Understanding and integrating water issues into investment processes: Stephen Dover, Head of Franklin Templeton Institute offers insights from the recent United Nations Water Conference.
In March, the United Nations (UN) Water Conference was held for the first time in nearly 50 years. This historic event focused on tackling the global water crisis and ensuring a water-secure future. I sat down with my colleague Seth Cothrun, a member of the special delegation representing Franklin Templeton at the UN, to discuss his key takeaways and the role financial markets and asset managers must play in helping alleviate and solve this growing crisis. Here are some highlights from our conversation of this event:
- Addressing the water crisis is a catalyst to addressing our biggest global challenges. Climate change; food insecurity; diversity, equity, and inclusion; geopolitical insecurity; global health; and the energy transition are key economic challenges, and all involve water. Notably, all 17 UN Sustainable Development Goals (SDGs) require water, with each goal setting out specific targets and metrics. For example, women and girls spend over 200 million hours globally each day collecting water.1 This is staggering! Addressing the needs of the two billion people globally currently lacking access2 to clean water could add an estimated US$260 billion to global gross domestic product.3
- How to value water. The monetary cost of water does not always consider the actual value of water. The valuation of water must consider access to clean water as a human right and its unmatched importance in properly functioning global natural systems. The full valuation of water is necessary to accurately price water, as well as to understand and analyze its impact on a company, industry, or sector. As asset managers, understanding the gap between price and value is where we will find opportunities for clients and flag potential risks. However, a lack of full valuation makes this challenging.
- Data standards and mandatory disclosure are critical. As investors, we must engage companies to properly disclose water footprints, and ensure data and disclosure is standardized. Disclosure should also include negative externalities—a critical factor in accurate valuation, risk and pricing models. Franklin Templeton is actively working to drive corporate action on water-related risk and disclosure through our role on the Valuing Water Finance Task Force, led by Ceres.
- Multisector collaboration and innovation are needed. The current water resource allocation system—solving the water crisis via a fragmented approach and a cumbersome 20th century model—makes it difficult to solve water-related issues. New ways to finance and invest in better water management will require all of the major interested parties to collaborate, including asset managers, institutional investors, banks, auditing firms, water-intensive corporations and NGOs.
- Trillions of dollars of investments are required. This investment can come from private and public markets, public-private partnerships (PPPs), governments, and global debt financing institutions (e.g., World Bank, International Monetary Fund, etc.). Investments are required across asset classes—whether it is traditional infrastructure, social infrastructure, technology, real estate, or green (environmental) and blue (water) bonds. The investments needed to address water security in just the food-water-energy nexus are estimated to top US$670 billion per year.4 This is huge opportunity set for investors and asset managers, but…
- …trust is a key issue. Many institutions, governments, nonprofits and individuals are wary of whether market pricing and private investing can balance all stakeholders needs and are concerned about ongoing issues with greenwashing.5 It will be crucial for investors interested in water issues to know that their investments are achieving their stated goals.
- Many solutions are simple. Many positive changes could be implemented with known, low- technology solutions, but they need investment and financing. For example, water access and sanitation most often requires basic infrastructure investments, such as drilling wells and building water treatment facilities.
- The failure to address this crisis will lead to growing systemic risk and asset losses. A 2006 report estimated that US$63 trillion of assets are at risk by 2050,6 and this number is likely much higher now, especially in the inflationary environment we’re currently experiencing. (This also highlights our data issues—we are making decisions based on old data). Clearly, there are opportunities and risks in working to solve water issues.
This conversation builds on the Franklin Templeton Institute’s ongoing work on exploring the impacts of the food-water-energy nexus. I encourage investors to delve deeper into the opportunity and risks by revisiting our first two pieces on the nexus, Water disruption: Investment risk from multiple angles and Food innovation: Investing to feed our future. And, be on the lookout for our next piece focusing on energy, arriving in mid-2023, which will explore the alpha opportunities at the nexus of water, food, and energy.
Stephen Dover, CFA
Chief Investment Strategist,
Franklin Templeton Institute
- Source: Water.org.
- Source: United Nations. 2023. The United Nations World Water Development Report 2023: Partnerships and Cooperation for Water. Paris:UNESCO.
- Source: Water.org.
- Source: World Economic Forum. 2020. Transformational Investment: Converting Global Systemic Risks into Sustainable Returns. Geneva:WEF.
- Greenwashing is making unsubstantiated claims or exaggerating a company’s environmental credentials and efforts.
- Source: FAO. 2006. World Agriculture: Towards 2030/2050—Interim Report—Prospects for Food, Nutrition, Agriculture and Major Commodity Groups. Global Perspective Studies Unit, Food and Agriculture Organization of the United Nations, Rome:FAO.