Watch for ETFs focused on ESG, climate change, and water resource stocks.

Recent research from the BlackRock Investment Institute (BII) warns that investors have not factored in the potential risk from a growing global “water risk,” when demand for H2O exceeds its supply.

Such a situation would be a fallout from the increasing evidence of climate change and its adverse reactions. (InvestorDaily)

Climate change and financial damage

“We believe increased asset flows into sustainable investing strategies in 2020 are part of a tectonic shift that could last decades,” said BII in a report. “A societal shift toward sustainability and growing awareness of related risks are behind these flows. Climate-related events such as extreme weather are already causing real financial damage.”

There are signs of investors plowing more and more money into ESG investments. According to recent statistics from ETFGI, inflows into ETFs/ETPs were US$3.49 billion during June 2020, bringing year-to-date net inflows to US$32.02 billion. These were more than three times the inflow of US$9.86 billion into ESG ETFs/ETPs seen in the corresponding period in 2019.

Further, assets invested in ESG ETFs and ETPs increased by 7.3% from US$82 billion at the end of May to a new record of US$88 billion in June.

Climate change and water stress

“(Water stress) is a component of growing climate-related risks such as hurricanes, wildfires, and flooding, and threatens public health, production facilities, and global supply chains,” BII wrote. “Large cities will need to strengthen their water infrastructure. Within a decade, much of the world will lie in regions of high water stress, projections by the World Resources Institute show.”

A global shortage of water will put a premium on utilities and other infrastructures that handle and supply this precious resource.

Stocks of companies/utilities that supply, conserve, and purify water are good long-term investments for the following reasons:

• High earnings growth and regular dividends
• Non-traditional investments that can diversify risk
• Water utilities trade at a premium compared with other utilities such as electricity and natural gas
• Water utilities are more recession-resistant than other utilities because more of their revenues originate from residential homes
• Excellent ESG play because water companies are stewards of a natural resource.

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