Discussing the world’s delicate balance with water is Nashat Moin, Senior Sustainable Investment Analyst. Nashat will explain why assessing water risks and opportunities is an increasingly important part of investment decision-making.
Marilyn Johnson: I’m Marilyn Johnson and you’re listening to On the Trading Desk®.
We’ll be talking about water from its basic, essential role in keeping us alive to the critical roles it plays in sustaining the world’s economies. And we’ll learn about the serious challenges of increasing water risks, as well as the opportunities these challenges provide for making a positive impact.
Our guest today is Nashat Moin, who is a Senior Sustainable Investment Analyst with our firm. Nashat, welcome to the program.
Nashat Moin: Happy to be here.
Marilyn: So tell us more about water. We know we need to drink a certain amount of it to survive. We need it to wash dishes, our clothes, ourselves, and to keep gardens thriving. But how does it affect not just our lives, but the entire world’s economies?
Nashat: That’s a very good question. So water is interconnected with our lives. You described several uses of water in our daily lives, but it also shows up in a lot of invisible ways, for example, in the value chain of many products and services.
Several industries have significant reliance on water. For example, with energy, you have thermal power generation, hydroelectricity. Then in terms of basic materials, chemicals, mining, oil and gas all heavily rely on water.
And also in some surprising ways, water is part of our value chain. For example, in semiconductor manufacturing and data centers.
So when you’re looking at a portfolio, you see how water is affecting very many industries and these are just some of the ones that I mentioned, but there are others, as well, that have second degree or third degree impacts of water.
In addition, water stress is increasing around the globe. The World Resources Institute found that 17 countries—mostly are in Asia and Africa—are experiencing extremely high levels of water stress. 17 countries might not seem like a lot, but they’re home to a quarter of the world’s population, and the World Bank estimates that climate-related water scarcity in these economies are likely to affect their GDP (gross domestic product) by 6% to 14%. So that’s a significant loss that we’re talking about.
Other than scarcity, there’s also the other physical effects of water. There’s riverine and coastal flooding. There’s significant infrastructure around the world, like train tracks and other infrastructure, that are at risk of flooding.
Marilyn: Well, you recently published a report, titled Ripple effects: Investment risks & opportunities in water. And in that report, you indicate that water risks are likely to keep increasing in the future. Could you tell us a little bit about this research, like what you learned about the potential for rising water risks, what different types of risks exist, and what these could mean for the world’s future?
Nashat: Water risks are often local issues, and so it’s important to understand what geographies are in play. There are so many different water risks, I like to divide them into two groups. There’s fresh water risks and then there’s oceans.
For freshwater, one of the main risks in play is the constraint between the supply of water and demand for water. Supply of water comes from precipitation and ice packs. And as global temperatures are rising, these patterns of precipitation are shifting. In addition, snow packs are smaller and they melt more quickly. So these are causing significant supply issues, not to mention flooding risks.
On the other hand, as supply is decreasing, demand for freshwater is increasing. Populations are rising and we’re finding more and interesting ways to use water. I mentioned a couple of examples a little bit earlier with semiconductors and data centers. We know these types of demands for water didn’t exist a few decades ago, not to the scale that we’re seeing it now. And so this lower supply and higher demand is increasing water stress around the globe.
On the oceans side, you have rising sea levels and ocean acidification. Those are actually very closely linked. Both are causes of climate change. As temperatures are rising, it’s causing sea levels to rise, creating a direct impact on coastal and island economies.
Now the lesser known impact of global warming is ocean acidification. All that means is that the water of the oceans is increasing in its acidity. So as the concentration of carbon dioxide in the atmosphere is increasing, it’s actually increasing the acidity of the water. This is creating serious impact on ocean ecosystems and it’s not to be ignored.
In a nutshell, all of these signs are for the world to pay more attention to water risk and actively seek out opportunities to mitigate these risks.
Marilyn: Nashat, in identifying all these different types of water risks, is it possible to view them from investors’ perspectives? And if so, how would you break that down?
Nashat: Water risks are already present in investments. I’ll share a couple of examples.
There’s large swaths of infrastructure currently at risk due to coastal flooding. The Amtrak’s Northeast Corridor is likely to be inundated for all or significant parts of the year in the coming decades. One example is in Delaware where they estimated the cost of building removable flood barriers to be $24 million per mile of track. This is a significant cost in addition to the $40 billion of critical but unfunded basic repairs that the company already faces.
Another example is one that happened last year in 2020. Voters in a Mexican border city rejected the construction of a massive U.S.-owned brewery. This is an arid region rife with water shortages. The brewery, which cost $1.4 billion, was being built by Constellation Brands to brew beer for export. These would have included brands like Corona, Modelo, Pacifico. And so this creating some really interesting issues around where companies are sourcing water and, in a way, exporting the water not directly as water but as beer or other drinks or other products.
And so when you’re analyst or an investor looking at these risks, it’s really important to understand what is the complete value chain and where are the different risks that are present.
Marilyn: The examples you just gave are startling and they really drive home the severity of what the future could hold. But you also mentioned in your report that where there are risks, there are also opportunities. So what kinds of opportunities are there for investors to address water risks?
Nashat: Investors can choose to create positive impact with respect to water.
There are several corporate, sovereign, and subnational green and blue bond issuances for clean water, wastewater treatment, water efficiency, and ocean conservation.
On the equity side, there are listed companies providing innovative water solutions, for example, Xylem, whose business model is centered on alleviating water treatment. So as we’re thinking about risks, I really think it’s important to think about the opportunities that we have for mitigating water risks and actually having an active part in creating positive change.
Marilyn: That’s really helpful information, especially for investors interested in helping reduce water risks. You mentioned in your report that your team has created a Water Working Group. Can you tell us more about that?
Nashat: Our firm created a Water Working Group, which researches and analyzes risks and opportunities related to water. It’s a cross-functional team, leading top-down and system-level analysis and, in addition, working directly with analysts to identify bottom-up and issuer-level implications.
We’re assessing physical, social, and regulatory water risks at the issuer level, at the industry level, and the sector level. And by using our proprietary water risk framework, we are identifying key impacts at the issuer level and aggregating them up to understand portfolio implications.
Marilyn: Well, thanks, Nashat, for that insight into how our firm is working to understand water risks, even at the level of issuers’ potential impact on portfolios. Do you have any last thoughts that you’d like to leave with their listeners?
Nashat: People may not realize the extent and variety of water risks. For example, economic losses from weather-related disasters range between $250 billion and $300 billion annually. And 3/4 of all weather-related disasters are actually related to water.
By 2050, the number of people vulnerable to flood disasters is estimated to be at 2 billion. That’s a significant portion of our global population.
Intense water scarcity could displace 700 million people by 2030.
And the World Bank estimates that investments of $114 billion per year is needed just to ensure basic access to water and sanitation for all.
I would encourage investors to think more critically about water risks and examine opportunities. The cost of water is low, but the risks are real. They lie in supply disruption, in competition with local communities, wastewater management, and of course, climate hazards.
Marilyn: Thanks, Nashat, for sharing your insights with us today.
Nashat: You’re welcome. Thanks for having me.
Marilyn: That wraps up this episode of the On the Trading Desk podcast. If you’d like to read more market insights and investment perspectives from our firm’s investment teams, you can find them on our AdvantageVoice® blog and on our website. You can also find there the report titled, Ripple effects: Investment risks & opportunities in water.
To stay connected to On the Trading Desk and listen to past and future episodes of the program, you can subscribe to the podcast on iTunes, Stitcher, Spotify, Overcast, or Google podcasts. Until next time, I’m Marilyn Johnson; thanks for joining us.
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