Liquid Assets

As Los Angeles battles the rest of the west for water rights—and aquifers everywhere start to dry up—it’s no surprise that water is a hot commodity. But lately, experts agree, the market is especially robust. “It’s essential to human health, a safe environment and economic development—and, well, there’s no substitute, so it’s a basic supply-and-demand issue,’” says Steve Hoffman, president of WaterTech Capital, an investment firm that tracks this burgeoning sector.

Why is it that water has become, as many have said, “the next oil”? Access to clean drinking water has simply failed to keep pace with population growth, especially in the developing world. “Right now, 1.2 billion people are without access to safe drinking water,” says Erik D. Olson, senior attorney and director of the Natural Resources Defense Council’s Drinking Water Project. The United Nations has pledged to cut that number in half by the year 2015, which will require tremendous investment by governments of developing countries, the nations that aid them, businesses that offer clean water technology, and NGOs. Furthermore, rapid development in China, India, and elsewhere is driving demand for new water infrastructures to support those emerging economies.

At the same time, existing water systems in western nations are wearing out. In the U.S., nine out of ten water utilities are still using World War I–era technology, according to the NRDC, and bringing all of it up to date will cost around $500 billion, according to one estimate. Removing contaminants like arsenic and perchlorate from the domestic water supply is also emerging as an important, and costly, necessity.

As a result of this pent-up demand, companies that are developing technology to treat, filter, and deliver clean water—and even water utility companies themselves—have become the latest “next big thing.” “Water is hot right now,” says Francesca McCann, a vice president at Stanford Washington Research Group who specializes in analyzing the water industry. Last year, WaterTech launched the Palisades Water Index (ticker symbol: ZWI) to track this potentially big money-maker (it works in roughly the same way that the NASDAQ represents tech stocks). Comprising publicly traded stocks that stand to benefit from the demand for safe drinking water, sustainable use, and improved industrial processes, the Palisades Index is now up about 18 percent since its inception (compared to around three percent for the S&P 500), with companies that are developing new technology leading the way. In December, the investment firm PowerShares launched a portfolio, called Water Resources, to mirror the Palisades index so that investors can easily get in on the action.

But is it green to invest in these companies? “It is pretty earth-friendly—and human-friendly, of course,” says Olson. “There’s no such thing as a perfect technology, but on balance, these are sustainable, and they’re likely to play a role in fixing important environmental problems. And they’re helping people—you don’t want eight million kids dying each year because they don’t have access to clean drinking water.” Doug Wheat, director of SRI World Group, an organization that provides information on socially responsible investing, agrees: “Water Resources was developed to make money, not necessarily with social and environmental factors in mind, but still, in general, it’s good for both people and the earth.”

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Posted on Dec 11, 2006 at 2:45 PM
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Comments

Good to see the water issue getting coverage. My experience with the SRI niche is that the investment case for water [ie privatized water utilities, bottled water sales] is cloudy from a philosophical perspective. If 2bn people need potable water every day, can investors make money from it.

My own view is that private-public partnerships are necessary, so their will be exposure through fixed income or equity markets to water investment, that is not morally compromised.

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Posted by:Chris Anderson |December 12, 2006 5:21 PM