Water: The Next Big Asset Class
Water: The Next Big Asset Class
For many years, investors have considered utility investments one of the 'blue chip' stocks, because utilities provide essential services.Investments in these sectors have tended toward Big Ag[riculture], and Big Utilities [Con Ed, PJM and others]. Recent changes in the energy sector have created new asset classes in solar, wind, storage and efficiency. Each brings new challenges:
- How do investors know which technologies are going to 'win';
- Which projects have real long term viability;
- How can risk be assessed when there are so few projects to learn from;
- How can investors compare companies and projects, when there are so few standardized metrics; and finally
- How can smaller projects be bundled together to make investor ready packages with predictable risks/reward profiles.
The distributed energy market is now at least a decade old. Lessons have been learned, and those lessons have created contracts, terminology and metrics that allow savvy investors to make decisions. Water, which has been more the realm of public entities, such as municipalities and counties, is now coming forward as a unique -- and profitable -- asset class.
The irony lies in that water is a more basic necessity for humans that energy. We all are over 50% water, as is the food that we eat. Yet water is even critical in energy production and industry, as in agriculture. However, investing in water is a growing operational and strategic risk that investors must look out for, according to the policy nonprofit Ceres. Water risk can manifest as floods, shortages, spills or community backlash that can lead to immediate and significant – or even total – value destruction. The examples of water risk are countless. Examples include the mining company Newmont, which had to delay a $5 billion project in Peru due to community protests over water concerns, as well as an incident in Brazil, where a tailings dam ruptured, polluting waterways with billions of gallons of sludge and resulting in a $48 billion fine for BHP-Vale.
Looking to help manage the risks to investors, Ceres, along with more than 40 institutional investors managing $6 trillion, created the Investor Water Toolkit - a comprehensive resource that helps investors become water aware in their investment decision-making processes. A first-of-its kind tool, it closes a critical gap for institutional investors who have long sought a how-to guide for integrating water risks into portfolio management and decision-making.
The Investor Water Toolkit includes the following elements:
Five modules covering topics such as understanding and evaluating water risks, establishing firm-wide water priorities, buy/sell analysis, portfolio and asset class analysis of water and engagement resources and trends
Recommendations and methodologies for analyzing water risks by asset class, including private equity and municipal bonds, with associated water-engagement questions
Numerous case studies written by investors showcasing real world examples of water risk integration.
Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy. Through powerful networks and advocacy, Ceres tackles the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and human rights abuses. Ceres mission is transforming the economy to build a sustainable future for people and the planet.