Why Water Funds are getting popular globally

Nov 26, 2021

Only 1% of all water is actually drinkable, according to the FAO. And yet, we tend to treat water as though it were an infinite resource, with massive quantities literally being flushed down the pipes every day.

According to some research, a typical shower lasting around 10 minutes requires around 100 litres of water and about 5 kilowatts of energy to heat the water to body temperature. If we assume we spend one or two of those 10 minutes using body washing products and shampoo, that leaves eight minutes — or 80 litres — of reusable water wasted.

This wastefulness gets even worst when considering that vast swathes of the world population are still in need of water. According to 2020 research by UNESCO, worldwide 3.6 billion people — nearly half the global population — live in areas that experience water scarcity at least one month each year. That figure could reach 5.7 billion by 2050.

The hunt for fresh water

The management of water services represents a major challenge for future generations, but it is also an opportunity for investors. “The main thesis underlying an investment in global water equities revolves around the scarcity of fresh water as a commodity. Over recent years, demand for fresh water has increased at more than twice the rate of global population growth, leading to dramatic predictions of future shortfalls between supply and demand,” says Kenneth Lamont, analyst at Morningstar.

Additionally, fresh water resources are not evenly distributed across the globe. Even highly developed regions such as California, are not immune to crippling shortages. This is likely to provide an increasing number of opportunities for companies involved in the treatment and distribution of water globally.

The coronavirus pandemic has led to greater attention on environmental issues and water is something investors are increasingly concerned about.

Don't forget about food

The issue of water is closely linked with agriculture too, if you consider its intensive use in food production. According to the Water Footprint Network, producing 1kg of apples requires 822 litres of water. A kilogram of coffee requires 18,900 litres. And, according to this 2018 report, the water footprint of California almonds averaged 10,240 liters per kilogram kernels (or, 12 liters per almond kernel).

The food issue becomes more complex if we consider the increase in food prices. According to a February report by the FAO, prices had increased for nine consecutive months. The FAO’s Price Index (which tracks monthly changes in the international prices of commonly traded food commodities) recorded an average of 116.0 points in February, 2.4% more than the previous month.

Of course, the environmental pollution factor should not be underestimated when thinking about food. According to the United Nations, livestock accounts for about 14% of global greenhouse gas emissions. Reducing the consumption of meat - with a simultaneous decrease in intensive farming - could therefore make a difference in the slowdown of climate change.

New eating habits such as Veganism or "Flexitarianism" that are taking root seem to go in the right direction. Consumers' preference for healthier and more sustainable sources of nutrition is growing. According to a study by the research firm MarketsandMarkets, the global plant-based meat market, which was worth $4.3 billion in 2020, will grow nearly 15% annually through 2025. “The uptick in demand for vegan and vegetarian products is yet more evidence of the generation wealth flip as millennial consumers shift demand paradigms." says Elizabeth Stuart, ESG analyst at Morningstar.

The spot price of water.

In December 2020, CME Group started trading futures contracts on the Nasdaq Veles Water Index, which tracks the spot price of water in California. That may be just one local market in one country and one economy, but it's the first instrument to offer a water price proxy, and given its size, exposure to urban and agricultural use cases, and the growing effect of droughts on water availability, California's water market provides a solid illustration of what scarcity and competing demand drivers do to the price of water.

Water Funds

Sitting at the intersection of two key trends in investment management--environmental, social, and governance (ESG) investing and thematic investing--are water funds, which seek to invest in companies that are leaders in limiting their water usage or creating innovative solutions to increase the availability of clean drinking water.  Money managers have launched six new water funds over the past year.

Unlike energy and agriculture commodities markets, the water business is fragmented and highly regulated by the municipal, agricultural, and environmental interests that use water the most. Because of this, none of these open-end water funds invest directly in water rights or have direct exposure to the price of water. Rather, they invest in companies that fund managers believe have exposure to the price of water, either through selling it, treating it, or using it as an input.

There are four broad categories that the holdings typically fall under.

  • Water utilities. Regulated companies that provide clean drinking water and/or wastewater management.
  • Water transportation. Pumps and pipes, as well as companies that improve water delivery.
  • Water technology. Companies that produce equipment to treat or purify water.

These companies may have little to no exposure to the water industry but may be considered leaders in water efficiency. Besides water utilities, there are no globally recognized aqua sectors, industries, or subindustries.

There are roughly 65 water funds globally that have about $35 billion in assets under management. It's a niche that's been around for a while, but it's one that continues to grow as concerns about climate-change-induced water shortages, and interest in investing in ways to adapt to or avert them, grow.

You can get more information from Why invest in water? and Are water funds too watered down? from where the above information has been sourced. 

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