Navigating the Canals of Water Investing

From March 2022 Archive – Water is elemental. Crucial for life as we know it. Finite in supply—particularly fresh water—it is chronically degraded by pesticides, herbicides, fossil fuels operations, discarded plastics, and countless other contaminants. Add it all up and it seems like the perfect combination of inelastic demand and diminishing supply. In fact, 2.2 billion people around the world do not have safely-managed drinking water services and 4.2 billion people don’t have safely-managed sanitation services. In the U.S. alone, fully one in six gallons of the fresh water we produce is wasted through old, leaky, deteriorating infrastructure, equaling 6 billion gallons of treated water wasted every single day before it has a chance to be consumed or otherwise put to productive use.

The easy math: we need more, and better access to, safe fresh water. It seems very straightforward to invest in freshwater solutions and enjoy the returns. But, invest in what, exactly?

Time to Do Your Homework

Key to deciding what to invest in is discerning what not to invest in, or, at least, what is more or less likely to give us the market exposures we had in mind. So, tonight’s homework assignment: scour the list of water-themed ETFs available on any given brokerage platform. Look at the underlying holdings. You will find companies that produce water infrastructure…but almost none of it is for recycled or recyclable water projects. You will see companies in water ETFs’ 10 Largest Holdings lists that have little water exposure at all, such as a firm that garners only six percent of its revenues from water testing and 94 percent from entirely different industries and activities. Keep looking, and you will find water utilities with no sustainability, stewardship, or other related efforts behind their sale of water. They are in charge of the earth’s most precious resource while failing to demonstrate good stewardship of it. In fact, many water-themed ETFs hold utilities that derive a material portion of their revenue from selling water to fracking companies.

As is so often the case in ESG investing, it pays to do your homework, and to know that your fund manager is doing theirs, too.

The Value of Water: A Growing, Global Risk by The World Economic Forum (WEF) highlighted the critical need for investors to take action on the water shortage. This striking report outlines a comprehensive list of risks and opportunities related to freshwater scarcity across all industries globally. In fact, according to WEF’s analysis, water scarcity will not just slow economic growth and exacerbate social inequalities, but is one of the greatest risks to global stability. Activities like selling water for use in fracking fluid will not decrease our economy’s freshwater risks.

The Value of Water report concludes that:  Water security has increased in importance for investors; private sector actors have a vital role to play in securing water supplies through investments in infrastructure and technology solutions; a growing number of opportunities exist to invest in water-related projects that have positive environmental and social outcomes.

It is time for investors to pay attention and consider where their money can do the greatest good when it comes to one of our most precious resources: fresh water. Advisors should resist the temptation to “blanket” buy a water fund or ETF and call it good enough. Rather, in order to navigate the complex and increasingly urgent issue of freshwater scarcity, they should consider if what they buy are genuine, significant, sustainable water solutions that help to mitigate and to assist in adapting to the real-world problems confronting us. This is important in terms of sending market signals that only true solutions have value, and in increasing our probabilities of competitive investment returns. Inadequate or false solutions will not ultimately hold value.

Never Stop Questioning for a Better Future

Clearly one purchases a mutual fund or ETF because they have faith in their professional manager, and because they may not have the time or inclination to do the research and pick stocks to determine what the constituents of a portfolio should be. However, before buying a fund, performing a small amount of homework on the largest holdings list can go a long way to ensure the fund’s investment committee has the same vision of the future as you and/or your clients. Where investments are made – where capital flows – defines what the economy is, so it is imperative to invest assets in the future we want to see unfold. By looking at the largest holdings list, an investor can do quick research on those few companies to evaluate what each is doing to earn their revenues. What a company gets paid to do is tantamount to the company’s reasons for existing.

Investors should ask: Is there a clear market need for the product/service they are delivering? Does this investment solve that problem? How do we know if the solution works? Is the solution scalable and sustainable? How high quality is the management team’s track record with similar activities? Are they aligned financially to succeed – meaning are their incentives linked directly to performance of that investment over time? This kind of inquiry can help an investor understand exactly what a company does to earn its money.

Water scarcity is a pressing global issue that is not going away, and is, in fact, getting appreciably worse by the day. But—investable solutions exist. By engaging in some prudent research, we can ensure that our money flows toward solutions seeking to create a better and brighter future.

Article by Garvin Jabusch, Chief Investment Officer for Green Alpha Advisors and Betsy Moszeter, Chief Distribution and Sales Officer and a Portfolio Manager Green Alpha Advisors.

BIOGRAPHIES:

Garvin Jabusch is the Chief Investment Officer for Green Alpha Advisors, where he leads investment research; conducts macroeconomic, scientific, and technological analysis; and develops and communicates the Next Economy investment approach.

Garvin previously worked at Forward Management, LLC where he managed the Sierra Club Stock Fund and the Sierra Club Equity Income Fund. Prior to that he was Vice President of Strategic Services at Morgan Stanley, where he contributed to such projects as the integration of European acquisitions and the sale of Morgan Stanley Online. He also served as a product manager at Morgan Stanley Online, managing the launches of wireless trading and after-hours trading for the firm’s clients. After-hours trading on MarketXT marked the first time retail investors in the U.S. had the opportunity to trade in the after-close markets. His other experience includes research and analysis, trading and mutual fund sales. Earlier, Garvin studied in the Ph.D. program in physical anthropology and archeology for five years at the University of Utah. Garvin was a field Director for the American Expedition to Petra, Jordan for two excavation seasons, and served as archeologist and crew chief at many sites in the American West. Other jobs held by Garvin have included EMT and whitewater rafting guide.

Betsy Moszeter is the Chief Distribution and Sales Officer, and a Portfolio Manager for Green Alpha Advisors. She serves as the lead analyst on a portion of Green Alpha’s investable universe and is the lead PM on Green Alpha’s portfolio strategies that overtly focus on diversity and social inclusion issues in addition to the sustainability and innovations on which all Green Alpha portfolios are centered.

She first became acquainted with Green Alpha through her work at First Affirmative Financial Network, LLC. As a core part of her job, Betsy became familiar with many sustainability-oriented investment options and was particularly impressed by Green Alpha’s rigorous research approach. As the SVP and a Managing Member of First Affirmative, Betsy was responsible for building the firm’s third-party platform business and institutional account investment capabilities. Prior to First Affirmative, Betsy was the Chief Operating Officer and Chief Compliance Officer of TAMRO Capital Partners, LLC in Alexandria, VA. She participated in all aspects of the firm’s growth from $200 million to $2 billion, growing the business to include five mutual funds, a collective investment trust fund (CIT), institutional accounts, and separate accounts for high-net-worth clients, as well as separately managed wrap accounts and UMA programs where TAMRO served as an asset manager. She began her investment management career at Harbor Capital Management in Boston, MA, where she did everything from portfolio administration to new client due diligence meetings, attribution analysis, earnings calls, trading support, and FX communications.