By; By Lee Clements, head of Applied SI, Global Investment Research, FTSE Russell
In March, the UN held its first water conference in 50 years, underlining the importance of this vital resource to health, social development and even economic growth. The conference culminated in the adoption of the Water Action Agenda, a “milestone” action plan containing almost 700 commitments to protect “humanity’s most precious global common good”.
General Assembly President Csaba Kõrösi said the $300 billion in pledges made to buoy the agenda has the potential of unlocking at least $1 trillion of socioeconomic and eco-system gains [1]. Mobilizing capital to address the challenge of providing clean water, cleaning up wastewater and maintaining the health of rivers, lakes & oceans (which is both vital for biodiversity and challenging as climate change impacts natural water cycles) is vital to everyone in both developed and developing markets.
Given the enormous demand for capital, it’s fortunate that the water has proven to be a solid investment: the small, but growing, water investment sector in the global equity market has outperformed the broader market over the last 10 years.
Despite this performance, investment in new water infrastructure is lagging other sectors. The total value of water and sewage projects and deals in 2022 was only $41 billion compared to $441 billion in mining, oil & gas and petrochemicals, according to data from Refinitiv Infrastructure 360. This new water infrastructure is needed to address a double challenge of aging infrastructure in the developed market, much of which is more than 50 years old [2] and providing much needed new water infrastructure to billions in the developing market. It is estimated that the latter, linked to SDG 6, will cost $114 billion per year by 2030[3][4]. The good news is that with investor focus and economic solutions such levels of mobilization of capital is possible, the total value of renewable energy projects and deals in 2022 was $655 billion, according to data from Refinitiv Infrastructure 360. Whilst there is still a long way to go on mitigating climate change, the success in mobilizing capital and at least partially integrating its consideration into economic models can be seen as a model for water (and other areas such as biodiversity can follow). Often the needs of these different environmental issues can be addressed by the same solutions.
One positive aspect of investment in water is that it is already a small, but acknowledged investment sector, which has seen growing assets. The Equity Theme Water segment of investment funds now stands at more than $28 billion in assets, according to data from Refinitiv Lipper, having grown from $16 billion at the end of 2019.
Another positive aspect is that whilst it is a small segment [5], it has a range of fascinating companies from water utilities to infrastructure developers and water technology manufacturers and has been a strong long-term performer versus the broader equity markets [6]. Over 10 years it has outperformed by 38%, whilst having a very similar level of volatility to the overall market.
Following the UN conference, given the vital need for investment, government funding pledges and the returns made by water investors who have already taken the plunge, hopefully we will see increasing flows (pardon the pun) into the water sector.
There is a long way to go. Whilst many people have gained access to safe drinking water and sanitation over the last 50 years there still remains a large gap to achieving the 2030 UN Sustainable Development Goal (SDG 6) of providing access to all. As of 2020, some 2 billion people still lacked safe drinking water in their homes and around one-third of people did not have basic hand washing facilities at home. The challenge is particularly acute in low-income countries, with an estimated 70% of the population of sub-Saharan Africa lacking safe drinking water services. Around half of the of the world’s population is already at risk of severe water scarcity for at least some of the year, according to the UN IPCC, with this figure likely to increase with the effects of climate change.[7]
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Originally Posted April 5th, 2023, FTSE Russell
PHOTO CREDIT: https://www.shutterstock.com/g/ladik
Via SHUTTERSTOCK
Footnotes:
[1] New agenda sets sail with bold action as UN Water Conference closes | UN News
[2] US water infrastructure: Making funding count | McKinsey
[3] Financing SDG 6 | Water.org
[5] FTSE Environmental Opportunities Water Technology Index (“EO Water”), made up of companies with >20% revenue exposure to the water sector, had 65 constituents with $207bn market cap at 28/2/23
[6] FTSE Environmental Opportunities Water Technology vs FTSE Global All Cap Index, USD Total Return 22/3/2013 to 24/3/2023
[7] The world faces a water crisis — 4 powerful charts show how (nature.com)
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