Due to climate change, the next frontier for environmental, social and governance investment could be water.
It’s not easy. Water is a fragmented market, highly regulated by municipalities, agricultural and environmental interests. In the US, land rights and water rights co-exist, unlike other countries such as Australia, where investors can buy them separately.
There are several simple ways to invest. Until two years ago, unlike other commodities like corn, crude oil or gold, there was no futures market for water. The contract barely traded.
There are also few investment incentives. In North America, the cost of extracting, cleaning and delivering water has long been low, said Matt Howard, vice president of water management at The Water Council, a nonprofit that helps companies address water challenges.
“All we’re paying is the embedded energy cost of extracting, moving and cleaning energy. So you have an almost unrealistic expectation that water is relatively cheap and ubiquitous when we need it,” he said.
However, water may finally get the attention it deserves. In addition to climate change — and the consequent drought in some regions and flooding in others — awareness of water quality is increasing; lead-contaminated drinking water in Flint, Michigan is a prime example. The crumbling U.S. water infrastructure could see long-term investment after the passage of an infrastructure bill last year, with $55 billion of the $1.2 trillion earmarked for improving water supplies.
As a result, decades of underinvestment in water-related infrastructure may be coming to an end, says Matthew Diserio, president of water investment firm Water Asset Management. For ESG investors, improving water quality benefits communities, industry, agriculture and the environment—and it’s easy to measure.
“Water as an industry really cuts across a lot of ambiguity around quotes, and ESG investing because around water can identify very clear, positive indicators,” he said.
Tuesday is World Water Day, a UN observation highlights the importance of fresh water, and 50 in 2022th Anniversary of the Clean Water Act, the U.S. federal law governing water pollution.
read: What’s right and wrong in UN climate talks, says a fund manager and a climate risk researcher
How to Invest in Tap Water
Buying a public company is the easiest way to own water. Water companies are generally divided into two market segments: Utilities such as American Water Works AWK,
or industry, such as water technology company Xylem XYL.
Utilities provide drinking water and wastewater treatment. Most are regional, such as York Water.,
Serving Pennsylvania Cities and California Water Authority CWT,
Doing business in California, Washington and New Mexico. American Water Works is the largest public utility company with operations in 46 states.
Industrial companies make pipes, pumps, irrigation equipment, sensors and other technologies. Xylem and Evoqua Water Technologies AQUA
provides water infrastructure and wastewater treatment products, while Advanced Drainage Systems WMS
Production of water infrastructure products.
However, only a few public companies are directly in the water business, said Morningstar research analyst Bobby Blue, who wrote a column on water investments. That hasn’t stopped fund managers from putting more than 60 exchange-traded funds or mutual funds on the market.
The fund has a lot of overlapping holdings. Of the two largest U.S.-focused ETFs with over $1 billion in assets under management, First Trust Water FIW
and Invesco Water Resources PHO,
Eight of the top 10 holdings are identical.
Some holdings are problematic because of water play, Blue said. Many water funds own life sciences group Danaher DHR,
This includes a water-related business unit, but it only accounts for about 10% of the company’s revenue. Another popular name is Roper Technologies ROP,
The company makes smart water meters for utilities, but generates less than half of its revenue from the water business.
read: Can I beat the stock market with ESG investing?How to find the right fund for you
Gavin Maguire, an analyst at Briefing.com, said that while water ETFs are not pure investments, they can still offer individuals a different way to gain access to industrial stocks and provide solid long-term performance. The First Trust Water ETF’s 5- and 10-year annualized growth rates were 15.7% and 14.3%, respectively, while the 5- and 10-year annualized growth rates for the Invesco Water ETF were 15.5% and 11.3%, respectively, outpacing Industrial Select Sector S&P Fund XLI has a 5-year annualized yield of 10.7% and a 10-year annualized yield of 12.3%.
Investors who want Pure Water should stick with individual stocks and tap into the company’s revenue stream through 10-Ks, Blue said. Maguire agreed, pointing to another popular water fund holding company, Essential Utilities WTRG,
Owns a natural gas utility company. Irrigation systems companies such as Lindsay LNN
and Valmont Industries VMI
Also manufactures other equipment not related to water.
What is the future liquidity of water investment?
Ginger Rothrock, senior director at HG Ventures, the corporate venture capital arm of The Heritage Group, said some small startups are starting to tackle the problem of treating industrial wastewater, especially as water costs are likely to increase. There is also the potential for greater monitoring of industrial water use, as sustainability requirements of large companies require more transparency in their supply chains. Another part, she added, is an interest in a circular economy, in which resources are reused rather than discarded.
She pointed out that many small companies that have gone public have been gobbled up by larger companies such as DuPont DD.
In 2019 it acquired desalination company Desalitech, and in 2020 Evoqua acquired Cincinnati-area water services and equipment company Aquapure.
Instead of buying water-related investments, ESG investors may focus on companies’ water goals, as they have done with carbon. But the Water Council’s Howard cautioned investors to be skeptical of companies’ water targets and metrics under the guise of sustainability, as most companies haven’t addressed water issues. Unlike carbon, where a ton of carbon affects only one metric, water is irreplaceable because supplies and demands on aquifers and water systems vary widely.
Read: Today’s widely adopted ESG ratings and net-zero commitments are mostly worthless, say two sustainable investing pioneers
The Water Council is working with companies to define good water management and recently launched an initiative called WAVE, a corporate approach to help companies understand water use and impacts.
“I think there are maybe 10 to 15 companies around the world that really understand water management and really have a handle on how they operate and the goals, objectives and commitments they set for themselves,” he said. In his opinion, the two best companies in this regard are water treatment company Ecolab ECL
and food giant General Mills GIS.
Debbie Carlson is a columnist for MarketWatch.Follow her on Twitter @Debbie Carlson 1.
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