Liquid Assets: Impact Investing in the Water Sector

By Marta Maretich

Water is a hot issue in investing circles these days. Once considered a free natural resource, water is increasingly a focus for finance and speculation; hardly surprising in a world where water stress is a reality, global demand for water is on the increase and investment in water-related infrastructure is urgently needed, according to sector-watchers such as the World Bank-sponsored 2030 Water Resources Group.

There are a number of well-known “tailwinds” pushing this trend. Population growth, uneven distribution of resources, increasing urbanization and new government regulations are some of the factors influencing the rise in demand for water. Pollution, deforestation and climate change are taking a toll on supply, with many dry regions, like California and Australia, experiencing the longest droughts in their history.

Large international development organizations like the UN, the WEC and the WHO have been vocal about the need for more water investment and cross-national cooperation and now key players, like China and the US, are waking up to the urgent need to invest in infrastructure and water security. Collecting water data will be part of this. Earlier this month the US launched a climate data collection initiative to “stimulate innovation and private-sector entrepreneurship in support of national climate-change preparedness.” The results will certainly influence future government spending on water-related issues, and probably increase it. In drought-hit states, like California, the spending has already begun and the trend toward more state investment activity is likely to continue, spurring overall market growth in the water sector.

Doing good and preventing harm

All these factors are coming together to produce what some commentators have called a “blue gold rush“; a sharp rise in interest in water investing among mainstream investors that clearly holds opportunities for impact investors, too. The reasons for this are obvious: Clean, plentiful water is necessary to all forms of life on the planet. Animals, plants, ecosystems and habitats all require adequate water to thrive. Human societies need water, too, for health, agriculture, industry and economic development. Investing in water is clearly a way to create a whole range of positive impacts.

There’s another compelling reason for impact investors to get involved now: Preventing harm. Water sector investment is undergoing a boom and, if the right safeguards aren’t applied, social and environmental concerns could fall by the wayside. Water that serves people has to come from somewhere, for example, and irresponsible extraction or dam building can lead to destruction of habitats and communities. Polluted water; such as agricultural runoff, which is often full of nitrates; can devastate whole ecosystems and destroy species. Competition for water can mean the poor and marginalized are denied fair access. Water grabs, linked to land grabs, are becoming more common in places where resources are scarce. Pricing is an issue in a sector where many analysts agree that consumers have not been paying enough for the water they consume; a situation that is set to change as water becomes more market-oriented.

Addressing the risks of privatization

As business becomes more involved in the supply and management of water, there’s concern about negative consequences of treating water as a commodity. Water hoarding and monopolizing, and the exploitation of water rights, could all be harmful to human communities, to the environment and even to world peace.

There are certainly wrong; as well as bizarre; ways to invest in water. And some business leaders have shown a distinct lack of understanding of the complex issues surrounding water. Yet there are moves in many parts of the business community to manage the risks of privatization. Ceres, a US nonprofit that encourages sustainability, works with businesses to identify and address negative water impacts across their operations. The CPD, a UK charity, works with investors and companies to uncover risk and catalyze corporate water stewardship. It holds the largest collection of self-reported climate change, forestry and water risk data in the world.

Water activist Maude Barlow takes a different tack. Starting from the premise that water is a human right, she recommends limits to its commoditization and calls for businesses and governments to adopt a new “water ethic“:

“Water must never be bought, hoarded, sold or traded as a commodity on the open market,” she writes, “and governments must maintain the water commons for the public good, not private gain. While private businesses have a role in helping find solutions to our water crisis, they shouldn’t be allowed to determine access to this basic public service. The public good trumps the corporate drive to make profits when it comes to water.”

Building robust impact portfolios with water

Whatever one’s stance on the commercialization of water, it’s clear that the water sector is now at a turning point and this means impact investors have a golden opportunity to shape its future. What’s more, water investments may be the ideal basis for building robust, profitable impact portfolios. In the words of Steve Falci, head of strategy development: sustainable investments, for Kleinwort Benson Investors, “Water is probably the biggest win-win of all the sectors in terms of delivering reliable financial returns and positive impact.”

