Investing in Water – No Longer ‘ESG Safe’? 3 Thoughts

By Debra Tan 21 August, 2023

Greenwashing risks are on the rise as investing in water is heading for choppy waters, which could leave us up sewage creek. CWR's Tan shares 3 thoughts on why water investments are not automatically ESG safe, investors take note

You would think that rising chronic water scarcity means that water is a good sector to invest in. After all, which ESG/ sustainability fund is not going to love SDG 6 – improving access to clean water as well as health and sanitation. Indeed, many pension funds thought that investing in water automatically ticks the ESG/responsible investment boxes and were happily making guilt-free returns … until they were not.

Greenwashing risks are on the rise as investing in water is heading for choppy waters

No doubt, greenwashing risks are on the rise as investing in water is heading for choppy waters (couldn’t resist the pun) thanks to climate change which triggers and escalates different types of water risks – all of which are interlinked and have compounding effects. These risks are currently undervalued as many investors have their eye off the ball – they confuse investments that qualify as ESG to automatically mean being resilient.

Here are three thoughts on why water investments are not automatically ‘ESG safe’ nor resilient …

1. UK’s water fiasco has made investing in water shit, literally…

Privatized water utilities across the UK have been suffering sewage and pollution issues. Untreated sewage is now spewing out into UK waterways in larger amounts with higher frequency thanks to a combination of more rain/floods and under-investment in the sewage systems.

Could this have been avoided? Yes, but wrong incentive structures and relaxed regulations meant that instead of upgrading the nation’s water systems so that it can operate in the 1.2ºC world we’re in today, shareholders paid themselves handsome dividends that averaged more than GBP2bn per year since 1991.

Spills preventable with proper investments & regulations…

…but dividends took priority; ~GBP60bn extracted

A total of ~GBP60bn was extracted in the past 30 years by stakeholders. Many of these claim to be sustainable/ESG investors including pension/sovereign funds from UK, Canada, Australia, Norway, Singapore, Abu Dhabi to China as well as Hong Kong & Malaysian tycoons.

So, it was not like the water utilities had no money to invest in resilience. Worse still, they were debt free when they were privatized but have now racked up more than GBP60bn of debt. This raises 2 questions regarding funds which purport to be ESG/ sustainable investors:

1. Safeguarding the environment is a key tenet of ESG so pollution is a big no-no, yet why did the so-called ESG funds not speak out about the significant and growing untreated sewage spillage?
2. Are funds acting responsibly/sustainably when they vote for dividend extraction for short term gain rather than reinvestment to ensure a sustainable resilient water system?

Last year, 301,091 spills meant that untreated sewage flowed into the waterways for more than 1.75mn hours, the year before that raw sewage was discharged 375,000 time for over 2.7mn hours. Evidently investors in the water utilities are neither ESG, responsible or sustainable.

Now that it’s mired in shit some funds, according to Bloomberg, have divested on sustainability risks – surely, these excuses are rich, especially after having made off like bandits with dividends in the good old days whilst staying silent on growing pollution problems. Is this what ESG/sustainable investing has been reduced to?

“…staying silent on growing pollution problems. Is this what ESG/sustainable investing has been reduced to?”

The government is also in the spotlight for privatisiting water, and the water regulator, Ofwat, has also been called out by the Industry and Regulators Committee for failing to “treat water with the care and importance it deserves”.

However, shifting blame doesn’t solve the problem – we can’t go back and undo this and going forward, this shit is only going to get worse. Lord Hollick, the committee chair is right – we have to “act fast before we are all left up sewage creek.” The good news is that we know how to fix this but whether it will be fixed remains a mystery – revamping the system to cut raw sewage discharges could cost up to GBP660bn – somebody has to foot the bill.

But given the current state with large CAPEX holes, who’s going to invest? Instead, investors are writing down their stakes – according to the FT, Thames Water’s largest investor wrote down its investment by 28%. That said, in July, the company did manage to secure a cash injection of GBP750mn between now and 2025. However, this is still short of the GBP1bn it was looking to raise and in the longer term, Thames Water will need much more. Looks like, taxpayers will be left footing the bill after all.

