Explainer: The business of water: no one-size-fits-all approach

Interpump SpA

22/03/2023 21:30

By Isla Binnie
       NEW YORK, March 22 (Reuters) - The United Nations wants
to get people talking in New York this week about investing in
safe water, sanitation and hygiene, which it describes as "the
most basic human need for health and wellbeing".
    Puzzles remains over how best to count the financial, social
and environmental costs and benefits of water, but many
investors now state an aim to generate returns while also
improving water access and quality.    
    Here are some examples of the business of water.
        
    SELLING NEW PRODUCTS
    Non-profit group CDP says firms have identified ways to use
less water or respond to an increasingly resource-conscious
market. These range from more efficient cooling systems for
power generation to selling new products such as rinse-free soap
in a market CDP calculates could be worth a combined $436
billion.     
    
    BUYING STOCK
    Shares in large groups that provide water-related services
are listed on national stock exchanges, including household
names such as Britain's 7-billion-pound ($8.6 billion) Severn
Trent  SVT.L  and American Water Works  AWK.N , which operates
across 14 U.S. states and is valued at around $27 billion.
    
    PUBLIC-PRIVATE PARTNERSHIPS
    A group of experts established by the Dutch government is
proposing "Just Water Partnerships" in which development finance
institutions would invest alongside private firms to improve
water systems in lower-income countries.
    The World Bank and some national governments have already
launched public-private structures aimed at reducing the
planet-warming impact of greenhouse gas emissions, with partners
including lender Citi and asset manager BlackRock.
 
    FUNDS
    There are about 80 funds globally which specialise in
investing in the theme of water, according to data provider
Morningstar.
    One of those, the Calvert Global Water Fund, tracks the
performance of an index of companies that "are offering products
or services that are part of a solution to global water
challenges," said portfolio manager Jade Huang. 
    These range from Italian pump maker Interpump  ITPG.MI  to
United Utilities Group  UU.L  and firms in water-intensive
sectors such Taiwan Semiconductor Manufacturing Co  2330.TW .   
  
    "There is no one-size-fits-all approach that can help to
approach the many aspects of dealing with water challenges,"
Huang added. 
    New York-based Water Asset Management launched its first
fund in the sector in 2006. It runs vehicles that invest in
water quality and supply-related companies and assets, and has
now launched platforms that allow collective investments by
retail investors.
   "Purpose and profit in the water industry have been
bedfellows for 1,000 years," said Matthew Diserio, Water Asset
Management's president. 
    
    PRIVATE EQUITY
    Sciens Capital Management in New York started working on
bringing together the tens of thousands of smaller utility
businesses in the United States eight years ago, and closed its
Water Opportunity Fund last summer with committed capital of
$850 million. 
    "We would go around in a pickup truck and look at these
broken water systems that service 100, 200 or 300 people, and we
have aggregated that," partner Alex Loucopoulos said.
    "I feel like we are just getting started here because of the
magnitude of the problems that need to be fixed," he added.    
   
    DERIVATIVES   
    Traders can buy and sell futures contracts - agreements to
buy in the future for prices agreed today - based on the price
of water in California on the Nasdaq Veles California Water
Index. 
    Lance Coogan, who developed that concept for water price
indexing, describes it as "the volume-weighted average of the
actual water transactions that are taking place".
    "People were buying water in the western United States and
not knowing what the guy down the road was doing, so we worked
out the formula and put that price up on a screen," Coogan said.
    "I was astonished that you can get derivatives on every
commodity in town: wheat, pork bellies, whatever you want, but
no water. How can you have those things without having the water
price?" he added.  "A more efficient market means cheaper water
and cheaper food." 
    
    WATER RIGHTS
    In Australia, rights to share water resources or receive
irrigation for crops can be bought and sold. A 2021
government-led inquiry called for reform of the markets'
governance, although it said water trading had allowed
irrigators to increase access to water and earn income from
selling rights.
    
    HUMAN RIGHTS AND RISKS
    A U.N. Special Rapporteur on water questioned in 2021
whether it was right to use market tools like pricing based on
supply and demand on water, saying it should be managed as a
public good fundamental for life, rather than as a commodity
that can be traded. 
    Pedro Arrojo Agudo argued specifically against water being
managed in futures markets, suggesting this could lead to price
volatility and speculative bubbles. He also called for stronger
regulation around managing concessions and said private
investment in water infrastructure was reducing the quality of
service.
    ($1 = 0.8173 pounds)

 (Reporting by Isla Binnie; Editing by Lincoln Feast.)
 ((isla.binnie@thomsonreuters.com; Reuters Messaging:
isla.binnie.thomsonreuters.com@reuters.net))