The U.S. has recently experienced the worst drought in decades, yet each year an estimated 1.7 trillion gallons of water leaks from pipes before it can be put to use. And according to the United Nations, currently 41% of the world’s population lives in a water stressed area.
Despite the dramatic need for investment in water infrastructure, there is no way to price the cost of producing water, according to IBM and Waterfund, a global water risk management firm. So no benchmark exists with which to assess risk when it comes to investing in the water sector. Until now.
IBM (IBM) is partnering with Waterfund to create the first-ever water cost index. By using Big Data analytics, it will estimate the cost of producing water globally for 25% of the world’s GDP, and allow the creation of financial products to invest in the water sector.
The principals involved sat down with the Daily Ticker to explain.
“At one end of the spectrum you have housing, the most over-financialized sector of our economy,” Scott Rickards, President and CEO of Waterfund. “At the other end, you have water – there’s not a single financial product. Investors, Wall Street have pretty much ignored water. What we’re doing is using derivatives and insurance products to link to the index and enable risk management to actually take place for the first time in the water industry.”
“There’s plenty of capital that’s beginning to take an interest in investing in water,” notes Peter Williams, IBM Distinguished Engineer and Big Green Innovations CTO. “What we think the index will do is make it easier to invest in water by establishing a risk benchmark against which people can then lend. And the idea then is to encourage capital inflows into the water sector.”
This means for governments, municipalities, and water agencies looking for ways to finance the estimated $1 trillion in investment needed in water infrastructure in the U.S. alone, they could more easily raise this money and keep the liquidity (i.e. water) flowing to citizens.
On the note of risk, the misadventures of mortgage-backed securities during the housing crisis (not to mention commodity bubbles) may raise eyebrows when it comes to the idea of speculation over an element so essential to life.
Rickards argues, “It’s taken 25 years for housing to go from non-financialized to where we are today after everything that occurred four years ago.” When it comes to water, “if it ever gets there where speculation is a problem, that will not be a bad thing because we will have come a long way in the meantime.”
In the meantime, when it comes to retail investors being able wager a bet on water, Rickards and Williams anticipate an ETF allowing people to “go long the cost of water.”
Source: Yahoo! Finance Daily Ticker (By Lauren Lyster)
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