Water resilience should not be left to the private sector without strict regulatory authority

Perhaps, the lesson here is that we cannot leave something as important as water (which is very vulnerable to climate change) to market forces – the private sector cannot be trusted with building resilience without strict regulatory authority.

But then again, the government may not be better either – Rishi Sunak’s comment that the newly approved 100 North Sea oil and gas licences are “entirely consistent” with reaching net zero by 2050 clearly shows that he does not understand the importance of not overshooting 1.5˚C for water, energy & economic security, which brings me to the next point…

2. Rising CAPEX = pouring money into drains…

Move over droughts, floods have dominated the news this summer. Dams have been breached, bridges failed, subways/tunnels flooded. Our drains are not big enough; our dams are not high enough; and even China’s sponge cities need to be “spongier”. In short, we are going to have to pour a lot of money into drains.

I have been saying that “a new class of ‘water poor’ is developing in rich countries due to years of neglect and lack of upgrades”.

Our ageing water infrastructure presents a whole new set of problems that will eventually lead to breakdowns in our water systems in terms of access, storage, drainage and pollution.

With rainfall breaking records around the world, we are going to have to revamp our water storage and drainage systems.

Remember the floods in Singapore in 2010 when Orchard road flooded? Well, it hasn’t since despite Singapore’s ever-heavier rains because the nation’s government has spent over a billion dollars on upgrading and expanding its drains and storage systems to better detain, delay and divert storm runoff.

Even Singapore’s spending of >$1bn is not enough to free itself from future flash floods

That said, Singapore is still not free from flash floods as adapting to more intense rainfall is an ongoing exercise as our world gets warmer. But it’s not just about building bigger drains to avoid flooding – what about where it drains into?

If that river / sea is also rising, then Houston we have a problem – a city-wide problem. As sea level rise is virtually certain, we will have to deal with this sooner or later. To tackle this holistically, with ever rising risks – Singapore estimates a price tag of over S$100bn but not every country will have this kind of money / ability to raise such funds.

Urgently need to start a serious adaptation finance conversation

Adaptation finance has always lagged transition finance, but the recently flooded subways of Beijing to Seoul show us that we can no longer afford not to address this financing gap. We urgently need to start a serious adaptation finance conversation now and the private sector, despite its flaws, must be included.

I hear you ask: what’s the return on investment? While it’s easy to say everyone will benefit from not being flooded, actual dollar returns are not obvious. Maybe we will have to resort to a flood tax, otherwise which investor would want to pour money into drains?

Also let’s not forget that most water infrastructure from storage to piping will require the use of carbon intensive cement, iron, steel and plastic. There’s no easy fix but we can’t do without water – so fix it we must. The longer we wait, the harder it will be as the ever rising emissions and warming will only escalate water risks, which brings me to the next point…

3. Cleaning water is a dirty with high carbon emissions…

It is easy to blame “dirty sectors” like cement and steel for carbon emissions but let’s not forget that meeting SDG6 is also energy intensive.

Cleaning water requires power; delivering water from source to your tap also requires power. So, if the grid is still running on fossil fuels, supplying clean water can be carbon intensive.

If the grid is still running on fossil fuels, supplying clean water can be carbon intensive…

…yet, less noise on calling for net zero water utilities

To give you an idea, the electricity required to produce safe drinking water can account for 2% of global GHG emissions – similar to emissions from global shipping. For perspective, clean water supply for 1.4bn people in China required 64.5TWh of electricity in 2020 – this can power the whole of Denmark, Ireland and Laos.

So investing in water can be just as bad as perceived “dirty” power-guzzling sectors yet there has been less noise from “ESG investors” in the water sector on calling for net zero water utilities than the other sectors. If you have not heard about net zero water, my point exactly.

Did you know that UK’s water utilities in 2019 have committed to achieve net zero water by 2030? This was hailed as the “vanguard of climate action” because by achieving net zero 20 years sooner, the UK water sector could help save up 10 million tonnes of greenhouse (10MtCO2e). Water UK estimates that a capex of GBP2-4bn will be needed to achieve this. Given that the sector is now plagued with debt and pollution woes, the net zero water conversation has somewhat taken a backseat.

