The water is scarce. Why should markets pay attention?

New York ( Business) — The world is in dire need of water. Drought and rising temperatures threaten to affect almost any sector of the economy, from energy to agriculture to freight transport.

The markets take note. The S&P Global Water Index, which tracks 50 global water utilities, infrastructure, equipment and materials companies, has outperformed the S&P Global Broad Market Index (BMI) by more than 3 percentage points a year since its inception. beginning in late 2001. Year to date, the Global Water Index has outperformed the S&P Global BMI by nearly 5 percentage points.

The Big Picture: Europe suffers the worst drought in last 500 yearsafter scorching temperatures caused thousands of deaths in Germany, the United Kingdom, Spain and Portugal. European rivers reached minimum water levels, interfering with crop and energy production, as well as shipping. The Rhine fell so low that shipping had to be cut back considerably, causing supply problems in Swiss Y Germany. Yields of major crops are expected to decline by at least 10-20% due to water restrictions.

It is not the only region in the world struggling with water scarcity. The drought engulfing the southwestern United States since 2000 marks the driest 22-year period in the last 1,200 years, according to a study run by UCLA. The American Federation of Agriculture suggests that harvests could be down as much as a third this year compared to last due to drought and extreme heat.

Climate change could make these extreme droughts commonplace. A report by the United Nations Intergovernmental Panel on Climate Change (IPCC) revealed last year that droughts in dry regions, which previously occurred only once every 10 years, now occur an average of 1.7 times per decade. If the Earth warms another 2°C, droughts that were previously rare will occur about 2.5 times a decade.

What it means for the markets: pressure on public budgets will make it difficult for governments around the world to solve water access and drought problems on their own. Publicly traded companies are increasingly likely to be part of the solution, with analysts predicting profit opportunities.

“As the demand for clean water increases, companies engaged in water-related activities will grow in the coming years,” wrote Tianyin Cheng, senior director at S&P Dow Jones Indices.

Recent reports from the World Economic Forum estimate that the global water industry will be worth $483 billion by mid-2022. Investors want in: 23 water funds have been launched in the last five years, totaling $8 billion. million in assets, according to Morningstar data.

The most common holdings in these funds include utilities such as American Water Works Company, Georg Fischer AG, a Swiss company working on safe water transportation, and water technology companies such as Xylem, which forecasts revenue growth. of about 5% per year until 2025.

Consolidated Water, which recycles wastewater into drinking water, is also under the scrutiny of analysts. Its shares are up 52% ​​this year, while the S&P 500 as a whole is down almost 19% in the same period.

A rising tide: On the other side of the equation are companies that are depleting water resources and failing to address drought as a critical issue for their business operations. A recent analysis by environmental disclosure platform CDP and Planet Tracker, a nonprofit think tank, showed that publicly traded companies could face losses of at least $225 billion from water-related risks.

Also in August, the group of investors in sustainability Ceres announced the creation of the Valuing Water Finance Initiative, with 64 US and international investors representing a total of $9.8 trillion in assets under management. Investors include pension funds and asset managers such as Franklin Resources. Ceres says the fund will push companies to pay more attention to their impact on water quality and availability. Participants, they say, will consider other “escalation” measures such as voting against company directors who don’t make the necessary changes.