🤔 What’s Finance to do with the Water Industry ?! Well, much more than I erroneously thought, two years ago ⬇️

What is Water Finance?

What have we learned about Water Finance in 2021?

If you had asked me at the start of my podcast if I would ever cover Finance, I would probably have laughed. By then, I honestly didn’t realize how interlinked this topic is with both our challenges and solutions in the Water World. So if you’re like me two years ago, I’ve prepared this synthesis to decode some key aspects of Water Finance.

First, there’s this fact, that Alexander Loucopoulos shared:

It’s extremely exciting to approach water from the finance field because frankly, I don’t think enough attention has been spent on it.

Alexander Loucopoulos – Partner at SCIENS WATER

That’s the white hat side of the story. The water sector is a growth sector because neither industries nor farmers and consumers expect to stop using water. So it’s basically the best possible market to invest in.

There’s a dark side to Water FInance

Now, there’s the black hat side of that same story: there’s a lot of money to make in water, which might be fine as we’ll see later, but which can lead to major catastrophes, as Scott Hamilton revealed us.

In one of the most popular episodes of this podcast in 2021, and of course in his book “Sold Down the River,” Scott explains how Australia put a water market in place, to trade water as a commodity and with the lowest level of regulations in the World.

Using a market-based mechanism, we could make sure that this resource and this amount of water would go to what was going to be its best use.

Scott Hamilton – Author of SOLD DOWN THE RIVER

The terrible example of the Murray-Darling River Basin

But that was the theory. In practice, it created an irresistible opportunity for banks and investment funds.

How do we create more trading? Let’s invite other people to add more liquidity. So we have this trading and as I mentioned before, now we’ve done all this work at unbundling all the different components, the delivery rights, the entitlements in credit, this short-term and long-term markets and multiple different parts. An enormous amount of work that had gone into it. And a lot of trading.

And what happened is that essentially the money and the water flow to where the most money could be extracted from the system.
We changed the market fundamentally from being a market or a natural resource market into a financial commodity market, which is now worth billions of dollars. So we’ve created this opportunity with literally billions of dollars for hedge funds and the smartest guys in the room.

Scott Hamilton

When you listen to that story, you’ll probably wonder what good Finance can make in the water sector.

First, I can tease you something: I’ll be investigating further in 2022 to bring you other examples of water markets and to try to figure out in which conditions they can be beneficial.

Investing in Water vs Investing in a Water Company

But beyond that, there’s not only Finance as an investment in the Water good, there’s also Finance as a partner of the Water Industry. Gaetane Suzenet reminds us that this wasn’t always a straightforward relationship.

In our discussions, we talk about regulation. We talk about technology, we talk about infrastructure. We talk about engineering. But for me, the missing link has been Finance.

Gaetane Suzenet

When Finance goes missing, companies with promising technologies, people, or markets end up like a car without fuel. Be it a Ferrari or a Lada; it’s still not going to move.

Hence investors have a key role in the development of a new scene of Water Companies, as Julian Kölbel confirms:

Companies, especially in developing markets, have a problem to tap into capital that allows them to grow. If you go in as an investor and you provide that external financing, that’s how you can have an impact by growing companies that doing something good, doesn’t have access to capital. You can solve a problem here.

Julian Kölbel

Emerging players: Venture Capital Funds

If the problem people have, is that they struggle to find a way to move from point A to point B, and you have an Idea which is called Uber, there’s a certain type of investor that’s ready to burn money on you for a while with the hope to make an amazing profit, the day you actually become Uber.

These people are called Venture Capitalists or VCs. They have deep pockets, and they’re ready to lose 95% of their bets because the remaining 5% will experience hyper-growth and repay the losses with a multiple.

But the problem in the Water Industry, as Gaetane Suzenet points out, is that we’re not sure that hyper-growth is really possible in this sector.

Is the traditional VC model that we all knew the right one for the water sector? That’s a question I don’t have necessarily the answer today, but I think, you know, if European startups were able to sell a service and not to take, and especially with digital water, that would change considerably the way of the success in the water sector.

I like your ambition about hypergrowth. But if we had just growth, I think, you know, I would be a very happy woman

Gaetane Suzenet

But if Venture Capitalists are not the natural interlocutor of Water Entrepreneurs, there’s another one that’s much more catered to their needs: the Sustainable Investors.

