Analysis: As drought risks rise, investors look at thirsty companies, solutions

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NEW YORK/LONDON, Aug 22 (Reuters) – As droughts worsen around the world, investors are mounting pressure on water-wasting companies and trying to pick winners from a sparse crowd of specialist listed companies trying to solve the problem.

From Kenya to California and nearly half of Europe, a shortage of fresh water has caught the attention of policy makers and given millions of citizens a new window into the stressed state of the planet.

Against this backdrop, a group of investors managing nearly $10 trillion on August 16 said it planned to step up its efforts to pressure boards to better manage the critical resource and that they might vote against directors of laggards. Read more

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The direct interest in doing so is clear: an analysis by the environmental disclosure platform CDP and Planet Tracker in May showed that listed companies could suffer losses of at least $225 billion due to the risks associated with the water. Read more

“These are no longer distant events; they are happening right now,” said Dexter Galvin, global director of enterprises and supply chains at CDP.

Last week, for example, Toyota (7203.T) suspended production at a plant in China’s Sichuan province due to a drought-induced power shortage. Read more

Realization of the seriousness of the situation – 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 investment funds. actions to generate growing investor interest to help find a solution.

Morningstar Direct global data shared with Reuters shows that 23 water funds have been launched in the past five years, with collective assets of $8 billion at the end of July.

David Grumhaus, Jr., portfolio manager for the $812 million Virtus Duff & Phelps Water Fund, said there has been a “ripple effect” as the water crises deepen.

“When the big news is that the boats can’t cross the Rhine and the Germans aren’t going to fully stock up, that certainly makes people think of water and our fund,” he said.

DILUTED?

Despite their name, water equity funds do not directly own the water rights, which are highly localized and regulated, and instead invest in companies with commercial exposure to water, according to Bobby Blue, principal research analyst at Morningstar.

Common holdings include utility American Water Works Company Inc (AWK.N), water technologist Xylem Inc (XYL.N) and Swiss industrial company Georg Fischer AG, which works on the safe transport of water.

The number of listed companies focused exclusively on this commodity, the so-called pure-players, is low, fund managers and analysts said.

Simon Gottelier, co-manager of the $282 million Thematics Water Fund, estimated there are around 25-30 investable water utilities around the world, along with a “handful” of tech companies. some water.

“Everyone wants to do something for water, but it’s hard to do it through public action,” Morningstar’s Blue said.

Managers are therefore turning to a larger pool of companies that have water businesses alongside other business units. Many of them focus on desalination, smart irrigation and pollution prevention.

Cédric Lecamp, head of the $9.2 billion Pictet-Water strategy, said his firm had identified 360 companies with “significant water-themed exposure”.

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 of the diagnosis, according to the documents filed by the company.

Water fund managers have called this diversification beyond pure 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 providing water solutions,” said Justin Winter, co-chief strategy officer of $7.3 billion Impax Water.

“But the outlook for existing businesses has never been better.”

Xylem Senior Vice President Albert Cho said he expects revenue growth of around 5% through 2025 as customers seek to improve water efficiency. That’s not a high growth rate for a tech company, but Cho called it significant for the water sector, where the buyers are often underfunded local utilities.

Many see digitizing their infrastructure as a powerful tool to increase efficiency, for example by spotting underground pipe losses. With the right equipment, “you know where your water is and where it’s leaking and you can fix it,” Cho said.

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Reporting by Cole Horton in New York, Simon Jessop in London and Ross Kerber in Boston; edited by Diane Craft

Our standards: The Thomson Reuters Trust Principles.

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