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Tapping into ESG Investing With Water ETFs

The growing water scarcity crisis is a humanitarian crisis with dramatic economic implications. A recent paper from Morgan Stanley notes that the gap between the global demand and supply of freshwater is expected to reach 40% by 2030. The climate crisis, population growth, and the transition to clean energy may further widen that gap.

Meanwhile, the World Bank estimates that by 2050, water scarcity in some regions could impact GDP growth by up to 11.5%.

“Structurally, the global water landscape needs to change,” says Jessica Alsford, global head of sustainability research at Morgan Stanley.

More investors are realizing the importance of water, and more companies and governments are finally wising up to the fact that water scarcity is a real issue that needs to be addressed immediately.

“Without [water], the economy, ecosystems, and society at large can’t survive. That makes access to water a sustainability issue for investors, writ large,” according to Morningstar research. “Water risks, in their various forms, are pressing environmental, social, and governance challenges. Unlike fossil fuels, no alternatives to freshwater exist.”

Added Morningstar: “Despite the paramount importance of water, the risks that scarcity or poor quality pose to economies and individual businesses have received less attention from investors than they deserve when compared with carbon.”

Water ETFs may be a way for investors wanting a low-risk way to get into the environmental, social, and governance (ESG) space. These funds are relevant from an ESG investing perspective because water risk is very real, and corporations are just starting to acknowledge it.

Like Water For Funds

The Invesco Water Resources ETF (PHO), the Invesco S&P Global Water Index ETF (CGW), and the Invesco Global Water ETF (PIO) all have lower risk profiles relative to other clean energy ETFs while capturing an environmental theme. While other clean energy funds tend to be sensitive to energy prices, water isn’t linked to oil prices.

PHO follows the NASDAQ OMX US Water Index, which “seeks to track the performance of US exchange-listed companies that create products designed to conserve and purify water for homes, businesses, and industries,” according to Invesco.

PHO taps into the theme of water investment with 38 stocks spread across ten industry groups. The average market capitalization of PHO components is $35 billion, but the fund isn’t dependent on large-cap equities as a primary driver of returns. In fact, the size factor could work in PHO’s favor in 2022, as the fund devotes about 76% of its weight to mid- and small-cap fare.

CGW, which tracks the S&P Global Water Index, holds 50 stocks and invests in water-related businesses such as water utilities, infrastructure, equipment, instruments, and materials.

PIO, which tracks the Nasdaq OMX Global Water Index, holds 52 stocks and is positioned to benefit as the industrial and government cases for enhanced water management and technology expand. While PIO features exposure to seven global industry classification standard (GICS) sectors, industrial and utilities stocks usually loom large in water ETFs. According to issuer data, that’s also the case with PIO, as those two groups combine for 75.6% of the fund’s weight.

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