In a recent white paper, Integrating Publicly Traded Water and Agribusiness Equities Into Impact Investor Portfolios, impact advocate Jed Emerson and Falci explore the potential of including water sector investments in impact portfolios. Water, the paper argues, has much to offer impact in financial terms. First, it’s a huge sector that boasts a wide range of investment opportunities in companies that provide the operations, equipment, chemicals, and services that make water available for municipal, industrial, and agricultural markets worldwide. These include:

-Water waste and water utilities: Companies managing infrastructure and delivery of water and or treating wastewater or reuse and safe remediation back into the environment
-Water infrastructure: Companies providing pipes, filters, pumps, seals, valves, water purification and desalination equipment, design engineering and construction services
-Water technology: Companies providing filtration, disinfection, test and measurement products and metering.

Next, not only does the water sector offer a vast array of different companies to invest in, it also offers a complete spectrum of different types of investments to choose from.

Without straying from the water sector, investors can elect to place their money in seed stage businesses, mid-sized growth businesses or large, established corporations. They can combine investments from different asset classes, each carrying a different level of risk and reward, and choose defensive and cyclical holdings to create a solid portfolio that gives reliable returns. For an explanation of how this works, see Matt Sheldon’s article on how he constructs Calvert’s successful Global Water Fund.

Including publicly traded equities

Most importantly, Falci and Emerson stress, impact investors can expand their horizons by including investments in publicly traded companies in their portfolios. As Falci explained, “Impact’s success so far has been in channeling private capital to small businesses that lacked access to other sources of finance. Many impact investors have focused entirely on investing in private markets, but publicly traded equities, chosen carefully, can help strengthen and balance an impact investment portfolio without sacrificing the commitment to positive impacts or small businesses.”

Falci and Emerson aren’t alone in advocating impact’s expansion into publicly traded equities. Others, including Michael Van Patten of Markets With Mission, have made similar suggestions. However using this method with water equities may work particularly well, according to Falci, because few water sector companies engage in activities considered negative or even controversial.

And what about managing negative social or environmental impacts of capitalizing on water? The authors suggest using SRI and ESG screening, both well established in mainstream business, to provide assurance. “Public equity managers increasingly have the tools to assess areas such as companies; carbon footprints, water usage and Base of the Pyramid activities,” they write. Undesirable consequences may be addressed through “engagement with company management; an element of investor strategy that has been a central part of most sustainable/responsible investing approaches for years.”

Whether one agrees with this “total portfolio management” approach or not, what’s interesting is the way it brings together several strands of the larger social and sustainable investing movements. Emerson and Falci are both social investing veterans with track records that predate the “invention” of impact. Their approach calls for the judicious application of various systems for ensuring positive outcomes and avoiding negative ones; including established systems like SRI and ESG and newer ones, like ISIS; to evaluate a variety of impact investments across a diverse impact portfolio. The water sector, with its great size and diversity, as well as its benign reputation, offers the perfect opportunity to experiment with this sophisticated approach to investing for impact.

Conclusion

The issues surrounding water; its use and abuse, its scarcity, its relative availability, its cost to consumers; are set to be high on the global agenda for the foreseeable future. With the situation becoming more critical, governments, international development agencies and businesses are all stepping up efforts to find solutions. This will create a buoyant marketplace for water-related investing in coming years. Impact investing, with its pragmatic approach to profit and its commitment to delivering social and environmental benefit, has a unique opportunity to engage with this market and influence its development for the better.

Read the white paper on water investing by Jed Emerson and Steve Falci

10 Things You Should Know About Water Infographic from Circle of Blue

To find live impact deals in the water sector, logon to Maximpact.

Image Credit: 123rf stock photography

 

Funding Water and Sanitation Business at the Bottom of the Pyramid

By Katie Bessert, Maximpact guest blogger

Today’s global water and sanitation crisis claims over 3 million lives every year according to data from the World Health Organization (WHO), the majority of these in communities at the bottom of the socio-economic pyramid (BoP). Finding answers to this problem will require more than government funds and charitable donations. According to recent World Bank research, in order to improve quality and availability for the poorest communities, we need to build sustainable independent businesses that meet a variety of water-related needs.

