Water is presenting ever greater risks, along with opportunities, for businesses and for investment portfolios. How might investors tap into this attractive emerging investment theme?
“Water, water, every where, nor any drop to drink.” It’s a line from the Samuel Taylor Coleridge poem The Rime of the Ancient Mariner, a poem that explores the effects of a violation of nature symbolised by the killing of an albatross by a seafarer. The metaphor of investment as a sea voyage is a common way of thinking about our journey as investors and, like Coleridge’s ancient mariner, a modern investor’s actions today will set the course for tomorrow.
Water is everywhere but often not where people need it the most. This presents obvious risks to business, to economies and to markets. By extension, those risks flow through to investment portfolios exposed to business through their equity exposures, and which are navigating an often volatile economic and market seascape. However, water also presents an opportunity for investors to mitigate the risks and capitalise opportunities by investing in initiatives and businesses focused on water quality, accessibility and conservation.
A five-year drought in California, exacerbated by climate change with no sign of letting up, is now officially the worst drought that part of North America has experienced in 1,200 years. Three years ago the residents of Camarillo in Southern California’s agricultural belt, faced wild fire blazing through the mountains surrounding their homes and farms, spreading quickly because of the extremely dry conditions. By Christmas 2015, the fields were full of produce grown with the aid of advanced irrigation technology, but residents still prayed for rain. In January 2016, the prayers were answered and it rained nearly a week, but while those rains did provide some drought relief, they also ushered landslides and flooding that destroyed property and businesses because the soil couldn’t absorb the volume of water falling on the parched earth.
Australia, the “sunburnt country,” is no stranger to “droughts and flooding rains” as another famous poet Dorothea Mackellar noted long ago. But the severity of those drought, bushfire and flooding rain cycles is increasing, and they’re spreading to regions once immune from their more devastating effects.
The World Economic Forum 2016 Global Risks Report identified ‘Water Crisis’ as the risk of greatest concern to business leaders looking at a 10-year horizon. Five of the top 10 risks for the coming decade are linked to water.
Why is water so critical?
Forget oil. It’s water that fuels the entire economy; everything from agriculture, to industry to energy. Nearly 70% of water supply goes to agriculture. Industrial use accounts for a little over 20%, with 10% used up in our homes. Water is closely coupled with energy use. Powering just one 60-watt light bulb for 12 hours a day over one year can require enough water to fill a large tanker truck. Water impacts investments across asset classes, from stocks across sectors, to real assets such as property and infrastructure, as well as fixed income such as corporate and government bonds. It impacts infrastructure, in which an estimated $12 trillion of investment in water will be required over 2013-2030, according to a McKinsey & Co report. Water represents the largest component of global infrastructure spending over that time period - more than roads, railroads, seaports, and power combined. Water technology, focused on meeting the multitude of needs across the water cycle (including filtration, disinfection, metering and testing) is set to give rise to new ventures that will be household brands in the future as they succeed in freeing up supply and addressing demand.
As we said at the outset, it’s a case of water, water every where.
So, what can you do as an investor?
Trustee boards must be educated and unified, sharing an agreed belief on how to manage qualitative risks related to water, climate change and other environmental impacts. We believe it’s sensible to have a framework for addressing water risks. At the portfolio level, you need to identify specific risks/scenarios that threaten attainment of objectives and potentially take action to mitigate. At the strategy level, you need to review or monitor existing managers for exposure to water risk, then use the results to engage managers where necessary/appropriate. For example, you might review real assets exposure to flood risk. You might also allocate to high quality strategies focused on the investment opportunities in water such as:
- Institutional-quality global equity funds focusing either exclusively on water, or on water as one of several environmental themes.
- Regulation and trade of water entitlements (water rights), an area in which Australia is currently a world leader.
- Hedge funds.
- Water bonds (e.g. the $7.5 billion municipal water bond approved in California in November 2014).