January 6, 2020 / 4:11 PM / 2 months ago

Breakingviews - An ever-drier world will unleash investment flood

Clouds gather but produce no rain as cracks are seen in the dried up municipal dam in drought-stricken Graaff-Reinet, South Africa, November 14, 2019. Picture taken November 14, 2019. REUTERS/Mike Hutchings

NEW YORK (Reuters Breakingviews) - The global water crisis is getting worse. By 2030 humans will be using 56% more than is sustainable, according to new research out later in January from the World Resources Institute, a climate think tank. Luckily, investors and companies are investigating some solutions.

The WRI reckons it’ll cost $1 trillion a year to fix the problem, almost half of which is required to boost water supply, with the rest going towards managing demand. Buyout shop KKR is hoping to do its part, announcing in December that it would invest alongside specialist fund XPV Water Partners to develop wastewater-treatment solutions.

It’ll be hard to solve the crisis without addressing farming, since the industry accounts for around 70% of global water use and the same proportion of the WRI-calculated sustainability gap.

Encouragingly, a fix would soak up only 38% of total investment. Trouble is, it can take three or more years for water and other sustainability projects to pay off for farmers, points out Continuum Ag, an agriculture consulting firm set up by Iowa farmers. Yet many eke out a living from season to season. The companies who buy farmers’ goods therefore need to help.

Some are already doing so, like brewer Anheuser-Busch InBev and Mars. The confectioner recently helped Pakistani smallholder farmers cut water use by a third over three years, while increasing their income by a similar amount. On a larger scale, such projects lend themselves to green-bond financing, as PepsiCo showed with a $1 billion deal in October. Some of the proceeds will go towards smarter water use, including for farmers.

Shareholders, meanwhile, are targeting slower-moving companies. A coalition managing $6.5 trillion is haranguing fast-food providers like McDonald’s to force their suppliers to up their game. That pressure will increase in 2020. A number of discussions are underway involving investors, companies and a couple of governments, with goals ranging from setting science-based targets to corralling big water users to publicly set more ambitious targets.

Others, meanwhile, see a big investing opportunity. UBS Global Wealth Management, with $2.5 trillion in assets, has identified water scarcity as one of its top longer-term investment themes. That came after some three-quarters of the 3,400 high-net-worth clients it recently surveyed tagged clean water and sanitation as the most pressing issue facing the world.

Ignoring water risks can drain earnings. Salt and potash supplier K+S lost 11% of quarterly revenue from lost production as last year’s German drought prevented it from shipping out its wastewater. Meanwhile, investing in solutions can return several times the principal, the United Nations, among others, has calculated. More big players are starting to notice. There’s a flood of money looking to flow into action, and the WRI’s startling new data should help unleash that. But it’s a race against time.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/2ZUdthv

Breakingviews

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