My colleagues from the Colorado State University Global, Social and Sustainable Enterprise program and I are now taking part in a project to identify innovative ways to fund small and medium-sized enterprises (SMEs) bringing solutions across the water and sanitation sector to BoP communities. Our findings so far shine a light on the water challenges facing the world, and they provide insight into how impact investors and funds can be part of the solution.

The need for private intervention

The WASH (water, sanitation and hygiene) sector has historically been an expensive and risky market for investment. Yet it has potential: For every $1 USD invested in global water and sanitation efforts $9 of economic value are returned.

However, to tap into this inherent economic value it has usually been necessary to leverage local government funding to finance massive infrastructure projects that often take several years to complete. These infrastructure projects are rarely directed towards the poorest BoP communities where the vast majority of deaths and illnesses from water-related diseases occur. For example, the majority (73%) of Calvert Investment’s water fund is invested in infrastructure projects and utility companies, of which 48% are based primarily in the U.S.

There is evidence, too, that the private sector is already bearing the costs and reaping the rewards of WASH projects. A large percentage of funding for improving water sources and increasing access to sanitation already comes from the domestic private sector in the form of tariffs, initial capital investments, and recurrent costs. A 2012 WHO report on sanitation and drinking water found that 44% of reported funding for the WASH sector came from household contributions in comparison to just 18% contributed by government. Currently, the WHO reports, the median government investment for water and sanitation is only 0.48% of GDP, indicating a lack funding for the projects that are necessary to reach the Millennium Development Goals for water and sanitation.

This makes it clear that it is time to shift focus away from government funding towards partnering with the private sector.

Promising models

Addressing this water issues at the base of the pyramid means first identifying appropriate technologies and solutions for individual communities. There are a variety of local solutions for these global problems; including in-house latrines, public latrines, borehole wells, decentralized water purification systems, safe household water appliances, water vending machines and community-based water distribution centers; and it’s important to find the right one for each case. Assuming that there is a blanket cure for the diverse problems of water access and sanitation can prevent growth in this important market while evaluating the specific needs and capabilities of each community is key to furthering models with promising financial return and successful impact. Once the right approach is identified, investors can provide working capital to those SMEs that offer appropriate solutions.

Several promising models are now emerging for investable WASH sector SMEs:

Sanergy employs a unique franchise model that allows for the installment of affordable latrines. These public latrines are owned and operated by individual entrepreneurs. The units are serviced on a daily basis and when possible human waste is converted into a biofuel or organic fertilizer which provides another revenue stream for the franchisee. 35% of the world’s population lacks access to adequate sanitation facilities so the market potential for businesses like Sanergy is massive.

Grundfos LIFELINK delivers clean water to rural communities by setting up community water distribution systems from uncompromised groundwater sources. Each project is funded through partnerships with local banks and private investments. Community members purchase water credits through mobile money transfers (M-Pesa) and once a month the money spent on purchases for the water credits are forwarded to the local community bank account and the savings from this account are used to repay the loans.

Montana-based Habihut LLC has successfully launched three solar powered water kiosks in Kenya. These kiosks deliver water, contain a solar-powered cell phone charging station, and sell prepaid phone cards. Based on this successful initial launch the company plans to deploy their technology with a Hot Spring Micro-Franchise initiative. Franchisees can generate revenue from four distinct streams: Billboard advertising, cell phone charging, prepaid cell phone card sales, and water sales.

Beyond capital

Poor communities and entrepreneurs serving the BoP are often in need of not only working capital but advice on the business skills necessary to make the projects self-sufficient. The lack of local financial expertise and business acumen is a challenge to this grassroots method of delivering sustainable change. The success of this approach depends upon a conscientious deployment of capital, yet it is crucial to leverage the local entrepreneurial capacity against the challenges facing each community to deliver significant social and financial return.

About the author: Katie Bessert is a graduate student in the Colorado State University Global, Social and Sustainable Enterprise program. This summer she will be working with the charity Water for People as part of research team investigating the uses of crowdfunding as a source of capital for small businesses in the WASH sector.

