Water: Priced for imperfection

Assets with inflated values are often said to be “priced for perfection,” meaning they must deliver stellar, upwardly mobile performance to justify and sustain those prices. Water, however, an asset that is key to life on Earth and essential for virtually every economic undertaking, has no universally assumed price or cost to extract. In our view, not only is water woefully underpriced today, but its future value is far greater.

Amid increasing water scarcity, a crisis may be looming, but we believe if water were priced appropriately, that risk could fall. Just as private-sector innovation and market-pricing signals have begun to reduce fossil fuel consumption, markets could have a similar effect on water consumption, helping to mitigate the risk of water shortages. In this paper, members of our Future Themes water scarcity team share insights from their research, including common misconceptions about investing in water and how investors can effectively gain exposure to this theme.

Changing the dialogue

Water scarcity will have humanitarian and economic impacts across emerging and developed markets. Seventeen of the world’s fast-growing cities are in emerging markets, where water scarcity is most prevalent. In many developed markets, including the US, water infrastructure is old and in need of modernizing. Substantial capital from public/private partnerships is already being channeled to fund solutions to alleviate water scarcity. This is welcome progress. It should also be a signal for capital markets. Stella Thomas, founder and managing director of the Global Water Fund, describes water investment as having a multiplier effect, telling us recently, “We need to change the dialogue about water from ‘aid’ to ‘investment,’ because one dollar invested in water can return thirty-five dollars in GDP.”¹

Through our research, we have uncovered potential investment opportunities that span equity and debt, global sectors, developed and emerging markets, and the market-cap spectrum. Ceres estimates that 50% of companies in four major global indices will face “mid to high” water-related risk.² The energy, utilities, industrials, mining and materials, consumer goods, health care, and technology sectors are all highly water-dependent. Companies in these sectors will likely need to invest in solutions that optimize water use in their supply chains, operations, and products.

While this may sound like all risk and no reward, we see the mismatch between a costly potential crisis and general underappreciation by markets as a significant opportunity for investors to add value. By providing capital to companies and issuers developing water-related solutions, the investment community can help prioritize and support innovations needed to forestall a global emergency, while potentially generating attractive long-term returns for their clients.

What’s different this time?

Water-related catastrophe has been predicted before, but we believe this time is fundamentally different. First off, we have clear evidence the climate has already begun to change in significant ways. Second, scientific data, scenario analysis, and climate-modeling technology have all improved significantly, allowing scientists to project climate change with greater accuracy than in years past. Localized climate data provides granular views of regions projected to face the greatest physical climate risks.

At the same time, rainfall variability has increased substantially amid worsening climate change. According to scientists at Woodwell Climate Research Center, with whom we study the physical effects of climate change on capital markets, between now and 2050, some regions could see up to…

¹Remarks made by Stella Thomas to Wellington Management, 23 February 2020. | ²Ceres.org, Investor Water Toolkit. Indices are S&P 500, Russell 3000, MSCI EM, and MSCI World. Data sourced and interpreted from SASB materiality indicators.

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