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Investing in Water: A Review of Outstanding Books

Many geologists and geographers realized decades ago that we are entering an age of water scarcity, and that clean water would someday be the world’s most coveted resource, even more valuable than oil. I bought into that premise when I was a student at the University of Illinois at Chicago, where I earned a bachelor’s degree in geography in 1977. The combination of increasing demand for clean water (due mainly to population growth) and decreasing supply of it (due to depletion and pollution) would inexorably lead either to the soaring price of clean water or to epic conflicts over water resources, or both.

Here are a few facts to support this premise: While global water supply has remained constant over millions of years, the demand has increased six-fold just in the last century. The rate of demand is increasing roughly double the rate of population growth due to irrigation, mining, manufacturing, and other industrial uses as well as household and commercial consumption. Today 40 percent of the people on earth live in water-scarce conditions—that will grow to 60 percent by 2025.

Now only a pandering idiot would deny that climate change is causing shifts in the patterns of ocean currents, storms, floods, droughts, and sea level which could result in potentially cataclysmic mass migration and critical scarcity of clean water in many parts of the world, including some of the biggest cities.

We can talk some other time about how (or whether it’s still possible) to prevent catastrophic climate change. In this column, I will talk about adapting to it. As animals, we must exploit, consume, and excrete.

Booming Business

About a year ago I read “Windfall: The Booming Business of Global Warming,” by McKenzie Funk (Penguin, 2014). This is one of the finest pieces of business reporting I’ve ever had the pleasure to read. It is fascinating, exciting, startling, inspiring, and downright fun. Funk, a veteran journalist who studied economics at the University of Michigan, does not moralize, does not try to alarm, and does not disrespect the people who suffer from droughts, floods, superstorms, and sea level rise. His approach can be summed up thus: Where there is catastrophe, there is market opportunity.

Funk spent six years traveling around the world to interview inventors, scientists, speculators, politicians, activists, financiers, builders, warlords, private firefighters, and “climate capitalists.” They include Greenland secessionists, Israeli snowmakers, Dutch seawall developers, Australian desalinators, geoengineering patent trolls, long-range energy planners, etc. Scientific American said this about Windfall: “Funk’s reporting brings him face-to-face with individuals who are investing in planetary crisis. Far from vilifying these opportunists, he attempts to see the warming world through their eyes.”

Investing in Water Resources

Thus aroused, I started reading Steve Hoffman’s book “Planet Water: Investing in the World’s Most Valuable Resource” (Wiley & Sons, 2009). Hoffman first writes about water science, the classification of water as a public good vs. a privately owned commodity (and points in between), national and global water regulation, the “cost of clean water,” and the “drivers” of water-related industries.

In Part Two, Hoffman (the founder of WaterTech Capital), delves into specific investment opportunities, including: water utilities, treatment of water and wastewater, water distribution and reclamation infrastructure, water analytics (metering, monitoring, measuring, testing, etc.), water resource management, desalination tech, etc.

The book’s third and final section is about “emerging issues” like pollution and contamination, biotechnology and nanotechnology, water recycling and conservation, climate change, and—more specifically related to investment—water as an asset class.

Before I got halfway through Planet Water, I realized, having studied geography, that the development and utilization of specific utilities, treatments, technologies, construction techniques and materials, analytics, etc., depends to a large degree on future government policy, legislation, and ownership of or control over water resources. As the demand for clean water keeps increasing and the supply keeps declining, and conflicts sprout like algae blooms, there will be major policy debates, legislative and regulatory action, water treaties and alliances, diversion and exportation schemes, and mobilization of new security forces to defend valuable water resources from raids by water crime syndicates. So I set aside Planet Water (to be resumed below) and delved into some background reading.

Cadillac Desert

If you read “Cadillac Desert: The American West and Its Disappearing Water,” by Marc Reisner (Penguin, first printing 1986, updated 1993), you’ll learn that not all water-related government policy and legislation is effective or sustainable. In fact, you gotta assume that much of it will be dictated by short-term political expediency, special interests, dubious science, and criminal intent. Cadillac Desert is a disturbing chronicle of the rampant construction of dams, aqueducts, and reservoirs in the 20th century by the Bureau of Reclamation and Army Corps of Engineers, which competed aggressively for the right to build, build, and build more dams wherever possible and wherever remotely feasible (or not feasible). The result was agricultural miracles (e.g., the San Joaquin Valley) and desert metropoli (e.g., Phoenix and Las Vegas) of uncertain sustainability, and ecological disasters (e.g., the Owens Valley and lower Colorado River) whose long-term effects are worrisome.

Although Reisner’s depiction of this era is often disheartening, the book is so thoroughly researched, vividly historical, and wittily composed that it is a deeply satisfying read nonetheless.

