that gives reliable returns. For an explanation of how this works, see Matt Sheldon’s article on how he constructs Calvert’s successful Global Water Fund.
Including publicly traded equities
Most importantly, Falci and Emerson stress, impact investors can expand their horizons by including investments in publicly traded companies in their portfolios. As Falci explained, “Impact’s success so far has been in channeling private capital to small businesses that lacked access to other sources of finance. Many impact investors have focused entirely on investing in private markets, but publicly traded equities, chosen carefully, can help strengthen and balance an impact investment portfolio without sacrificing the commitment to positive impacts or small businesses.”
Falci and Emerson aren’t alone in advocating impact’s expansion into publicly traded equities. Others, including Michael Van Patten of Markets With Mission, have made similar suggestions. However using this method with water equities may work particularly well, according to Falci, because few water sector companies engage in activities considered negative or even controversial.
And what about managing negative social or environmental impacts of capitalizing on water? The authors suggest using SRI and ESG screening, both well established in mainstream business, to provide assurance. “Public equity managers increasingly have the tools to assess areas such as companies; carbon footprints, water usage and Base of the Pyramid activities,” they write. Undesirable consequences may be addressed through “engagement with company management; an element of investor strategy that has been a central part of most sustainable/responsible investing approaches for years.”
Whether one agrees with this “total portfolio management” approach or not, what’s interesting is the way it brings together several strands of the larger social and sustainable investing movements. Emerson and Falci are both social investing veterans with track records that predate the “invention” of impact. Their approach calls for the judicious application of various systems for ensuring positive outcomes and avoiding negative ones; including established systems like SRI and ESG and newer ones, like ISIS; to evaluate a variety of impact investments across a diverse impact portfolio. The water sector, with its great size and diversity, as well as its benign reputation, offers the perfect opportunity to experiment with this sophisticated approach to investing for impact.
The issues surrounding water; its use and abuse, its scarcity, its relative availability, its cost to consumers; are set to be high on the global agenda for the foreseeable future. With the situation becoming more critical, governments, international development agencies and businesses are all stepping up efforts to find solutions. This will create a buoyant marketplace for water-related investing in coming years. Impact investing, with its pragmatic approach to profit and its commitment to delivering social and environmental benefit, has a unique opportunity to engage with this market and influence its development for the better.
Read the white paper on water investing by Jed Emerson and Steve Falci
10 Things You Should Know About Water Infographic from Circle of Blue
To find live impact deals in the water sector, logon to Maximpact.
Image Credit: 123rf stock photography