Is Water an Asset Class?

Benjamin Franklin once said “When the well’s dry, we know the worth of water.” Water has long been a precious resource, but who knew that it could also be an asset class? While it may sound funny, water is becoming an increasingly valuable commodity in the world of investing. This is not a new concept. Back in 1998 Enron had bet on it when it acquired Wessex Water for $2.2bn, before facing the scandal we’ve all heard of. A bit more than a decade later Citygroup Chief Economist Willem Buiter predicted that Water would become the new oil.

In recent years, investors have been turning to water-related stocks, funds, and commodities to diversify their portfolios, maximize returns, on top of fulfilling ESG commitments. So, if you’ve ever wanted to make a splash in the investing world, it may be time to consider investing in water!

Why is Water Essential?  

This probably sounds like a rhetorical question. Water is an essential resource and a basic human need. It is essential for life and is a key factor in sustaining the environment and enabling economic development. As a result, water has increasingly been recognized as a valuable asset and an important resource for financial investments. Although it has not traditionally been considered an asset class, it is increasingly being seen as an important part of a diversified portfolio. There are a number of water-related investments, including water rights, water infrastructure, and water-related technology, that have the potential to provide significant returns and help investors manage their risk.

Can Water really become an asset class?

Yes, water can be an asset class, although its not one officially. It has become increasingly popular among investors as a way to diversify their portfolios, due to its low correlation with traditional asset classes such as stocks and bonds.

Water asset investments can range from investing in water rights and water-related infrastructure, to investing in companies that focus on water management and innovation. These investments offer the potential for strong returns, while also allowing investors to make a positive environmental impact. There is an increasing demand for water, and investors can capitalize on this trend by allocating a portion of their portfolio to water-related investments.

To put things into perspective, it is worth recalling the flop of the launch of the Chicago Stock Exchange futures market. At the end of 2020, the Chicago Stock Exchange (CME) decided to launch the futures market based on a weekly water index published by the Nasdaq. The interest of these forward contracts was, for large water consumers such as Californian municipalities and farmers, to hedge against fluctuations in the water course – in the event of drought for example.

However, investors quickly realized the lack of liquidity and the lack of transparency of the price of the underlying, and consequently the volumes recorded remained marginal. Unless the sector benefits from consolidations, most pundits believe Water won’t become an asset class because its lack the liquidity and transparency of the underlying collateral.

Investing in Water: benefits & risks

Even though water can not be considered an asset class at this stage, it’s still possible to invest in it. Investing in water has many potential benefits. First, in the long-term, water is a finite resource, with demand likely to increase as population and global economic growth continue. This means that there are likely to be attractive returns available. Secondly, water is an essential resource, meaning it is a relatively safe asset to invest in – it will always be in demand and any losses can be offset against inflation. Finally, investing in water can help to protect the environment, as it can be used to reduce water wastage and pollution.

Water investments are not without risk. While it is a valuable resource, it can also be subject to regulatory and environmental changes which can affect the availability and cost of water. Companies may also face competition for rights to water, both from other businesses and from local communities. Additionally, investments in water infrastructure can be expensive and require significant capital investments. As with any asset class, investors should research potential investments carefully to ensure they make the right decision for their portfolio.