In February, residents of Texas found that their drinking water was contaminated- or lost access to it entirely- when freezing temperatures led to widespread blackouts. Last week, Taiwan cut water supplies to certain areas because of the worst drought in decades. These are just two examples of an impending global water crisis that will only get worse as time goes on; in fact, the WHO estimates that in less than four years, half of the world’s population will be living in water-stressed areas. This global water crisis will create a new market, one where water securities are traded as nonchalantly as gold or company stocks.
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According to Thomas Schumann, the founder of Thomas Schumann Capital, a firm that’s created investable water indexes for the US and Europe, nine of the 10 greatest risks faced by humanity are linked to a lack of water. This, he says, means that there is an investor and business case for prioritising water stewardship.
Schumann says, “These risks are only expected to grow as climate change effects intensify. Not only that, but the business costs associated with these risks are projected to be $300 billion…or five times greater if left unaddressed.”
On March 24, Taiwan issued its first red alert on water supply in six years. While the government restrictions aren’t directed at Taiwan Semiconductor Manufacturing Co, which needs extensive amounts of clean water, the company said it plans to increase the amount of water it uses from tanker trucks.
According to many ESG experts, valuing water has never been more important. Without access to water, many companies would be unable to survive; as a result, investors increasingly use water security as a proxy for climate security. Thomas Schumann Capital has developed the TSC U.S. Water Security Index, which includes around 550 of the nation’s biggest companies, and the TSC Euro Water Security Index, which includes about 225 large-cap stocks from the Eurozone.
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Schumann says that companies with lower water footprints and water-risk exposure, AT&T Corp., Microsoft Corp. and Citigroup Inc., are given higher weightings in the indexes. The indexes automatically exclude companies that operate in the gambling, tobacco and defense industries, as well as those with the worst combined ESG and UN Sustainable Development Goals ratings.
The TSC U.S. Water Security Net Return Index generated a cumulative return of 116.5% between its creation in October 2015 and last month, compared with the 104% gain of the S&P 500 Index, including reinvested dividends, in the same period.
The $1.5 billion Invesco Water Resources ETF is the largest U.S. fund investing in companies that make products to conserve and purify water for homes, businesses and industries. The exchange-traded fund, which tracks the Nasdaq OMX U.S. Water Index, rose at an annual rate of 17.8% in the past five years, beating the 16.3% advance of the S&P 500.
According to the World Economic Forum, transformational investments are the solution to systemic risks such as water crises. These investments can tackle long-term water risks and also generate competitive returns. While the thought of creating a capitalist-type market to address the concerns of a global water crisis seems like an opportunity to exploit it, it is hoped that it will create incentives for companies to take better care of their water resources to ensure their long-term survival.
