Water: Climate Change makes it scarce, makes it a new asset class!

The 2015 Paris Climate Accord (alongside the extreme weather events in recent years) has made Climate Change a much talked about issue. However, most of the discussions have been around carbon emissions, and the resulting efforts towards de-carbonization. An issue less recognized, but equally important, is the issue of water scarcity. Water stress is happening both because of changing rainfall patterns and falling underground water table. Scientists predict by 2030, global water demand will exceed supply by 56% (Responsible Investor, October 2020). The implications of this water stress are huge. Agriculture gets affected by water scarcity, since 70% of all natural water withdrawn across the globe is used for crop irrigation. Costs of agriculture production also rises disproportionally to the cost of water. Water stress adversely impacts agricultural yields and increases the cost. World Economic Forum estimates that by 2030, water scarcity could cut world harvests by 30 per cent! The resulting effect would be rising agricultural commodity prices, and adverse impacts on emerging market (EM) countries where agriculture is a large share of GDP or employment. It impacts food and beverage industry, a big part of consumer staples sector and an important part of equity and bond markets. EM countries impacted would see decrease in the value of their financial assets (thus affecting their equity indices, corporate bonds, and sovereign yields). Major emerging market cities are getting impacted (e.g. Chennai and New Delhi, major cities in India), in turn influencing population movement and real estate prices. This is not just an EM issue, with major developed markets like west coast of U.S and Australia being at major risk.

Capital markets are increasingly becoming aware of the implications of water stress, and are creating financial instruments tied to water. In October 2018, Nasdaq and London based Veles launched the Nasdaq Veles California Water Index. In September 2020, CME Group, (Chicago based derivatives marketplace) and Nasdaq announced plans for a new futures contract on the Nasdaq Veles California Water Index. Water futures are expected to be available for trading up to two years out. A liquid and transparent futures market, with a forward curve, will help water users hedge future price risk. Any financial instrument available for hedging also implies opportunities for investing, leading the way to the creating water as a new asset class!