Water is one of the world’s most essential commodities, but it is at risk from overuse, pollution, and soaring demand. S&P Dow Jones Indice’s Tianyin Cheng joins Redsand Ventures’ Colleen Becker to explore new tools for understanding water as an asset class.
Treating water as an asset class is to become increasingly important, particularly as nations are set to experience an anticipated 40% shortfall in water by 2030 due to climate change, population growth and resource competition
Investment in water could be one of the ways of tackling this deficit, and companies addressing the growing water crisis would be offering key long-term growth opportunities amidst challenging global circumstances.
The S&P Dow Jones Indices (S&P DJI) Global Water Index is an effective way of identifying listed companies involved in water-related activities. Investors can use this data source to enhance their exposure to water, manage water risk, express their sustainability views, or allocate as part of a broader natural resource theme.
Redsand Ventures’ Colleen Becker caught up with Tianyin Cheng, Senior Director, Strategy and Volatility Indices at S&P DJI, to learn more about how their indices increase investor access to natural capital and biodiversity asset classes including water.
We are in the very early days of treating water as an asset class
Whether water is an asset class is still too early to tell. As yet, it does not have enough cohesive history to determine long‐run return in comparison to assets such as oil and gold. The risk and return parameters for water are just beginning to be tested by the markets.
Water as an asset can be accessed directly through farmlands, water rights and water futures. But these options only are somewhat limited for individual investors, due to the highly localized nature of water pricing and regulation.
Water can also be indirectly accessed through listed companies involved in water related business, as well as the portfolios of such companies.
Demand for improved water infrastructure is an investment opportunity
As the global population continues to expand, there is a vast demand for improved water infrastructure, responsible for treating and distributing drinking water to the public. This demand includes the refurbishment and replacement of existing infrastructure worldwide and new infrastructure development in emerging markets. Many water utilities companies operate in an environment of limited competition as a result of government regulations. Hence, they tend to be regarded as stable businesses with lower volatility than other industries. These companies also tend to pay dividends, which can be attractive to many investors.
Water technology companies aim to combat water scarcity
There are many water technology companies globally helping to combat the water-scarcity crisis, such as companies which develop new treatment technologies, smart water networks, desalination systems, non-revenue water products, metering solutions, outsourcing systems, and testing equipment. These companies supply equipment and materials to water utilities companies enabling them to expand water supply, water supply efficiency, and improve water quality.
Water is attractive to investors for a variety of reasons
From a portfolio context, different investors may come to water for different reasons. Some may use water to express their sustainability views, some may allocate to water as part of a broader natural resource theme, some may be looking for a utility play, and some may just be looking for diversifiers.
Data is key to helping make sense of this opportunity
Allocation to water can be systematically captured by rules-based, transparent index construction. Market participants could utilize index-linked water strategies to gain exposure to water, manage water risk, express their sustainability views, or allocate as part of a broader natural resource theme.
With this objective in mind, the S&P DJI Water Index is designed to provide liquid, diversified exposure to 50 of the largest publicly traded companies involved in water-related business activities through two distinct clusters: Water Utilities & Infrastructure and Water Equipment & Materials.
The index was launched in February 2007, and it is backfilled to November 2001. This long history of index data helps investors to better understand the historical characteristics of listed water companies.
Please visit S&P DJI’s Research & Insights for more information.
Watch the interview with Tianyin below: