Water is one of the most valuable resources on earth. The vast majority of water on the Earth’s surface, over 96 percent, is salt water in the oceans. Most of the Earth’s freshwater is in ice or glaciers or in the ground. Only about 1% of fresh water is available for human consumption. Currently, 1.1 billion people lack access to water. 2.4 billion people, more than one-third of the population, live in water scarce areas. Population growth, increased pollution, and climate change will make water even scarcer, including in the United States. It is possible to make investing in water sustainable, so that it helps to address water scarcity.
Is Water Investing A Sustainable Investment?
The sustainability of water investments is a complex topic. Although water is a precious resource, investments in the sector do not necessarily promote efficient and fair use of the resource. Companies that make devices to help conserve water may make other products that do not promote conservation.
Sustainable investors may want to focus on specific aspects of the water industry e.g., conservation, improved access to clean water, and alleviation of the cost burden on low-income customers. Two aspects that investors may want to consider when assessing the sustainability of water investments may include:
- Environmental, social, and governance (ESG) ratings
- For water utility investments – if the companies help to alleviate the water cost burden for low-income households.
ESG ratings are provided by a host of different private companies including MSCI and Morningstar. MSCI offers free access to sustainability ratings of many companies and funds. Equally, Morningstar provides free access to sustainability ratings of investments.
ESG ratings are imperfect due to challenges such as a lack of a standard way to measure and inadequate quality of data. However, ESG ratings are a starting point for establishing if a publicly-traded stock or fund is sustainable or not.
Water Cost Burden
When investing in water utilities, investors may want to consider if the utilities offer assistance to low-income customers. The affordability of water can be a significant burden for low-income households. A survey by the non-profit American Water Works Association (AWWA) conducted a survey of 333 water utilities to determine if assistance was offered to low-income customers. The survey results revealed that of the water utility respondents:
- 37% reported that they do offer assistance
- 37% reported that they do not offer assistance to low-income customers.
- 26% did not know whether their utility had an assistance program.
An internet search may provide investors with information about if a utility company offers a low-income assistance program or not. For instance, information about the American Water’s program in Pennsylvania is available.
Water Investment Types
Water is a commodity. Uniquely, it is a commodity that, in most instances, cannot be bought and sold on a marketplace. We will provide insight later in this blog post about an innovative new investment offering that allows for the purchase of water futures.
In the Calvert Global Water Research Index, Calvert divides water investments into five categories, as seen below. Examples of publicly-traded companies follow the description of each category.
- Water Utilities. Companies whose services or products provide clean, drinkable water or wastewater management.
Examples include: Aqua America (WTRU), American States Water Co (AWR), and American Water Works (AWK)
- Water Infrastructure Providers. Companies whose products (pumps, pipes, valves, etc.) and services help cultivate clean water infrastructure systems as well as companies whose products or services are related to the construction, planning, design, or engineering of infrastructure that improves water efficiency and/or delivery.
Examples include: Xylem Inc (XYL) and Flowserve (FLS).
- Water Technology Providers. Companies that develop, manufacture, distribute and/or install equipment or technologies for the treatment, separation, and purification of water. This includes membranes, ultra-violet, desalination, filtration, ion exchange, and biological treatment. Also included under this category are companies that offer technologies that promote water conservation and the efficient use of water, such as metering or recycling.
Examples include: EcoLab (ECL) and Pentair, Inc. (PNR). A. O. Smith Corporation (AOS)
- Water Solution Providers – Water Use Leaders. Companies that are leaders in water efficiency or water re-use in high-intensity water industries (food, apparel, etc.)
Examples include: Taiwan Semiconductor Manufacturing Company Limited (TSM) and Levi Strauss & Co (LEVI).
- Water Solution Providers – Water Innovators. Companies providing innovative solutions to global water challenges.
Examples include: Tetra Tech, Inc. (TTEK), Badger Meter Inc (BMI), and Trimble Inc (TRMB).
