Three years ago, on December 7, 2020, the financialization of a vital raw material began with the introduction of the first water futures contract on the Chicago Stock Exchange. The much feared speculation that would bring with it the price of a basic necessity resource reduced to the level of a transferable value has not been a material element until now. What will happen with this rapidly worsening water crisis?
The volatility of the price manifested itself, in step with the vagaries of climatic conditions. This is evidenced by the Nasdaq Veles California Water Index, which tracks the price of the stock futures contract and which closed at US$513 per acre-foot (a measure equivalent to 1.2 million liters). It reached a peak of US$1,260 in November 2022, under the effect of the drought in California, returning today to around US$180.
If the water has not yet attracted speculators, investors have responded. For the moment, most strategies involve index or direct investments in the shares of companies whose activities are linked to water. Or, even more widespread, to exchange-traded funds or other investment funds focusing on the various industry players involved in infrastructure, distribution, public services and water treatment.
Uptrend
The performance is there. Unlike the volatility of the price of the futures contract, the (upward) trend in the price of shares of companies operating in this sector is much more regular. We can think here of the SGI World Water benchmark index, which houses the 20 largest companies working in the fields of infrastructure, equipment and water treatment. Certainly, there was the effect of the pandemic, with the index touching a low of 3660 points in February 2020 to reach a high of 6682 points in November 2021. It is trading today around 5390, multiplying by five its historic low of 1026 hit during the Great Recession of 2009.
In exchange-traded funds, for example, $10,000 invested in 2007 has been multiplied by five (for First Trust Water) or three (for Lyxor World Water) since their creation. Over a ten-year horizon, $10,000 invested in the Invesco Water Resources ETF has multiplied by 2.3 since September 2013, while the same amount invested in the S&P 500 index has multiplied by 3, and by 2.5 in the Nasdaq sector index.
So much for historical reading. For the future, the investor will have to deal with an already intense water stress set to quickly increase.
An accelerated crisis
The Bank of America research team paints a rather gloomy picture of the state of affairs. It is recalled that 75% of the planet is covered in water, but less than 1% is so-called usable or drinkable water. This small portion is declining rapidly. Demand for this water has increased by more than 40% over the past 40 years and is expected to grow by 25% by 2050, while supply has been reduced by more than half since 1970. pace, we could run out of fresh water by 2040. “We use natural resources 1.7 times faster than the ecosystem can regenerate,” emphasize the authors.
About half of the world’s population already experiences very high water stress at least one month per year, and two-thirds of the population could face a shortage as early as 2025. According to the World Health Organization, one billion people do not have access to drinking water.
A little further in time, with a world population heading towards 10 billion in 2050, more population and more production (GDP) mean a 400% increase in water demand over this horizon, in connection with increased agricultural and energy demand. Strong pressure which takes place in a context of deterioration of the supply and its quality with, in particular, 80% of wastewater which is not adequately treated and the presence of microplastic in 83% of tap water. “More than half (57%) of aquifer resources have passed a tipping point, and a third of transported drinking water is lost through leaks in distribution networks,” add analysts from the American investment bank .
With, also, global warming changing the situation. “Every 1°C increase in global temperature reduces renewable water sources by 20%. » Not to mention increased flooding phenomena destroying or contaminating the water supply juxtaposing with increased risks of drought. And, as a result, a predictable increase in geopolitical tensions and cross-border struggles, with 80% of all countries sharing the presence of fresh surface water basins.
There is hope, but…
There is hope, however, says Bank of America. “Every dollar invested in water access and sanitation could generate a return of $7. » Furthermore, “just 1% of global GDP per year by 2030 would be enough to solve the global water crisis”. But political will still needs to respond to the call, on a global scale.