Cover story – Water
Indeed, the UN puts the annual economic loss related to water insecurity, inadequate supply, poor sanitation and flooding at $470bn (£359.5bn). It warns that such problems could knock 6% off the value of the global economy in the next 30 years. Water is needed to grow food, to generate energy and to keep offices, factories, warehouses and shops open. Indeed, the UN estimates that three in every four jobs globally are, to some extent, dependent on water.
This is an issue that governments cannot solve alone. Private capital is needed to improve the quality of water, stop leakages and increase consumer access to it. The Organisation for Eco- nomic Co-operation and Development estimates that a $22.6trn (£19.1trn) investment will be needed by 2050. It is in investors’ interests to help solve this issue. If companies cannot get access to the water they need, their business could suffer. Misusing the resource could also count against them. “Mis-management of water can have an impact on a compa- ny’s balance sheet and the profit and loss as well as its reputa- tion,” says Edward Geall, a thematic research analyst at New- ton Investment Management.
Ways to play
Demand for freshwater is expected to rise. The UN believes that we will have to share the planet with 9.7 billion other peo- ple by 2050, which is almost 2 billion more citizens than we have now. This will be felt most in major towns and cities as urban populations are projected to reach 6.3 billion in the next 30 years, up from 3.4 billion in 2009. So the infrastructure on how water is stored, transported and delivered will need to be upgraded. Solutions will also have to be found to deal with the resulting rise in wastewater. Tech companies will have to play their part, especially in pre- venting leaking taps and bursting pipes. According to a Con- sumer Council for Water report in 2017, 3.1 billion litres of water was lost on the way to homes and businesses in England and Wales every day due to leakage, so how much must be lost in developing markets? Purifying wastewater, improving distribution, developing products that are more efficient in their use of water, such as meat-free meat, and products that ensure its security are ways investors can gain exposure to the long-term water trend. The amount of private capital raised by companies to fund pro- jects that protect the environment is at an all-time high, if the green bond market is a gauge of institutional appetite. Yet water does not appear to be high on institutional investors’ list of priorities, being the fourth most popular reason to issue such debt.
Less than 10% of the $202.2bn (£154.6bn) green bond market has been used to fund water projects, far behind those for energy, property and transport (see above).
26 | portfolio institutional February 2020 | issue 90
Where’s the risk? RobecoSAM was an early innovator in this area. It launched what it claims was the world’s first pure water fund in 2001.
Use of green bond proceeds – October 2019
3% Waste 1% Industry
9% Water
Energy 33% Other 5%
20% Transport Property 29% Source: Climate Bonds Initiative
“Back then we realised that water is a key issue, not just for the economy but society in general,” says Roland Hengerer, senior analyst, sustainable investing research at RobecoSAM. “There was an opportunity in that as water becomes more important over time companies providing services, technologies and infrastructure for it will have a bright future.” The RobecoSAM Sustainable Water Fund, which is now worth €1.38bn (£1.16bn), was established to back companies that are working to address the resource’s quantity, quality and alloca- tion. It regularly beats its benchmark. In the past year the fund returned almost 32% and has grown 7.35% since inception. “Looking back, launching the fund was a good decision,” Hen- gerer says.
The fund focuses on four areas: utilities, water infrastructure, chemicals, and quality or analytics. This gives it a small uni- verse of stocks to pick from, so management consider compa- nies that make at least 20% of their revenue from water. Agi- lent Technologies, Suez, Veolia and Thermo Fisher Scientific are all on its top 10 holdings list.
The sectors it is most exposed to are industrials (39.2%), healthcare (19.3%), utilities (17.1%) and discretionary consumer (8.6%). Water funds appear to be enjoying a moment in the sun as BNP Paribas Aqua also enjoyed similar success last year. It returned 33% in 2019, a sign perhaps that demand is rising for the services of companies in the water market. Manulife also assesses a company’s water risk before invest- ing. In terms of ascertaining if water can affect a company’s valuation, reputation or revenue, the firm looks at the sources on which it relies. If it is assessing a food and beverage company, for example, is it operating in China? If so, are their plants in areas where there is water stress and competition for water with the agriculture sector. Or, if it is a semi-conductor company, does it have pre-fabrica-
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