Analysis: As drought risks rise, investors eye thirsty companies, solutions
22/08/2022 12:00
By Cole Horton, Ross Kerber and Simon Jessop
NEW YORK/LONDON, Aug 22 (Reuters) - As droughts worsen
across the world, investors are turning up the heat on companies
wasting water and trying to pick winners from a sparse crowd of
specialist listed companies looking to address the problem.
From Kenya to California and nearly half of Europe, a
shortage of fresh water has grabbed the attention of
policymakers and given millions of citizens a fresh window into
the stressed state of the planet.
Against that backdrop, a group of investors managing nearly
$10 trillion on August 16 said they planned to step up efforts
to pressure boards to better manage the critical resource and
could vote against directors of laggard firms. urn:newsml:reuters.com:*:nL1N2ZS1MZ
The vested interest in doing so is clear: analysis from
environmental disclosure platform CDP and Planet Tracker in May
showed listed companies could face losses of at least $225
billion from risks related to water. urn:newsml:reuters.com:*:nL5N2WW2UY
"These are no longer far-off events; they are happening
right now," said Dexter Galvin, CDP’s global director of
corporations and supply chains.
Last week, for example, Toyota 7203.T suspended production
at a plant in China's Sichuan province amid a drought-induced
power shortage. L1N2ZU096
Awareness of how fraught the situation is - with 2.3 billion
people currently living in water-stressed countries, according
to the United Nations - has led a number of asset managers to
launch equity funds to tap growing interest among investors to
help find a solution.
Global data from Morningstar Direct shared with Reuters
shows 23 water funds launched over the last five years, with a
collective $8 billion in assets at the end of July.
David Grumhaus, Jr., portfolio manager for the $812 million
Virtus Duff & Phelps Water Fund, said there has been a
"spillover effect" as water crises have worsened.
"When the top news story is that boats can’t make it through
the Rhine River and Germans aren’t going to get all their
supplies, it does definitely make people think about water and
our fund," he said.
WATERED DOWN?
Despite their name, water equity funds do not directly own
water rights, which are highly localized and regulated, and
instead invest in companies with business exposure to water,
according to Morningstar senior manager research analyst Bobby
Blue.
Common holdings include utility American Water Works Company
Inc AWK.N , water technologist Xylem Inc XYL.N , and the Swiss
industrial firm Georg Fischer AG FIN.S , which works on the
safe transportation of water.
The number of listed companies exclusively focused on this
commodity, so-called pure plays, is small, fund managers and
analysts said.
Simon Gottelier, co-manager of the $282 million Thematics
Water Fund, estimated that there are around 25 to 30 investable
water utilities globally, as well as a "handful" of water
technology businesses.
"Everyone wants to do something about water, but it's just
difficult to do so through public equities," said Morningstar's
Blue.
Managers therefore turn to a larger pool of companies which
have water segments alongside other business units. Many of
these focus on desalination, smart irrigation, and pollution
prevention.
Cedric Lecamp, manager of the $9.2 billion Pictet-Water
Strategy, said his firm has identified 360 companies with a
"meaningful exposure to the water theme."
His fund's largest position at the end of July was Danaher
Corporation DHR.N , which owns water quality businesses but
derives most of its revenue from the life sciences and
diagnostics sectors, according to company filings.
Water fund managers called this diversification beyond
pure-play utilities not only necessary, but a potential asset
given the range of companies working on water solutions.
"There hasn't been a massive explosion of new companies who
are providing solutions in the water space," said Justin Winter,
co-manager of the $7.3 billion Impax Water Strategy.
"But the outlook for the existing companies basically has
never been better."
Xylem Senior Vice President Albert Cho said it forecasts
revenue growth around 5% through 2025 as customers look to boost
water efficiency. That’s not a high growth rate for a technology
company, but Cho called it significant for the water sector,
where buyers often are underfunded local utilities.
Many see digitizing their infrastructure as a powerful tool
to boost efficiency such as by spotting underground pipe losses.
With the right equipment, "you know where your water is and
where it’s leaking and can do something about it," Cho said.
(Reporting by Cole Horton in New York, Simon Jessop in London
and Ross Kerber in Boston; editing by Diane Craft)
((simon.jessop@thomsonreuters.com; +44 (0) 207 542 5052;
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simon.jessop.thomsonreuters.com@reuters.net))