Water Part 3

The Business of Water

My mailbox is continually bombarded by representatives of the Canadian banks, mutual fund companies, venture capital seekers, stock promoters, spammers, Nigerian businessmen and others, all hyping their product and offering to help me promote their latest hot investment to the general public. This marketing blitz has just moved into overdrive with the recent announcement of “this century’s most important investment opportunity.”

Not my words, that bold pronouncement comes at you from Criterion Investments, a division of Toronto-based VenGrowth Asset Management. Talk about marketing budgets, VenGrowth just had Al Gore and 1200 guests for cocktails and presentations in Toronto, where they promoted Canada’s first actively managed water fund, the Criterion Water Infrastructure Fund. It is based on one of the world’s largest water funds managed by Swiss firm Pictet Asset Management, which is a division of 200 year-old private Swiss bank, Pictet and Cie.

Going over the list of the top ten holdings in the Criterion fund, one comes across many of the same names present in the CIBC water-based investment that was profiled in my May column. You’ve got every global activist’s favourite foil, Suez SA, along with Veolia Environnement (currently the largest holding at 8.2% of the fund’s assets), ITT Corporation, who make water pumps, night vision goggles and space station systems amongst other neat things, Kelda Group and Severn Trent, a couple of the larger privatized water utilities in the UK, and Nestle and Groupe Danone due to their substantial bottled water businesses. Coca Cola is conspicuous by their absence from this fund, which likely reflects better growth prospects for Danone’s bottled water brands than Coca Cola’s, and not market misgivings about Coke’s water troubles in India, or angst over the whole subject of bottled water.

Now the socially aware citizen is going to know about some of the difficult history of these companies, and others in the water business. But we don’t live in a world of black and white, and corporations like Nestle have come a long way in recognizing (some may prefer the term greenwashing) the social and environmental impacts of their various activities. Suez has gone to great lengths to answer critics of their past business in South America, and Group Danone can be found on more than one list of the world’s ‘most sustainable’ companies, despite ongoing controversy over their bottled water sales. Hey, don’t shoot the messenger, OK?

The President of Criterion, Ian McPherson, must have already received an earful from segments of the public who have fears about the nature of his water fund, and I have the feeling he’s engaged in some damage control when he says, “It would be difficult for people to believe that you should have poor people in the world that couldn’t afford their water bills. This isn’t about that. It’s about an infrastructure to deliver that water to the world, which is a necessity. This is not driven by price increases.” McPherson points out that the fund would not be considered an SRI fund, but stresses that the fund’s investment mandate does not include the trading of water rights. The goal, McPherson says, is not to make money from fluctuating prices of water but to profit from the provision of the resource to areas and people in need of water. I think his message is a bit muddy here, and will provide little comfort to those concerned with the ongoing commoditization of water.

I drilled into Pictet’s 419-page Annual Report to get a better idea as to the companies upon which the Criterion Water Infrastructure Fund will be based. Besides the bigger names, you will find some smaller Canadian companies such as Canadian Hydro Developers, a certified producer of Green Power through their renewable energy projects, Pure Technologies, who have an advanced method of analyzing and managing the integrity of water pipelines, and H20 Innovations, a water filtration and treatment company.

So when you invest in a fund like this, you’re going to get the good little innovators, the big bad corporate behemoths, and every shade in between. Generally speaking, this is one of the main reservations that I personally have in recommending this fund to my clients, as I would prefer to be much more selective in my approach to this sector.

Public Services International Research Unit has reported that to reach the UN’s Millennium Development Goals for water by 2015, the world must connect 270,000 new people to water every day. Private sector investment has apparently managed to make only 900 of these connections per day over the last nine years, which leaves the obvious question of how these goals are going to be met without a major ramping up of private sector involvement. At the same time, communities will continue to challenge corporations as more realize their life resources are best managed locally.

But to my mind, the whole issue of private participation in water infrastructure can be boiled down to one overriding consideration. Emilia Sibley, a Research Analyst with KLD Research and Analytics, put it best when she said, “There are certain goods so essential to life one would hope they rise above the quarter-to-quarter push for profits that define the private sector. Water is one of these.” I’ll wrap up this series next month with some thoughts on how this sentiment might be applied.