Most conventional assets offer lower expected returns following substantial economic setbacks during the coronavirus pandemic, making water-related investments more attractive. Strained public budgets mean that local, state, and national governments must turn to alternate sources of financing from investors to complete water infrastructure projects.
Water: An Undervalued Commodity
Investors often undervalue water due to its seeming abundance. Misconceptions about the value of water are further strengthened by policies that set water prices below market values, leading to inefficient use in agriculture and energy production. At the same time, the belief that drinkable freshwater is cheap and abundant leads to underinvestment in water infrastructure.
Providing universal access to safe drinking water alone would cost around $1.7 trillion, yet actual investment is less than half that amount. Excluding irrigation and energy, the world needs approximately $22 trillion in water infrastructure investment by 2050.
Optimal Water Policies
Artificially low prices are only the first of many water policy issues that need to be resolved. The mispricing of water resources leads directly to excessive water pollution, but clean water has additional value that is not reflected by many current policies.
Other uses can reduce the quality of the water, sometimes dramatically. Yet, the pricing for these different uses of water is often identical. In some sense, all water resources are borrowed from the environment, and there should be a price to be paid if they are not returned in good condition.
The other side of water policy is developing new technologies to conserve and extract water resources. Overall new water-related patents more than doubled between the 1990s and the early 21st century, indicating increased innovation. From reduced pollution to increased efficiency, these new technologies offer hope for improved water management and opportunities for investors.
Types of Financing
Long-term municipal bonds have traditionally been the preferred way to fund water infrastructure due to its long-term benefits. However, other types of financing for water projects are becoming more popular as investors adopt new standards and technology advances. Green bonds, subordinated loans, convertible bonds, and public-private partnerships are just a few of the other options that often work better for specific water projects.
Stocks in companies developing water-related technology have high upside potential but also offer substantial protection in bear markets due to the world's insatiable thirst for water.
The future may belong to blended financing approaches that combine multiple types of financing to achieve specific water resource goals. By offering both stocks and bonds, water projects can appeal to different investors' risk and return preferences. Combining financial instruments is particularly crucial to funding water projects in emerging and frontier markets, which might otherwise be too volatile for most bond investors.
Long-Term Water Infrastructure Planning
Given that water infrastructure often lasts for over a century, it requires a significant amount of data analysis and long-run planning. Typical considerations, such as getting loans from banks and other financial institutions still play a role, but the consequences of underinvestment are much greater. For example, improved water management systems generally decrease the negative impact of rainfall variations.
If climate change causes rainfall to increase or decrease decades from now, investing in water infrastructure today might prevent a drought or a flood that has catastrophic consequences for the local economy. Investors and governments are beginning to realize the full interrelated potential of water projects. At Ashton Global, we stand ready to help in this process.
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