Six years after the launch of the Calvert Global Water Fund, water remains a serious sustainability challenge and a significant investment opportunity.
By Matthew Sheldon, Portfolio Manager, Calvert Global Water Fund, Kleinwort Benson Investors International Ltd; and Stu Dalheim, Vice President, Shareholder Advocacy, Calvert Investments.
As pressures on our planet’s water supply mount, investing in water infrastructure and technologies offers strong upside potential while contributing to a more sustainable world. However, smart investment in water involves more than just buying shares in utilities and filtration companies. Water is the sustainability issue that transcends social values, yet investors are only beginning to recognize the linkages between water sustainability, economic value, and the investment opportunities in companies creating innovative water product and service solutions.
Just as the climate change conversation has moved from a debate over the basic science to more sophisticated considerations of mitigation and adaptation, so too has the water conversation evolved. And yet, we still find that its translation to an investment strategy has lagged. A survey of the landscape reveals the significance and complexity of the problem.
The Blood of Life, Running Dry?
The World Economic Forum, or WEF, publishes an annual report that assesses the evolution of a comprehensive set of global risks, and the mechanisms by which they can become systemic. The WEF surveyed 900 leaders and decision-makers for its 2015 edition. This year, after steadily climbing the charts, water crises ranked as the single greatest risk in terms of impact. Indeed, water crises trumped such other serious risks as the spread of infectious disease and the failure of climate change adaptation.
Last year, the journal Bioscience published the results of its survey of more than 600 environmental decision-makers and scientists in the United States, analyzing their research priorities for natural resources management over the next decade. The number one research question was, “What quantity and quality of surface and groundwater will be necessary to sustain U.S. human populations and ecosystem resilience during the next 100 years?” The answer remains to be seen, but the urgency is clear.
Various factors have converged to put us in this position, chief among which are the following:
• Investment in water infrastructure has lagged significantly behind depreciation.
• Climate change has increased regional water stresses, exacerbating drought conditions in some areas and flooding risk in others, while contributing globally to sea level rise.
• The energy sector depends more on water for industrial purposes than any other global consumer, and shortages are already compromising output and increasing costs of some of the world’s most productive energy sources.
• Only 3 percent of the water on our planet is freshwater, and of that, less than 1 percent is available for human consumption. Nevertheless, demand for freshwater is growing twice as quickly as the global population.
• In the United States, aging water infrastructure leaks 20 percent of total volume. Replacing that infrastructure would cost an estimated $300 billion to $1 trillion.
The WEF’s Global Agenda Council on Water Security explains how these issues have already played out in dramatic and devastating fashion. In 2011, flooding in Thailand slowed down global automobile production and severely disrupted the computer hard-drive supply chain. The tsunami in Japan that same year compromised global industrial production. All of that is what happens when there’s too much water. The reverse is also devastating. Russia restricted agricultural exports in 2010 in response to drought, which sent staple-grain prices soaring across the Middle East and North Africa. The WEF observes, “The resulting food shortages and price rises aggravated the tensions that led to the Arab Spring.”
A New Fund, a Novel Strategy
In light of this situation, Calvert (www.calvert.com ) felt strongly that launching a water fund was important, both because it offered a strong value proposition for our investors, and because it advanced our efforts to invest in long-term solutions to the world’s sustainability challenges. We launched the Calvert Global Water Fund in September 2008.
Water: a Fundamental Human Right
We think that pricing this valuable resource is necessary, but at the same time, we think it is critical to recognize water as a fundamental human right. Prices will necessarily go up, because water treatment and transportation costs continue to rise as infrastructure ages and eventually fails. This is why we are investing in a broad range of solutions, including treatment, chemistry, pipes, pumps, valves, and everything that gets water from the source to the factory. The price of all of those keeps increasing, which presents the essential investment case for water.
Water is unique as an investment theme, in that there is no such thing as a water sector. There are different products across industries, and it amounts to a collection of niches with different regulators and a disparate and fragmented playing field. As a result, our investment universe includes an incredible variety of companies. Since the fund’s inception, we have never bumped up against constraints on our ability to find good ideas. There has always been an available pocket with a good risk/reward balance.
So Much More Than a Sector Fund
Many people still operate under the misconception that a water fund is a sector fund, which is simply not the case. The distinction is important. The energy sector, for instance, is oil driven, but 20 different high-level issues drive a water fund. Some investors are looking for a natural resource play, others want exposure to infrastructure, and still others are focused on sustainability. A well-managed water fund has the potential to meet all of those needs. Ultimately, the water theme is an ecosystem, which is why Calvert’s management approach benefits from our research perspective.
It is important to understand that this is a long-term investment. We are dealing with a multi-decade problem that requires multi-decade solutions. The water crisis is getting more and more acute every day and, in the water space, there are numerous themes that have not gotten traction yet.
In addition, over the life of our portfolio, Mergers & Acquisitions (M & A) activity has provided a tail wind year by year. Given balance sheet commentary and economic logic, we expect M & A activity to pick up again in 2015 after the relative silence we have experienced recently. Such activity tends to attract people’s attention, so the coming year may well be a dynamic one.