Emerging players: Sustainable Investors

Don’t get me wrong; these players are not philanthropic; they also expect to make money. But they’re betting on the long term, and they are looking at different performance indicators, like for instance ESG. I’ll let Julian Kölbel define that for us.

ESG is generally about what two companies do with regard to the environment, social issues, governance issues. How do they behave?

Julian Kölbel

The Idea behind sustainable investing is that a business can only be sustainable if it solves a problem in at least one of the three ESG indicators. The main idea is that profit is no longer the north star. Profit becomes a by-product of the act of solving a problem.

That’s a shift of paradigm, as Claudia Winkler highlights:

We were trained to think of this profit maximizing thinking, the purpose of business is business, and this thinking goes to you. So that’s what you do all day and opening up and saying maybe economic theories we grew up with are wrong. Maybe the science, the Friedman thinking that was our prevailing economic thinking is not suitable for the future was a wake-up.

Claudia Winkler

But again don’t get fooled, it’s not about hippie finance or philanthropic investment. No, there’s money to make and it’s a good thing, as Nicola Lei Ravello underlines:

Again, that’s an economic perspective of how Finance can be a catalyst for change. Obviously, there’s going to be a lot of people making money out of it, but you find the end of the day, you get an upgraded water system, maybe that’s a good thing, you know?

Nicola Lei Ravello

What indicators to follow

The thing that’s still to refine in this approach is essentially the way we measure ESG performance. And I say ESG, but this is true for any kind of sustainable investing indicators, because as Florian Heeb explains:

I think 50% of all the funds apply some sustainability strategies in their investment process. So if you look at that, you would assume that if you’re already far up off, you know, this 8%, but somehow we still don’t see the change needed to move really to reach the SDGs or solve climate change.

Florian Heeb

Indeed, if 50% of the money goes to virtuous projects, and we still don’t see the needle moving, it whether is a desperate cause – which I don’t think it is – or the problem lies in the way “sustainability” is defined.

In a nutshell, it’s about proving one thing, as Nicola Lei Ravello confirms, your company adds value.

By looking at all the investment, if we can show the value that you can bring there, then we could unlock something. Suddenly you have all the resources of the finance world. They could go to the water sector and somehow help it grow or get better

Nicola Lei Ravello

So yes, ESG indicators may still be a bit wacky today, but they will solidify in the future, and if 50% of the funds keep investing in virtuous practices, measured by a better sensor, we will see a win-win. As Julian Kölbel says:

I think it took a while, but now I would say that sustainable Finance is becoming a branch of Finance.

Julian Kölbel

Public Investment

So far, we’ve covered the private finance world, but there’s another important part of Water Finance, and that’s everything related to public funds.

Indeed, given the regalian aspect of Water and Watercourses, states, regions, and cities always had a key role in their financing. A role that’s not going to fade out at all, if private Finance gets more involved.

And, more and more, the same logic applies in both worlds, as Alex Loucopoulos underlines:

The reality is the federal government is not going to drop money from the Sky.

Alexander Loucopoulos

Public money isn’t there to be burnt; it shall also be profitable, hence sustainable. But relax, here as well, there’s a lot of money to make, as Michael Stanley Gallisdorfer explains:

There’s also evidence out there that restoring rivers and restoring water features in cities has economic value to the university of Michigan found that in cities like Buffalo and Detroit, it adds $4 for every $1 spent on restoration work to the economy. So it has economic value.

Michael Stanley Gallisdorfer

A Finance Nexus to Find

At the end of the day, it’s even going to be a team effort between private and public Finance, between regulators and entrepreneurs, as Julian Kölbel and Florian Heeb conclude:

As an investor, you act within the system of capitalism. You are by definition, a capitalist, you’re working within the system as an investor, and you can accelerate incremental changes, but there are some issues that require political change. Sustainable investing cannot stop climate change on its own. It can help, but not on its own.

Julian Kölbel & Florian Heeb

Investors and Water Professionals working hand in hand starts by knowing each other, I guess. And who knows, this may be the beginning of something if you share it with the right person! 😉