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Risks but ‘big opportunity’ in water investment

18 November 2019

Water risks are being systematically overlooked by investors despite posing a huge threat to global economic and political stability, Edison Group has warned.

In its new research paper Water – the real liquidity crisis, the investment group said sectors most at risk are agriculture, food and beverages, energy, oil and gas, chemicals and mining. It has urged investors to integrate water risks into the investment process to be able to properly assess the return potential of companies in these sectors.

Investors should consider physical risk, including potential natural disasters and lack of proper infrastructure; regulatory risk, covering policy changes or unexpected increases in tariffs; and social/ reputational risk including potential sanitation violations, community blocking of operations and customer/workforce perceptions.

Dan Gardiner, director, Edison Group, said: “Water risks need to be assessed more seriously and systemically integrated into decision-making processes to ensure that investors maximise their potential returns and achieve their investment goals.”

Ceres, a non-profit organisation focusing on encouraging investors to address sustainability, said investors should consider three main risks when integrating water into an investment portfolio.

Firstly, assessing corporate risk – which calls for investors to fully understand water’s dependency risk, the intensity of production, apply a shadow water price and assess management’s response to risk.

Secondly, integrating into decision process – which recommends investors carry out a screening process to define the material risk to absolute or relative performance.

Finally, full portfolio integration – which says it is vital for investors to carry out a standardised assessment approach and integration across products as well as integrating this into strategic decision making and in marketing to external investors.

Opportunity as demand increases
But, despite the risks, Edison said water presents a big opportunity for investors, with private capital set to play a huge role going forward.

Currently, only 2.5% of the global water supply is freshwater and just 0.025% is accessible as surface water. Yet, demand is steadily rising at 2% per year and 10% of the global population do not currently have access to clean water. By 2030, it is expected that demand for clean water will exceed supply by as much as 40%.

Closing the gap between global demand and supply requires new infrastructure. The World Bank estimates that delivering the UN’s Sustainable Development Goal 6 by 2030 will require over $100bn of additional investment every year on infrastructure and further development.

Ways to invest
For equity investors attracted to the water market, there are a range of ways to invest. Many fund managers have now launched thematic water products; some exclusively focus on capital growth while others aim to be sustainable and some have explicit impact mandates. There are also an increasing range of ETFs available for investors wishing to minimise management fees. According to Edison, most funds have sustained average growth of over 6% over the last five years with managed funds achieving over 10%.

Gardiner added: “The water sector presents big opportunities for investors. Huge spending increases are needed over the next decade to both address underserved communities and upgrade existing infrastructure. The sector is particularly attractive to income funds and the growing pool of capital looking at sustainable and impact strategies.

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