Sustainable investment in water: the expert view

Within the context of Responsible Investing, water is a worthwhile investment target of great social and environmental importance. Kaiser Ritter Partner Privatbank is working on water investments with Tareno AG. Tareno’s water expert and fund manager Josef Bollag gave us an insight into the factors he takes into account when helping Kaiser Ritter Partner Privatbank’s clients invest sustainably and responsibly in water.

Water is essential to life. Should it have a price, and can you invest in it with a clear conscience?

Unlike air, which everyone can breathe everywhere at any time, water requires industrial processing. It has to be collected, purified, prepared and then distributed. The price reflects this process. This is what justifies the fact that water is not distributed for free and needs to have a price.
The world’s water suppliers are either state-owned enterprises – meaning that the state controls the water supply – or private operators. These private suppliers usually work closely with their national governments to ensure the price is fair and that water is an affordable good for all levels of society.
Over the last 50 years we have seen that the private sector has had a positive effect on water supply in many countries. In the city of Manila, for example, a guaranteed water supply has been created for nearly 15 million inhabitants thanks solely to the investments made by two large private firms. So I can say with a very clear conscience that investing in the shares of water companies is absolutely legitimate, not to say very productive for the worldwide supply of water.
The underlying principle is that only when water has a price do private customers and industrial consumers have an incentive to save water; only then do water suppliers have an incentive to reduce leakage loss by investing in often worn-out water infrastructure.

Water is part of the infrastructure. In many places the provision of this resource is seen as a government responsibility. How does this affect investment?

In many countries, governments are charged with providing water resources, and sometimes they struggle to meet the demands placed on them. Consequently, collaboration between the private sector and the state has proved productive.

The environmental implications of investing in water are clear. What for you are the relevant social factors?

We make sure in particular that the private suppliers only set their water prices in close cooperation with their governments. We can then assume that price levels are set in the interests of the broad population of the country concerned.

Are there companies in which you will categorically not invest? And if so why?

Yes, we won’t invest in companies if we are not sure that they are prioritizing and making clear their commitment to the principle of “water for everyone at a fair price”.

Water is sometimes seen as “blue gold” and it is often marketed as an investment trend. Won’t this lead to a bubble? Are there really enough companies to invest in?

No, we don’t think a bubble will be created. The worldwide need to invest along the whole water value chain is enormous. It may well be that this or that share is overvalued at a particular time, but overall we see an enormous need for investment over the next 5-10 years, and this will prevent any bubbles forming.

What factors will most influence investment in water over the next four to five decades?

The five main drivers of growth are:

Infrastructure – This is a central theme especially in the western world. Most pipe systems are more than 50 years old, which means there is a huge need for investment in water infrastructure, whether it’s completely new systems in emerging countries or investments in ageing systems in the West. In London, for example, 40% of the transported water is lost on the way to consumers because of dilapidated pipes.

Water meters – In many developed countries, water consumption is charged at a flat rate. Technical progress means that it is now quite easy to install meters that send accurate consumption data electronically to the water supplier. The meters give more accurate readings, and they make recording and billing more efficient. In the USA more than half of all households still don’t have a water meter.

Shale gas extraction – Gas deposits held in shale rock are one of the largest unconventional sources of natural gas. Extraction is costly and requires large amounts of water. Chemicals are added to the water which is pumped into the ground to fracture the shale layers. These chemicals prevent the shale fractures from closing again. The water is heavily polluted by this process, and can only be purified again at great cost.

Corporate consultancy and planning – Sustainable water management requires long-term planning. Private companies and government authorities are using the services of engineers, planners and consultancy firms. One of the main subjects they are looking at is flood defence.

Sea water desalination and water treatment – Desalination of sea water is the only option for many regions that suffer from a scarcity of water. A number of major projects are being built or panned in the Middle East and parts of Africa and Asia.
Within industry (especially the oil and gas and food industries) it is becoming increasingly important to keep water within the production cycle. There is a demand for technologies that allow companies to treat water and feed it back into the production cycle. This is where the biggest growth in the water industry lies.

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