Regardless, there’s good news – net zero water is here to stay and gathering momentum. It’s good to see that there are several sessions on the topic at World Water Week in Stockholm this month. CWR too will co-host a fireside chat on “Making Net-Zero Possible For The Water Sector & The World” on 21 August 2023. If you missed our chat with Mark Smith, RSK Group’s Strategic Water Sector Director, sign up for our newsletter – we will cover key takeaways later this year.

Where does ESG investing in water go from here?

Investing in the water sector will remain murky with rising ESG issues as well as choppy with capital calls to build resilience that could curtail dividend payouts and eat into returns. It is never simple when it comes down to water …. for now, just remember ESG does not mean being water resilient and it certainly does not automatically mean being responsible – there’s still a lot of “growing up” to do in the sustainable/responsible investment space.

Investments remain murky with rising ESG issues + capital needs for resilience…

Sadly, time is running out – accelerated warming has meant that mountain glaciers, a source of river flow, are melting faster. ICIMOD’s latest report warned of “peak water” by 2050 for the rivers of the Hindu Kush Himalayas, the headwaters of Asia’s mighty rivers such as the Yangtze, Ganges, Indus & Mekong. The Swiss Alps and the key rivers that flow from there like the Rhine, Rhone, Danube and Po will face similar challenges. Last year, Switzerland lost a shocking 6% of its glacier melt over the summer – if this rate persists, the Swiss Alps will lose half of its glacier mass in a decade.

…have grow up fast & see the new risk water scape before investments are washed away

With rising water and climate risks, we all need to “grow up” fast – perfecting ESG guidelines/ box-ticking is all good, but don’t just focus on the trees, we must see the woods too. Our entire landscape is shifting from under us – we must look up and see this new risk water scape before all our investments are mired in shit or washed away.

Further readings

• It’s Time to Hit the Accelerator on SDG 6, and Hard — We are woefully off-course from SDG 6. We have driver-less cars & ChatGPT but not drinking water & sanitation for all… CWR’s McGregor reflects on this World Water Day calling for accelerating change
• 2023 Top 10 Trends in Responsible Investment in China — ESG becomes part of the Chinese path to modernisation. SynTao Green Finance & China Sustainable Investment Forum share their top 10 trends for responsible investment in 2023
• NZ Cities Urgently Need to Become ‘Spongier’ – But System Change will be Expensive — Are “spongier” cities the answer to NZ’s climate change woes – already had 2 deadly storms in 2023? Lo & Dr. Chan, University Lecturer & Professor, look at how and what would be needed to go spongy
• Peak Sustainability Ventures: Early-stage Water Investing in India — Isn’t it ironic that the modern age of AI co-exists with a billion people that don’t have access to clean drinking water? We chat with Shah, Managing Partner of Peak Sustainability Ventures who doesn’t think only investing in ‘sexy’ tech will solve our water problems
• CDP Global Water Report 2022 “Riding the Wave” – Key Takeaways — CDP’s new report reveals billions in potential gains for Southeast Asian companies that disclose water risks. Souza, CDP’s Regional Manager for Water Security, shares more key findings
• A Conversation with WSD’s Tony Yau on Ensuring Hong Kong’s Water Security — How secure is HK’s future freshwater supply? Does a drought along the Dongjiang mean HK will need to ration water like others did? We sit down with Yau, Director of the WSD, to learn about the various actions they are taking to build resilience & ensure supply

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• Gathering A Rising Tide: 8 Positive Points On Coastal Threat Stress Testing Since Publishing Our Report — Despite climate challenges, we’ve been feeling more positive thanks to the active engagement we’ve had with finance & corporates on our sea level rise report as CWR’s Mirando shares
• Engaging Investors: A Conversation With Founder Ben McCarron — McCarron, Founder of ARE, talks to us about his work on harmonizing Asia’s banks and the global climate agenda. Are Asia’s banks keeping pace with changing expectations?
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