Other index names include Danish biotech company Novozymes, which helps many industries use water more efficiently and keep it cleaner, and Singapore-based Hyflux Ltd., which provides desalination and wastewater recycling in water-scarce regions.
Huang sees no shortage of water infrastructure drivers. Many major world cities (particularly in the U.S. and Europe) have aging and antiquated systems in need of replacement and rehabilitation. Also, cities must be able to accommodate a huge influx of people as global urbanization continues, and there’s growing awareness of the potential loss of economic opportunities without proper infrastructure in place, she says.
Additionally, the U.S. government is pressing municipalities for better-quality water through the Clean Water Act and the Safe Drinking Water Act, she says, and legislation for new financing mechanisms for water infrastructure has been proposed.
Fixed-Income Opportunities
Over the dozen years that Steve Liberatore has managed the TIAA Social Choice Bond Fund (which has $750 million in assets), he’s witnessed rising global interest in the access to and availability of water. As a result, “we’ve been able to identify and see an ever-increasing and ever-broadening opportunity set to invest in securities that have a direct impact on water,” he says.
About 10% of his fund’s assets are somehow related to water, says Liberatore. Although he and his colleagues will look anywhere to find value, he says, “from the water-related theme, I think the fund has really had the most impact and the most positive results in the municipal space.”
One issue held by the fund is the District of Columbia Water and Sewer Authority’s 4.814% coupon maturing October 1, 2114. It’s the first 100-year green bond issued, he says, and it’s related to the water authority’s Clean Rivers Project.
The purpose of the project is to control combined sewer overflows, which are common in older cities that use the same pipes for storm water and sewage. This project, effectively built with a 100-year life, uses gravity-fed tunnels, and engineers anticipate it will reduce these overflows by more than 96%, says Liberatore.
The key for investors in any issue, he says, especially in a 100-year transaction, is to understand the longevity of a project and to ensure it has a useful life that corresponds with the maturity of the debt. Another key point is to make sure there aren’t construction delays, engineering issues or massive cost overruns, he says.
TIAA’s fund also owns a revenue bond from the California Pollution Control Financing Authority for construction of Poseidon Water’s desalination project in San Diego County. The project will provide clean water and restore San Diego Bay. The issue will receive a credit boost when it’s transferred to the San Diego County Water Authority upon completion of the project this year, says Liberatore.
The fund has numerous investments in municipal bonds related to improving infrastructure or water quality in cities including Cincinnati; Pittsburgh; and Austin, Texas. On the corporate side, one issue it’s invested in is a green bond issued by Regency Centers, a REIT with strong efforts in water conservation.
All of the TIAA Social Choice Bond Fund’s water-related bond investments are domestically focused. There have been industry discussions about future deals to provide water to developing nations, but according to Liberatore, “I haven’t seen anything flushed out yet to hit institutional size.” It’s something he plans to keep an eye on.
More Musings
George Gay, CEO of the First Affirmative Financial Network, an independent RIA that specializes in serving socially responsible investors and supports roughly 100 advisors who manage assets under the network, is also scoping out water investments for clients.
“Water is one of the great challenges we have for the future,” he says, “so that’s why most of our clients are interested in having exposure.”
The great majority of the funds First Affirmative uses have water exposure, he says. There is also fairly extensive exposure to water, he says, in the First Affirmative Global Infrastructure Folio, a separately managed account he oversees that is offered on the platform from Folio Institutional. “There’s a lot of choices in the space,” he says, “and there’s aspects of clean water even in companies where you wouldn’t expect it.”
It’s also hard to ignore water because of its strong ties with energy. As Gay points out, it takes one to produce the other. His clients often exclude companies involved in fracking because of poor water practices. “The idea of investing in water is also investing in public health and education,” he says, noting that women and girls in developing countries must spend significant time fetching water and miss out on school and other opportunities.
Richardson of Impax sums it up. “Water is so fundamental to economic growth, to life on Earth,” he says. “It’s one of these long-term investment opportunities that we think people should be more excited about.”