Water Scarcity and Municipal Bond Markets (or, Why it’s Important to Talk to Strangers)


susieseidelmanAs an environmentalist, I don’t often see other environmentalists actively partnering with financial management groups.  Although I can’t be certain, I have a hunch financial managers would report similar findings – generally speaking, we operate in separate spheres, and don’t really pay attention to one another.  Our worlds have some confluence, of course, but we don’t frequently have lunch together.  Maybe we should work a little harder to make connections.

A new report released by Boston-based investment firm Ceres would certainly have us think so. Ceres is a national network of investors and environmentalists working to integrate sustainability into capital markets, and in The Ripple Effect – Water Risk in the Municipal Bond Market, they sound a clear warning.  The report, co-authored by Water Asset Management and utilizing a quantitative model developed by PricewaterhouseCoopers, focuses on the hidden risks embedded in bonds backing public water utilities and municipal power plants, both of which are increasingly vulnerable to shutdowns due to water shortages.  Throughout, the authors clearly define the interconnectedness of water supplies and municipal bonds, and they do so by highlighting eight utility bonds, from California to Georgia, as examples of the impact scarcity can have on investment.

In each example, the story is similar – the freshwater supplies these municipalities depend on are drying up.  Even the slightest bit of reasoning tells us this can’t be a good thing – water utilities and power plants need water to function, period.  Despite the glaring evidence of vulnerability, all of these bonds were given a high value rating based on traditional bond models.  In other words, all of these bonds are lauded as highly recommended, safe investments.

What gives?  Why aren’t traditional models taking new risks into consideration?  In The Ripple Effect, the authors very elegantly avoid answers to these questions.  They focus instead on action, and call upon investment firms to modify these models to more accurately reflect the real risks associated with utility bonds.  In the face of looming freshwater crises across the nation, failure to heed this advice could amount to financial suicide.

There will, of course, be those who argue new investment models will negatively impact infrastructure funding.   In the forward to the report, Ceres president Mindy Lubber sets the tone as one of offense and immediately counters this argument, stating the recommendations in the report can help all those involved in water resource management to navigate the challenges inherent in freshwater scarcity.  Rather than undercut current financing options, Lubber argues an adherence to the report’s recommendations will “catalyze conversations and partnerships to develop best practices for understanding, anticipating and, ultimately, reducing water risk in our national investments.”  In doing so, we will “better preserve our precious water resources for generations to come.”  This seems like a win-win to me.

That’s exactly what I like best about this report – it’s not just about protecting an investor’s pocketbook.  A strong connection is made between how we should think about investing and how we should think about the environment – both are dependent upon innumerable outside forces, and both require radical shifts in policy to successfully and sustainably adapt.  We’re at a crossroads in our responses to both, and Ceres, like The Johnson Foundation, chooses to lead. There will be those who, instead, choose to wait for a crisis.  In the end, crises can be very effective teachers – there’s nothing like a shot to the pocketbook to jolt a naysayer into belief.  But if we wish to choose a more sustainable path, the recommendations are there.

To download your own copy of The Ripple Effect – Water Risk in the Municipal Bond Market, please visit www.ceres.org/Page.aspx

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