Water’s Impact on Investing

On September 26th, CFA Society Chicago hosted a panel discussion in the Vault Room at 33 North LaSalle on the implications of the worldwide scarcity of potable water. The panel was focused on how this water scarcity may affect future investing. The lack of usable water is an “obvious” danger that does not garner a lot of attention at the moment.

The moderator and three panelists brought their perspectives to this worsening condition.

Michelle Wucker: Wucker, moderator of the panel, is a Guggenheim Fellow and founder of Gray Rhino & Company. A Gray Rhino as defined by Ms. Wucker is an obvious danger that many people ignore. Her expertise is in strategy, public policy and crisis management. She is the author of the book “The Gray Rhino:  How to Recognize and Act on the Obvious Danger We Ignore”.

Dr. Dinah Koehler: Koehler has primary responsibility for the overall product positioning and development of Sustainable Equity Strategies and ESG database development at UBS Asset Management. She is a recognized researcher on corporate sustainability.

Dr. Bruce Gockerman: Gockerman specializes in the use of cross disciplinary analytics to understand and address complex issues and environments. In addition to his consulting work, he is a faculty member at Illinois Tech Stuart School of Business.

Lauren Smart: Smart is Global Head Financial Institutions Business with Trucost. She is an expert in sustainable finance and has advised money managers on how to integrate climate change into investment decision making.

Wucker began the panel discussion by stating that the demand for portable water is forecast to continue to outstrip supply. Current thinking is that 1. By 2030 demand will be 40% more than supply, 2. By 2050 global GDP may be reduced by 6% due to this shortage and 3. 43% of corporate CEO’s believe that their businesses will be impacted by this looming shortage.

The first panelist to speak was Koehler who presented four slides that geographically mapped out an investment opportunity set based on global water risk. The slides included:

  • Global Water Risk Map
  • Investment Challenges
  • Negative Impacts of Investment
  • Opportunities for Impact by Geography.

The slides illustrated that the greatest investment opportunities are located in densely populated areas with scarce water resources.

In response to a question from the moderator, Koehler stated that at the moment, most financing for water investment is coming from the World Bank. She expects the private sector to be taking a bigger role.

Gockerman, the second panelist, stressed six points that he believed has worsened the supply/demand equation.

  1. Governance is very weak (mainly local)
  2. Pricing does not include the cost of water (infrastructure only).
  3. Under investment has led to a deteriorating infrastructure.
  4. Needed capital must be focused on the “resilience” of any infrastructure.
  5. Investing impacts must include addressing increasing risk.
  6. Resulting opportunities

Gockerman pointed to the recent hurricane flooding in Houston as illustrating a lack of resilient infrastructure. Investments need to be made into better pumps, advanced technology and better designed large scale projects. He suggested that perhaps a “Marshall Plan” that included public/private partnerships may be a solution.

In response to a question by the moderator, Gockerman stated that current federal policy is mainly derived from the Clean Water Act enacted in the early 70’s. He reiterated that there is a need for the entire system to be rebuilt and expanded.

Smart was the third panelist to speak. She focused on the impact of dwindling water resources on agriculture and energy. Water stress with respect to crop production was illustrated on a slide she presented. The ratio of water withdrawal to supply can exceed 80% in areas where critical crops such as wheat and corn are grown.

In another slide, Smart illustrated that the price of water in most countries does not reflect actual supply or cost. Cities in arid countries like Cairo and Jeddah have much lower prices for water than cities like Copenhagen or Atlanta. These prices do not reflect true cost, are heavily subsidized and cannot be sustained.

After the presentation, there was a question and answer session. Some of the questions revolved around how regional or national solutions may help. Would a regional grid like an electric utility be workable? This is probably not doable since water resources are divided up into different aquifers across the US. Gockerman stated the Great Lakes aquifer region would resist water being diverted out of its aquifer to other states. The panel seemed to agree that Water Bonds might be a good solution and could be funded by pension funds and foundations. Finally the panel was unanimous in stating that de-salinization was not the answer to any shortage as it is currently prohibitively expensive and energy intensive.

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