The Bigger Picture
Broader engagement with companies around water is also an important part of our overall strategy. Indeed, the Calvert Global Water Fund is the only U.S. water fund we know of that engages holdings on ESG issues, with strong support for the promotion of the human right to water. We encourage improved disclosure of water risks and strategies, and we urge companies to consider water more broadly, for instance as it relates to climate change and human rights issues.
Water services and technologies often have poor disclosure around water, particularly in the case of those technology companies that are not consumer facing. The water space is also an area where companies need education about how best to disclose, and what metrics to use. It is highly challenging to measure and disclose water risks and strategies in a way that makes sense to broad audiences, as water is a local resource with local impacts.
For instance, Calvert filed shareholder resolutions with ITRON, Flowserve, and Aqua America, asking them to improve their sustainability reporting. Each does so now, and they address such topics as environmental health and safety, water use, energy use and emissions, community impacts, and employee programs such as diversity and employee engagement. Calvert has engaged companies such as Coca-Cola and PepsiCo on the human right to water through the CEO Water Mandate, a multi-stakeholder initiative that includes corporations, NGOs, and a few investors – Calvert was the first to join – working to agree on best approaches to corporate water stewardship.
On the subject of water’s connection to climate change, Calvert has engaged American Water Works a large, publicly traded water and wastewater utility – regarding concerns that they were not paying sufficient attention to climate change risks. After discussions with senior management we determined that the company is in the process of strengthening its existing reporting and already benefiting from efforts to modernize their systems and adapt to climate change.
Calvert has also engaged companies, especially those that rely on agricultural commodities on water risk, including Hanes Brands. The company undertook a water risk assessment in its cotton supply chain and its manufacturing operations, describing efforts to reduce risks, environmental impacts, and water use.
Water For Life
We use our expertise not only to offer an appealing investment prospect, but also to drive change toward more sustainable business models. The water crisis will be with us for a long time to come. We intend for this fund to be part of the solution, while providing attractive returns for our investors at the same time.
Article By Matthew Sheldon, Portfolio Manager, Calvert Global Water Fund, Kleinwort Benson Investors International Ltd. and Stu Dalheim, Vice President, Shareholder Advocacy, Calvert Investments.
Matthew Sheldon is a portfolio manager for the Kleinwort Benson Investors Water Strategy and is responsible for the development of investment strategy as well as the day-to-day management of the strategy. He joined the Environmental Strategies team in April 2011. Mr. Sheldon has extensive specialist knowledge and experience in investing in the water sector, including both global public listed equities and private equity. Prior to joining the firm, he worked at Water Asset Management where he was an investment analyst and at Wedge Capital Management where he was an equity analyst. Mr. Sheldon holds a B.S. summa cum laude in chemical engineering from Tufts University, an M.B.A in finance from Columbia Business School, and is a CFA charterholder.
Stu Dalheim is a Vice President, Shareholder Advocacy at Calvert Investments. Mr. Dalheim has led Calvert\’s shareholder advocacy program, which continues to grow as Calvert engages with more companies through direct dialogue, standard-setting exercises and partnerships as well as shareholder resolutions, since 2005. Mr. Dalheim has focused on corporate governance, transparency and environmental issues and works with policy makers and regulators to advance the interests of sustainable and responsible investors. Stu was the lead author on a Calvert report that benchmarked the environmental programs and performance of major U.S. homebuilders in 2008 and co-author of a 2010 report that assessed corporate board oversight of environmental and social risks. He serves on the board of the Sustainable Business Network of Washington. He earned a BA in philosophy from Wesleyan University and is a LEED accredited professional.
Article Details:
As of December 31, 2014, Calvert Global Water Fund’s holdings included ITRON (0.00% of Fund assets), Flowserve Corp (4.51%), Aqua America (0.00%), Coca-Cola (0.00%), PepsiCo (0.00%), American Water Works Co, Inc. (1.52%), and Hanes Brands (0.00%). Calvert may or may not still invest in, and is not recommending any action on, companies listed. For the most recently available information on individual holdings in each Calvert fund, visit www.calvert.com. Current and future portfolio holdings are subject to market risk.
Calvert Global Water Fund is subject to the risk that stocks that comprise the water-related space may fall in value. The water industry can be significantly affected by economic trends or other conditions, such as the availability of water, the level of rainfall and occurrence of other climatic events, and changes in consumption, in addition to environmental considerations, taxation, and government regulation (including the cost of compliance). The Fund is non-diversified and may invest more of its assets in a smaller number of issuers than a diversified fund; therefore, gains or losses on a single stock may have greater impact on the Fund. A downturn in the water-related space would impact the Fund more than a fund that does not concentrate in this space, and the Fund therefore may be more volatile than a typical mutual fund. Lastly, foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations.
For more information on any Calvert fund, please contact Calvert at 800.368.2748 or visit for a free summary prospectus and/or prospectus. An investor should consider the investment objectives, risks, charges, and expenses of an investment carefully before investing. The summary prospectus and prospectus contain this and other information. Read them carefully before you invest or send money.
Calvert mutual funds are underwritten and distributed by Calvert Investment Distributors, Inc., member, FINRA, and subsidiary of Calvert Investments, Inc. 800.368.2748
