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UN Desertification Day draws investors to water funds

By: Jack Dominy


Strong return prospects and a need to act on water scarcity has driven demand for water-themed funds…

Increased awareness around the growing issue of water scarcity has driven demand in water-themed funds. As investors pay more attention to climate-related risks, investment choices relating to desertification are vast, including strategies with a focus on water, drought prevention, or investing in water equipment innovation.

Those previously invested in such funds have enjoyed solid returns over the past two years.  In fact, in the period ending 31 May 2021, the MSCI Global Sustainable Water Index outperformed both the MSCI World and the MSCI All Companies World Indices over a three year period, on an annualised basis.

In Europe, thematic water strategies have become increasingly popular, and are now available from dozens of asset managers including AXA Investment Managers, BNP Paribas, Ecofin, Fidelity, Invesco, iShares, KBI, Pictet and RobecoSAM.

With so much choice, investors, fund selectors and asset owners now have the power to invest in targeted strategies that can bring real value both to their portfolios and to wider society.

On 17 June, the United Nations’ Desertification and Drought Day aims to raise the profile of how water scarcity is affecting global populations. It focuses on restoring ecosystems vulnerable to overexploitation. Recent years have seen a rapid increase in the acceleration of droughts in major global cities including Sydney, Cape Town, Mumbai, and Los Angeles.

As the earth warms, the frequency of such events will become more common according to the UN, leaving cities without water, with food shortages, and citizens left to handle the associated increasing cost of utilities and infrastructure. In addition, insurance bills will rise as these natural events become more frequent.

Active solutions

Combatting desertification is not limited to just environmental campaigners. Governments, consultants and investors all have a part to play.

Research in Finance’s UK Responsible Investing Study found that thematic investment strategies are now the second most popular ESG approach among institutional investors. These thematic approaches aim to make money by harnessing the risk premia from the shifting environmental and macro-level trends.

Water-themed funds are just one example of how asset managers are looking to identify investment opportunities arising from our growing awareness of the changes required to manage climate issues. Managers of these funds also hope to avoid any associated risks in their investments from emerging data on drought and desertification trends.

The Allianz Global Water fund, for example, invests in global equity markets and in companies that focus on water resource management, improvement of the supply, efficiency or quality of water.

Fund manager Andreas Furshki explains that while the water theme may experience “transient periods of underperformance” during periods of volatility, the strategy aims to make solid returns over the market cycle as water scarcity issues prevail around the world.

Although the demand for water is high, thematic funds can still underperform so investors commonly use these strategies to complement portfolios that are diversified elsewhere. Risks from thematic strategies are in keeping with most other mutual funds and include potential currency losses and stock volatility.

According to the OECD, global water demand is projected to increase by 55% from now up until 2050, while 40% of the global population is likely to be living under severe water stress. The World Health Organisation estimates that 55 million people are already affected by droughts every year and that up to 700 million could be at risk of being displaced by drought by 2030.

Through responsible investing, investors, fund selectors and asset owners have the power to make choices that can change this, promoting water conservation, preventing droughts and offering a solid portfolio diversifier at the same time.

To find out more about the Research in Finance UK Responsible Investing Study, click here.

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