Water is elemental. Crucial for life as we know it. Finite in supply—particularly fresh water—it is chronically degraded by pesticides, herbicides, fossil fuels operations, discarded plastics, and countless other contaminants. Add it all up and it seems like the perfect combination of inelastic demand and diminishing supply. In fact, 2.2 billion people around the world do not have safely-managed drinking water services and 4.2 billion people don’t have safely-managed sanitation services. In the U.S. alone, fully one in six gallons of the fresh water we produce is wasted through old, leaky, deteriorating infrastructure, equaling 6 billion gallons of treated water wasted every single day before it has a chance to be consumed or otherwise put to productive use.
The easy math: we need more, and better access to, safe fresh water. It seems very straightforward to invest in freshwater solutions and enjoy the returns. But, invest in what, exactly?
Time to Do Your Homework
Key to deciding what to invest in is discerning what not to invest in, or, at least, what is more or less likely to give us the market exposures we had in mind. So, tonight’s homework assignment: scour the list of water-themed ETFs available on any given brokerage platform. Look at the underlying holdings. You will find companies that produce water infrastructure…but almost none of it is for recycled or recyclable water projects. You will see companies in water ETFs’ 10 Largest Holdings lists that have little water exposure at all, such as a firm that garners only six percent of its revenues from water testing and 94 percent from entirely different industries and activities. Keep looking, and you will find water utilities with no sustainability, stewardship, or other related efforts behind their sale of water. They are in charge of the earth’s most precious resource while failing to demonstrate good stewardship of it. In fact, many water-themed ETFs hold utilities that derive a material portion of their revenue from selling water to fracking companies.
As is so often the case in ESG investing, it pays to do your homework, and to know that your fund manager is doing theirs, too.
The Value of Water: A Growing, Global Risk by The World Economic Forum (WEF) highlighted the critical need for investors to take action on the water shortage. This striking report outlines a comprehensive list of risks and opportunities related to freshwater scarcity across all industries globally. In fact, according to WEF’s analysis, water scarcity will not just slow economic growth and exacerbate social inequalities, but is one of the greatest risks to global stability. Activities like selling water for use in fracking fluid will not decrease our economy’s freshwater risks.
The Value of Water report concludes that: Water security has increased in importance for investors; private sector actors have a vital role to play in securing water supplies through investments in infrastructure and technology solutions; a growing number of opportunities exist to invest in water-related projects that have positive environmental and social outcomes.
It is time for investors to pay attention and consider where their money can do the greatest good when it comes to one of our most precious resources: fresh water. Advisors should resist the temptation to “blanket” buy a water fund or ETF and call it good enough. Rather, in order to navigate the complex and increasingly urgent issue of freshwater scarcity, they should consider if what they buy are genuine, significant, sustainable water solutions that help to mitigate and to assist in adapting to the real-world problems confronting us. This is important in terms of sending market signals that only true solutions have value, and in increasing our probabilities of competitive investment returns. Inadequate or false solutions will not ultimately hold value.
Never Stop Questioning for a Better Future
Clearly one purchases a mutual fund or ETF because they have faith in their professional manager, and because they may not have the time or inclination to do the research and pick stocks to determine what the constituents of a portfolio should be. However, before buying a fund, performing a small amount of homework on the largest holdings list can go a long way to ensure the fund’s investment committee has the same vision of the future as you and/or your clients. Where investments are made – where capital flows – defines what the economy is, so it is imperative to invest assets in the future we want to see unfold. By looking at the largest holdings list, an investor can do quick research on those few companies to evaluate what each is doing to earn their revenues. What a company gets paid to do is tantamount to the company’s reasons for existing.
Investors should ask: Is there a clear market need for the product/service they are delivering? Does this investment solve that problem? How do we know if the solution works? Is the solution scalable and sustainable? How high quality is the management team’s track record with similar activities? Are they aligned financially to succeed – meaning are their incentives linked directly to performance of that investment over time? This kind of inquiry can help an investor understand exactly what a company does to earn its money.
Water scarcity is a pressing global issue that is not going away, and is, in fact, getting appreciably worse by the day. But—investable solutions exist. By engaging in some prudent research, we can ensure that our money flows toward solutions seeking to create a better and brighter future.
Nothing in this blog should be construed to be individualized investment, tax, or other personalized financial advice. Green Alpha Advisors, LLC is an investment advisor registered with the U.S. SEC. Registration as an investment advisor does not imply any certain level of skill or training. Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Please see additional important disclosures here: https://greenalphaadvisors.com/about-us/legal-disclaimers/