Blue gold: How funds are investing in water scarcity

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Rising demand for water amid growing shortages is leading to more investment opportunities in what is often dubbed “blue gold.”
Although there are few pure plays among water-related securities, investors can gain exposure to this commodity through stocks in different sectors, exchange-traded funds (ETFs) and bonds.
“Water is key for economic growth,” says Vishal Bané, portfolio manager with Toronto-based AGF Investments Inc.
“Competition for water will grow more intense, whether it’s from population growth, industrialization, or digitization in manufacturing semiconductors or cooling artificial intelligence [AI] data centres.”
Companies with technologies to deal with water issues will become increasingly important, says Mr. Bané, co-manager of the AGF Global Sustainable Growth Equity Fund, which has 14 per cent of its assets in water-related plays.
Three-quarters of the Earth is comprised of water. The scarcity issue stems from the fact that only 3 per cent of that is fresh water while the rest is ocean salt water or in ice caps.
In emerging markets, water demand stems mostly from agriculture, but that need will grow with urbanization, industrialization and rising income levels, Mr. Bané says.
In the developed world, demand comes from agriculture and industry. In the technology sector, water is needed for the boom in data centres that store and transfer data for AI models to run.
“Data centres are guzzlers of water to cool the servers,” he says. “It is one of the fastest-growing sectors for water consumption.”
Water wars have even erupted between tech giants and the local communities where data centres are located in the U.S.
Mr. Bané says water-related projects in the U.S. are getting a tailwind from funding provided by the Infrastructure Investment and Jobs Act. “One of the biggest issues plaguing all the developed world is aging water infrastructure.”
In the AGF fund, “we tend to buy companies that grow in value by providing solutions – be it for droughts or flooding issues – and improving water management,” he says.
Ecolab Inc. ECL-N, which focuses on water, food safety and public health technologies, is a top holding. The company is a provider of solutions for cleaning and sanitizing water, and offers desalination services too, he says.
Although data centres can use recycled water, it must be pure or it can damage the machines, he says. Ecolab has an online tool to detect whether water quality is deteriorating.
Mr. Bané is also bullish on Xylem Inc. XYL-N, a pure-play water technology company. It offers online tools for water use and conservation and sells filtration systems. Xylem can also monitor water pipelines remotely to assess any risk of bursting.
Its Evoqua Water Technologies unit is also a provider of solutions to remove chemicals, such as Per- and polyfluoroalkyl substances (PFAS) that contaminate drinking water sources.
PFAS, which can have adverse health effects, are an emerging risk to companies, Mr. Bané says. Last year, chemical manufacturer 3M Co. agreed to pay more than US$10-billion to settle lawsuits over PFAS contamination.
Canadian engineering firm Stantec Inc. STN-T, whose water services represent 21 per cent of its revenue, is another holding. Stantec, which offers solutions for water reuse and conservation, gets more than 50 per cent of its revenue from the U.S and benefits from spending in the infrastructure act, he adds.
“Water is a great secular story for high growth, but not everything is a win,” Mr. Bané warns. “Sectors such as irrigation can be cyclical. They work based on crop prices and farmers’ incomes.”
He prefers companies with industrial and commercial end markets versus utilities serving municipalities where growth tends to be slower.
Mahi Roy, a fund analyst with Chicago-based Morningstar Inc., agrees there is a case for investing in water-related securities.
“There is water scarcity due to climate change, which is causing droughts, fires and uneven rains that make it hard to meet the growing demand,” she says.
For investors wanting to bet on this theme through funds, there’s only one water ETF in Canada. Launched in 2007, iShares Global Water Index ETF CWW-T has posted an average annual return of 10.6 per cent for the 10 years ended June 30.
There are seven U.S.-listed ETFs, but only three have one of the higher Morningstar ratings, Ms. Roy says. They include Invesco S&P Global Water Index ETF CGW-A, Invesco Water Resources ETF PHO-Q and Ecofin Global Water ESG Fund ETF EBLU-A.
The rest, which have a neutral rating, include First Trust Water ETF FIW-A, Invesco Global Water ETF PIO-Q, Global X Clean Water ETF AQWA-Q and IQ Clean Oceans ETF OCEN-A.
“Because it is difficult to invest directly in water rights or have direct exposure to the price of water, water funds invest primarily in water utilities, water transportation companies, companies that produce equipment to treat and or purify water, and companies that may be considered leaders in water efficiency,” Ms. Roy says.
“Funds often stretch to find investible names and end up offering a portfolio that may not be what an investor expects.”
Furthermore, as water ETFs are highly concentrated in one sector, they should be used as a part of a diversified portfolio, she adds.
The water focus is also gaining traction among bond managers. In April, Montreal-based Addenda Capital Inc. launched water as an additional theme in its Impact Fixed Income Pooled Fund. Climate change, community development, health and wellness, and education are its other themes.
The pooled fund targets green and sustainable bonds that finance water projects and are issued by different governments in Canada, says Monika Freyman, vice-president of sustainable investing at Addenda Capital. (Green bonds typically finance environmental projects, while sustainable bonds invest in a mix of environmental and social projects, such as affordable housing.)
Addenda’s pooled fund focuses on Canadian-denominated securities. It holds a City of Vancouver green bond, whose projects include water-management infrastructure, and a Government of Canada green bond, whose investments include improved water supply and wastewater management in Indigenous communities.
The water theme is less than 10 per cent of the $533-million fund, but “we want it to grow,” Ms. Freyman says.
Although there are water-oriented “blue bonds” financing ocean-friendly projects, none are offered yet in Canada, she says.
The decision to add the water theme to the pooled fund stems from the fact there’s a chronic lack of investment, globally, in water – be it for wetland restoration or water infrastructure, she says.
In North America, water infrastructure has tended to be neglected because it’s more “politically palatable to put more tax dollars into projects that can be seen by the public,” Ms. Freyman says. “Water is often underground – sort of out of sight and out of mind.”
However, aging water infrastructure became very apparent when Calgary suffered a major water main break in early June that caused several weeks of water restrictions. “Even in Canada, we tend to underinvest in water management systems,” she says.
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