Investors Tap Widening Pool of Solutions to Water Crisis
Asset managers make the case for long-term investing in the mitigation of water-related risks globally.
Given the wide array of risks arising from water stress and pollution, investing in water-focused climate solutions and engaging with portfolio companies to address negative impacts are a long-term priority by sustainability-focused asset managers.
Roughly half of the world’s population currently experiences severe water scarcity for at least part of the year, with water shortages linked to 10% of the increase in migration worldwide. By 2025, two-thirds of the world’s population will be subject to water stress – with economic and population growth, as well as the negative impacts of climate change, putting extreme pressure on groundwater and renewable surface water resources.
Research suggests that water security will become one of the biggest global investment themes over the next ten years, with capital employed in addressing the issue reaching US$12.6 trillion by 2034.
“The theme’s perpetual nature means investors are increasingly moving towards water as a long-term investment opportunity,” said Saurabh Sharma, Fund Manager of the Sustainable Water and Waste strategy at Regnan, a boutique sustainable investment manager. “The theme offers steady returns and has lower sensitivity to economic growth than other infrastructure investments.”
Exposure to commodity prices is negligible, Sharma added. And unlike the renewable energy sector, there is less dependence on subsidies or government support, which means political and regulatory influence is limited.
“The water crisis is a global phenomenon and a key risk that asset owners need to fully understand when investing,” said Praveg Patil, Head of Asia, Impact and Private Equity at M&G Investments.
Opportunity from adversity
Institutional investors have a variety of options to address water-related risks, starting for most with the technology and service providers along the water supply value chain. This is a diverse pool, ranging from startups to established providers to highly regulated utilities.
“The opportunity lies in the worsening water problems, driven by climate change, infrastructure degradation, and changing global consumer needs,” said Matt Sheldon, Senior Portfolio Manager at KBI Global Investors. “Climate change is most manifested in a more active water cycle, so there is a significant amount of investment globally to build resiliency into water systems and industrial facilities to handle more frequent and higher severity storm events or droughts.”
The holdings of Regnan’s Sustainable Water and Waste also reflect this increasing volatility and uncertainty, Sharma noted. These include solutions which ensure more efficient and accessible water resources during drought years, as well as drainage systems for periods of extreme rain and flooding.
“The water value chain comprises pump and valve manufacturers, water treatment companies, water storage providers, network operators, metering and billing companies and wastewater treatment firms,” added Bertrand Lecourt, Senior Fund Manager of the Regnan strategy.
It’s critical that investors take a long-term view on investments in water-related solutions – at least five to ten years, according to M&G’s Patil.
“[This will] allow for the unlocking of higher efficiencies, improvements in processes and technology, and development and maintenance of core infrastructure which will underpin the quality of [water] supply,” Patil said.
Earlier this week, investors and other stakeholders gathered in Stockholm for the annual World Water Week – during which channelling investment into water solutions was a major theme. One new initiative unveiled was the Africa Urban Sanitation Investment Initiative. It will function as a new financing window for urban sanitation across the continent, mobilising and deploying finance, preparing bankable and investment-ready projects, and implementing innovative and inclusive approaches.
A clear view
Beyond the firms involved in water supply, investors are increasingly scrutinising and engaging with a wider range of portfolio firms on their exposures to water-related risks, often in the context of climate impacts.
The Regnan waste and water-focused fund’s priorities have included addressing chronic and acute physical impacts of climate change on water security.
“Risks [are] emerging from changes to rainfall patterns, flooding and droughts induced by climate change,” said Lecourt.
He said portfolio companies are expected to undertake thorough physical risk analysis, including the use of quality data sources, due consideration of interdependencies, and plausible, challenging climate scenarios. Companies should then be able to demonstrate enhanced risk mitigation as a result of this analysis, providing evidence of active monitoring and assessment within core risk management processes.
Meanwhile, Nordea Asset Management asks portfolio companies to take an active approach towards managing water risk and resources to protect themselves from operational, legal and reputational risk, as well as to safeguard their social licence to operate.
“Priorities may range from pollution prevention measures to policies detailing their approach in water-stressed areas, as well as showcasing trajectories which point to reduced consumption or saving measures,” Eric Pedersen, Head of Responsible Investments at Nordea, told ESG Investor.
These priorities often vary according to sector and geography.
In the chemicals sector, for example, Nordea has focused on the production and usage of PFAS chemicals and the risks this poses to water resources.
Nordea is in the final stages of completing an entity-wide assessment of investee company impacts and dependencies on water via the ENCORE tool, Pedersen said. “[It] will contribute to comprehensive information on water-related risks across our portfolios,” he added.
Closer to home
Despite water scarcity being a global problem, local impacts vary widely, meaning investors must look to understand each country’s unique situation to inform their decision-making.
“The cost of access to clean water is a lot higher for poorer countries and emerging markets with less developed infrastructure than the rich world,” M&G’s Patil said. “Over time, this lack of access risks giving rise to deeper and broader issues, including socioeconomic rifts and geopolitical conflicts.”
Nordea has undergone a longstanding engagement with the pharmaceutical industry in India, which has been running since 2015. In addition, it initiated an engagement in 2018 with Indian beverage manufacturer, bottler and distributor Varun Beverages.
“[We] conducted a field visit to one of its manufacturing sites to hold dialogues with the plant manager and employees, as well as the CEO and chairman,” said Pedersen. “Given India’s vulnerability to climate change, which manifests itself amongst other things through an increased frequency and magnitude of droughts, we see it as paramount for a company like Varun to properly manage water, as it is its key raw material.”
In follow-up dialogues, the asset manager asked the company to increase its transparency on its water management activities and to have these audited by a third-party.
Varun has since implemented several water management programmes and has reduced the water needed in the manufacturing process.
“It now recycles 100% of its wastewater and has improved its replenishment of water through factory harvesting and pond harvesting,” Pedersen added. “The group’s water usage and recharging are now audited by a third party and is reported more extensively in its shareholder reporting.”
United front
Investors are also willing to work collaboratively to address water-related risks. In June, a group of global investors managing a collective US$21 trillion in assets called on over a thousand companies to report on their water-related impacts and risks.
US-based Ceres also launched the Valuing Water Finance Initiative in 2022 – a global investor-led effort to engage companies with a high-water footprint to value and act on water as a financial risk and drive the necessary large-scale change to better protect water systems.
“Business as usual cannot continue,” said Regnan’s Sharma. “There are solutions available to address [water risks], which brings a massive opportunity for companies that are involved in the value chain. Investments and innovation in this area at this critical moment can have a significant impact on how the future unfolds.”
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