Great Lakes Water Wars

I live in the Great Lakes Basin, where freshwater resources are abundant, so I have a regional bias. In fact, the Great Lakes contain 20 percent of the world’s fresh surface water. So it was with some dread that I read “The Great Lakes Water Wars,” by Peter Annin (Island Press, 2006). The title is misleading because it is not about military wars, but the legal and political struggles around protecting the Great Lakes water resources by limiting in-basin use and out-of-basin diversion. Whereas Cadillac Desert might be a cautionary tale of wanton exploitation, “The Great Lakes Water Wars” is a lesson in far-sighted diplomacy. I’m aware that in another century—or a few decades—history might prove me wrong.

Annin told me he plans to update the book, because it was published two years before the Great Lakes-St. Lawrence River Basin Water Resources Compact was ratified by the eight Great Lakes states and approved by Congress.

I wonder if the Compact will survive when drought- and salinity-stricken areas of the country start demanding access to “our” water resources. Will the federal government dictate a more equitable water distribution scheme? Or will the GLB states gain enough power, partly as a result of migration away from the stricken areas into the fertile GLB over the next few decades, to resist central authority over the resources?

Hydraulic Civilizations

To answer such questions today, it is useful to see how they were addressed in the past. “The control of water wealth throughout history has been pivotal to the rise and fall of great powers, the achievements of civilization, the transformations of society’s vital habitats, and the quality of ordinary lives,” writes Steven Solomon in “Water: The Epic Struggle for Wealth, Power, and Civilization” (HarperCollins, 2010). This is a seminal work, fascinating and profoundly insightful. Starting with the Nile River Valley of ancient Egypt and the fertile crescent of Mesopotamia, it tells of the hydraulic innovations, wars over water resources and maritime supremacy, and the ways in which water resources have shaped the destiny of human society up to today’s “dawning age of water scarcity.”

Solomon is not a historian but a journalist who has written for the New York Times, The Economist, Business Week, etc., and has commented on NPR’s “Marketplace.”

In the final chapter, Solomon refers to “the global freshwater crisis.” Not in the future, but now. Not just in poor, underdeveloped regions and communities. After reading this book, you will have a hard time convincing yourself that the crisis is far away in terms of time or distance.

I devoted several months to reading those books, which I very highly recommend, and two other good ones: “The Big Thirst: The Secret Life and Turbulent Future of Water,” by Charles Fishman (Free Press, 2011); and “When the Rivers Run Dry—Water, The Defining Crisis of the Twenty-First Century,” by Fred Pearce (Beacon Press, 2006). Thus informed, I returned to Hoffman’s Planet Water, the book about investing.

Privatization of Water Utilities

“By far the largest component of the water industry is the water utility sector,” where there is a trend toward privatization, says Hoffman. Water utilities, whether municipal or private, are responsible for delivering water supplies to residential, commercial, and industrial users. The government usually gives them monopoly power, and in return they have a “near-fiduciary obligation to provide quality, dependable water services.”

If the utility privatization trend continues, there will likely be “a substantial consolidation…the magnitude of [which] will be unprecedented,” resulting in “accelerating merger and acquisition activity…and a consistent flow of IPOs.”

The financial performance of water utilities has historically been driven by three factors over which managers have no control: weather, interest rates, and regulation, Hoffman points out. He provides a list of 44 publicly traded water utilities worldwide, 12 of which are in the USA. From 2000 to 2005, water utility stocks returned 134 percent. He also explains and lists three major ETF-based water indexes: Palisades, S&P Global, and ISE; and provides a list of 16 water funds including mutual, PE, hedge, equity, and other types of funds.

Published in 2009, the information in Planet Water is at least six years old. I asked Hoffman if any of the book’s content needs to be updated, and he replied by e-mail on 10/20/15: “The rationale for investing in water generally (and subsectors specifically) requires fairly detailed explanations about the science underlying water resource management, the technology governing solutions and the nuanced impact of water regulation/policy. The content of this narrative has not changed since I wrote the book….Any updates would focus on the changing landscape of water business participants; not really new pure-play water stocks but companies that have since refined their presence through M&A activities. So the book could easily have a 2015 publication date.”

Planet Water is a sound foundation on which to begin researching specific investment opportunities in the water industry. This might be the beginning of a wild, wild ride that lasts through the 21st century, like the oil boom in the 20th.

A few online resources

10 Best Water Utility Stocks for 2015 – The Street

3 Best Stocks to Invest in Water – Motley Fool, April 2015

Water Stocks: How to Invest – Barron’s, June 2014

5 Stocks to Profit from Water’s Scarcity – Kiplinger, August 2014

Forget Gold – Invest in Water – The Telegraph (UK), September 2014

Investing in Water Stocks: This is Better than Oil!– Energy & Capital, October 2015

 

About David M. Freedman

David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…

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