To view SME deals in the WASH sector, login to Maximpact now.

Image credit: benedektibor / 123RF Stock Photo

Banka BioLoo: One Woman-led Business Wins with Sanitation Solutions

Sanitation facilities in India are alarmingly poor with over 600 million people; half of India’s population; having no access to toilets. People are forced to defecate in the open and this poses health hazards and leads to water contamination across the country.

Banka BioLoo is a prize-winning social enterprise set to change all that.

Banka BioLoo, led by CEO Namita Banka, is committed to environmental betterment and social uplift through ending the problem of open defection in India. By providing eco-friendly bio-toilets (or bioloos), Banka BioLoo is helping meet Millennium Development sanitation goals while actively supporting the Indian government’s vision of a cleaner, healthier society. Banka BioLoo is currently seeking further investment on Maximpact.

Banka’s bio-toilet system consists of an easy-to-erect superstructure that houses a multi-chambered bio-tank containing the bacterial culture that treats the waste.

Inside the tank, an anaerobic process inactivates the pathogens responsible for water-borne diseases while converting the organic waste into water, methane and CO2. The system requires no external energy for treatment and produces pathogen-free effluent water that is suitable for gardening and similar purposes as well as bio-gas that can be used for cooking or heating. Banka BioLoo’s bio-digester technology was initially developed by the Defense Research and Development Organisation (DRDO), an Indian government arm.

Banka BioLoo doesn’t just supply biotoilets. Its full-service business model provides for the manufacture, installation and maintenance of bioloo units and it operates a rental service for mobile bioloos. It provides consultancy around developing larger biotank units, establishing sanitation systems for new housing developments and finding wastewater treatment and recycling solutions. It also supports better sanitation on the Indian railroads, providing spares for controlled discharge toilets on trains.

All of this good work has attracted international attention. Namita Banka was the Asia-Pacific Laureate of the Cartier Women’s Initiative Awards in 2013 while the business won Sankalp 2013 Healthcare, Water & Sanitation Award and was a CHANGING Markets Award 2013 Winner too. Banka Bioloos is currently looking to build in its success, raising capital from impact investors.

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Images courtesy of Cartier Women’s Initiative Awards and Banka BioLoo.

CLEAN DEALS: SANITATION SECTOR ACTIVITY ON MAXIMPACT

Sanitation may not be the most glamorous part of the social benefit sector but it’s potentially big business: Current estimates value the market for products and services at $80 billion over ten years. With this incentive, businesses are starting to take up the sanitation challenge. Several of the most promising innovators are listed on Maximpact today.

AZADI

Azadi manufactures biodegradable sanitary pads that are accessible and affordable to women in rural India. An estimated 300 million women in India are resorting to ineffective and unhygienic alternatives such as rags and newspaper to manage their menstruation. This poses health risks and constrains their access to work and education. Azadi’s pads are 100% biodegradable and 43% cheaper than the average retail price point in India. The company’s strategy has an enterprise element, too: They train local female entrepreneurs to sell the pads to consumers while educating them on the use and benefits.

WHO GIVES A CRAP

Who Gives a Crap is an environmentally friendly toilet paper company whose social business strategy works on two levels. First, they sell recycled toilet paper to customers in the USA and Australia, then they donate 50% of the profits to WaterAid to improve sanitation in the developing world. Their campaigns are humorous: One of their founders once sat on the “throne” until they’d reached a key sales target and their pun-filled communications include lines such as “Together we can save the world from the bottom up.” Yet their quirky approach has raised awareness of sanitation issues as well as money for sanitation development.

THE BIOENERGY CAPITAL PILOT FUND

A product of trend-setting Equilibrium Capital, this fund delivers project-level capital across a diversified portfolio of leading waste-to-energy biogas developers in promising and underserved markets. Proprietary projects include U.S. biogas developers in livestock and agriculture, food processing, municipal solid waste and wastewater. In other words, it’s a portfolio of companies that convert human, animal and vegetable waste into saleable energy. The Bioenergy Capital Pilot Fund offers insight into the changing face of waste and demonstrates a sophisticated approach to turning sanitation challenges into investment opportunities.

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