Investing in Water

Investing in water has been touted for a few years as the next great investable theme in sustainable finance. But "blue Gold" is not as catchy as "black gold", yes? No doubt as the population grows "up and to the right" it is obvious more people need water, which means an increase in the demand for potable water. 7 billion humans must drink. Investment website SeekingAlpha.com ["alpha" being investment-speak for outperformance, or returns] pitched the investment opportunities in "Renewable Gray Water - Sustainable Investments", also covered in California's Aquafornia. More accurately, much of the investment opportunities lies not in selling fresh drinkable water drop-for-drop, but in the pipes and pumping stations that moves water from catchment areas and man-made dams to urban or peri-urban areas where citizens or industry [light industry or agriculture] demand regular amounts of clean water for production and growing. What is "gray water"? That's the industry term for water from showers, baths, basins - not the human, animal or production waste that should be processed through sewage plants - rather water that is no longer drinkable but is not too heavily polluted that it cannot be re-deployed. See howstuffworks. It asks questions of "green building" and sustainability in built environment. Catching up in February with an architecture professor friend at the University of Cape Town and talking through what students get taught, or what developers want to fund, around more sustainable buildings begs the question: why in 2009 a full 40 years after humans land on the moon [and NASA erases the tapes!], especially in water-stressed regions like say southern Africa or Western Australia or Cyprus or south-western US, is gray water use not a mandatory requirement? Surely the drainage and plumbing systems are not that hard to adapt? Seekingalpha reports in the US just 10% of gray water is reused. Just think how much good work it took to get the clean water to a household, and that 90% is used once and then wasted. Not really a smart grid. But an opportunity for sustainable finance, and a gap for investors seeking to integrate ESG factors into investment architecture to invest in solutions.

The water as investable theme has been floated in various ways, and some major shops and some small shops have sold investment strategies on it for years. Today FT reported from India that "India's Thirst Drives Water to Crisis Level". See Credit Suisse "New Technologies Keep Water Flowing" with their retail structured product in water. Sarasin Sustainable Water Fund, their paper grandly named "Elixir of Life and Investment Theme"; Sarasin is partly owned by Dutch bank Rabobank, itself a serious sustainability player. Investment ejournals have been touting the pros and cons for some time, see Dailymarkets.com Case for Investing in Water ETFs, MSN Water Fund Thirves on Thirsty World pitching the Palisades Water Index, Water-stocks.com and Moneyweek. In another sign of the investment markets' sophistication in the views on water, the index shop Powershares in Washington DC has strategies indexed on the water theme as ETFs, exchange-traded funds [such as PowerShares Global Water Portfolio (NYSE:PIO)], pooled like an index but structured differently. In ETFs investors buy a range of stocks, not just one, thereby spreading some risk while getting the exposure to the underlying theme, in this case, water. It is hard to invest in a water "pure-play" though unless you're project financing a whole dam, pipeline or reservoir. If you look at the top 10 stocks in some of these water indexes or ETFs, just a small portion of their revenues come from water-related businesses. The problem of buying more than you choose to in the conglomerate play is not unusual in large industry players, like buying GE [NYSE:GE] for its wind assets and ecomagination, but they constitute less than 10% of annual revenue. See Marc Gunther's post on "Greener-and More Open-GE" and Bloomberg on Q2 2009 results.

An old mate I met in 2005, Gary White from Water Partners (named a Skoll Prize-winner in March, 2009 [nice work, Gary and team]) achieved something of a coup when Water Partners joined with Matt Damon's H2O Africa to relaunch a new global NGO focused on water issues at Water.org. Which puts in stark relief the challenge of investing in water. Water is seen as a basic human right: would you want to hear you made an extra dollar/yen/pound return while some "customers" died of thirst? That is too dramatic I know, but illustrates how some are making the point. See The Water Barons from 2003. Socially responsible investors (SRI) have always found this a double-edged sword, as Socialfunds.com reflected in 2008. In Soweto, South Africa civic activists headlined with "Johannesburg Water Declares War on the Poor" in June 2007. Rainforest Action Network, the activist organization based on the US West Coast and past experts at "naming and shaming" those investing in alleged nefarious activities, created some excitement in Canada at the "Investing in Water" conference. RAN's motto is "environmentalism with teeth". But no company ever stands in the way of a thirsty, poverty-stricken citizen, although the video Blue Gold points to a commodification of water. As one wise French investor active with a broad portfolio of projects and investments in Francophone Africa said, the water is a basic right, but someone has to pay for the pipe to get it to the people. French firm Veolia Environnement [EPA:VIA] works in infrastructure including water around the world, but only where it feels welcomed. And like the survivors of Hurricane Katrina in New Orleans found out in 2005, sometimes you have a much better chance of getting bottles of water faster from Wal-Mart (which stepped up with its impressive logistics) versus waiting for a slow and/or inefficient state or federal government to react. [Sidenote: last Thurs 16 July WMT hosted a major sustainability stakeholder milestone meeting].

Just last week hardcore investment markets types on US channel CNBC were looking at the money being dedicated by the US government to infrastructure and trying to figure out where in the water supply chain to investment their money into: 10 foot concrete pipes, water pumping stations, residential piping, or water gauges? See CNBC video 10 July 2009. Water utilities should be earning higher rates of return because the infrastructure is years old. In London, water pipes were laid when Queen Victoria was still around. Replacing them saves millions of gallons a year. A large part of water piping is the cost of the labour to lay the pipes, so it is an interesting option to create jobs. meeting the social need of creating jobs must tip the theme as an opportunity for sustainable finance, and a gap for investors seeking to integrate ESG factors into investment architecture. The major issue is getting more clean water to more places. As the FT covered in June, it is about scarcity, and markets understand supply and demand Age of scarcity: Resource shortages yield investment opportunities 2 June 2009. Investing in water is a solid opportunity worth checking out, but factor in all the ESG factors for the complete perspective. Clean water is a human right. But sustainable finance is needed to put pipes in the ground, orprovide clean energy to pump it. How the clean water droplet gets to people who need it, whether the government pays all or part of the costs of getting it there, requires some good work and is currently leading to investment decisions from Washinton to Beijing. In an age of scarcity, perhaps even on a planet that is hot, flat and crowded, may make a lot of sense to the average person's portfolio.