There are a number of water indexes designed to track various water-related investment opportunities. Some of these indexes highlight a focus on sustainable water investments. The indexes include:
- S&P Global Water Index (SPGTAQD) provides liquid and tradable exposure to 50 companies from around the world that are involved in water-related businesses.
- NASDAQ OMX US Water Index (GRNWATUSL) seeks to track the performance of companies that create products designed to conserve and purify water for homes, businesses and industries that are listed on the New York Stock Exchange (“NYSE”), NYSE American, Cboe Exchange (“Cboe”) or The Nasdaq Stock Market (“Nasdaq”).
- Ecofin Global Water ESG Net Total Return Index (EGWESG) includes companies across the globe and throughout the water cycle that are positioned to benefit from the pursuit of solving the water supply/demand imbalance.
- Calvert Global Water Research Index (CALH2O) is composed of companies that manage water use in a sustainable manner and are actively engaged in expanding access to water, improving water quality, promoting the efficient use of water, or providing solutions that address other global water challenges.
There are a number of water funds which track to the indexes. We will discuss these in the following section.
In the following sections, we will provide examples of water exchange-traded funds (ETFs) and mutual funds, as well as information about the indexes that the example funds track. The examples of funds provided all have an MSCI ESG rating of A or higher. We do not address the financial aspects of funds. Investors should invest in a manner that fits their risk profile and diversification needs.
Examples of water ETFs are:
- Invesco Water Resource Portfolio ETF (PHO) tracks the NASDAQ OMX US Water Index. PHO has a MSCI sustainability rating of A.
- Ecofin Global Water ESG Fund (EBLU) tracks the Ecofin Global Water Index. EBLU has a MSCI sustainability rating of AA.
- First Trust Water ETF (FIW) tracks the ISE Water Index. FIW has a MSCI sustainability rating of A.
Examples of water mutual funds are:
- Fidelity Water Sustainability Fund (FLOWX) includes water sustainability companies contained in the S&P Global Water Index. FLOWX has a MSCI rating of A.
- AllianzGI Water Fund Class A (AWTAX) includes companies that are represented in one or more of the S&P Global Water Index, the NASDAQ OMX US Water or Global Water Indices or the S-Network Global Water Index (Composite), or that are substantially engaged in water-related activities. AWTAX has an MSCI rating of AA.
- Calvert Global Water Fund (A) (CFWAX) tracks the performance of the Calvert Global Water Research Index. CFWAX has an MSCI rating of A.
As we previously wrote, there are a variety of crowdfunding platforms where investors can make small, potentially high risk investments in early-stage start-ups. On these platforms, investors can find a variety of water investment opportunities. Examples of sustainable water opportunities open for investment include:
Nasdaq Veles California Water Index (NQH20) is a first of its kind water index that tracks the price of water rights leases and sales transactions in the state of California. On December 7, 2020, CME Group launched a market which allows investors to purchase water futures. NQH20 is valued in US dollars per acre foot. This is equivalent to the volume of water required to cover one acre of land (43,560 square feet) to a depth of one foot, equivalent to 325,851 gallons.
Debating the Sustainability of Investing in Water Futures
Whether purchasing water futures is a sustainable investment or not is open for debate. Steve Hanke, a professor of applied economics at John Hopkins University, stated: “the CME’s water-futures contracts will provide crucial risk-management tools for both short and long hedgers alike. Sharp fluctuations in water supply and demand can now be offset by “insurance policies” offered by the new futures contracts. This innovative insurance will lower the cost of producing agricultural products — a win for farmers and a win for consumers.”
Pedro Arrojo-Agudo, the United Nations Special Rapporteur on the human rights to safe drinking water and sanitation, has expressed concern about the trading of water futures. “I am very concerned that water is now being treated as gold, oil and other commodities that are traded on Wall Street futures market. While there are on-going global discussions concerning water’s environmental, social and cultural values, the news that water is to be traded on Wall Street futures market shows that the value of water, as basic human right, is now under threat.”