The good news, investor advocates say, is that there is growing awareness of the interconnectedness of water issues with other environmental issues like climate change and supply chain risk, and new tools for investors.
The World Wildlife Fund's Water Risk Filter online tool helps companies and investors assess, value and respond to water risks in operations, supply chain and investments. It aggregates three water risk types: physical, regulatory and reputational. It allows them to integrate climate and other scenarios of water risks to perform scenario analysis across portfolios or even by asset class.
The Ceres Investor Water Toolkit helps investors evaluate and act on water risks in investment portfolios with concrete engagement advice.
"Investors finally have at our fingertips what we need to hold companies accountable," said Ms. James of Ceres.
Still, the lack of data on corporate water exposure "does hamper engagement," said Kris Nelson, director of investment research for Russell Investments' global equities team in Seattle. "It makes it a much more case-by-case exercise. You have to do some digging," she said.
While there are relatively few water-related strategies to invest in today, "there are thematic strategies that you can invest in with (water) solutions," Ms. Nelson said. "I do think there will be more if the effects of climate change continue to grow, which they will."
Matthew Diserio, co-founder and president of Water Asset Management LLC, a New York water industry-focused firm managing $500 million in public and private equity investments, couldn't agree more. His firm invests exclusively in companies and assets that ensure water quality and supply, and shorts companies that are at water risk from drought, wildfires and supply issues.
"We are seeing more interest from institutional investors. People are mostly still focused on risk. We are focused on investing in the solutions," he said.
It's not altruistic. "The entire water industry has a revenue growth tailwind from more and more spending" and growing recognition of water as an asset class. "We know that all these problems are solvable. These issues get solved by committing capital," Mr. Diserio said.
Recent headlines add a sense of urgency to the investors' mission. A drinking water crisis in Jackson, Miss., caused by poor maintenance and oversight has triggered a federal investigation and will require substantial infrastructure investment.
Record-low water levels in the Colorado River after a 22-year drought are even more ominous. According to the multiagency U.S. Drought Monitor, the Colorado River provides water to almost 40 million people in two countries, seven states, 29 federally recognized Native American tribes, and four million acres of farmland. According to a study by the University of Arizona, the river supports $1.4 trillion in annual economic activity—equivalent to one-twelfth of total U.S. gross domestic product.
Massive challenges like those, along with the energy transition push, could also create new opportunities for institutional investors through private and public partnerships, said Bill Green, managing partner of Climate Adaptive Infrastructure in Mill Valley, Calif. The infrastructure investment firm specializes in low-carbon real assets. Its investment mandate in the water sector includes integrated water and wastewater systems, industrial pretreatment and water recycling and potable reuse.
When it comes to drinking water and industrial uses, "we believe that as the historic supply models break down, you will see increasing demands for water partnerships," Mr. Green said. "The demand is being created by acute shortages resulting from climate-related drought."
The firm did not provide its AUM.