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Resource scarcity is a growing global concern. Sustainable investors need to wisely select Water and Ocean ETFs that are sustainable and focus on efficient use of water supplies, and conservation of marine ecosystems.

This is Part II of the “soft commodity ETFs” series, where we look into Water and Ocean ETFs. Make sure to read Part I, where we compare Forestry and Agriculture ETFs

The imminent risk of resource scarcity

Our obsession with unlimited economic growth combined with increasing urbanization and population growth will drive higher demand for energy, food, water, and other basic resources. Sooner than expected, this will create a global resource scarcity crisis.

The scarcity of a specific resource might drive the price of a commodity up. However, this should not be seen immediately as a good investment, since we need to access how the higher price would impact the final users and consumers of that commodity. The best approach for the sustainable investor is to invest in companies whose businesses focus on improving resource efficiency, instead of companies that mainly extract and trade commodities and natural resources.

Which commodities are more sensitive to climate change?

Soft commodities are products that need to be grown and cared for. The main examples are agricultural produce (corn, soybeans, sugar), livestock (cattle, fish), and forestry products (timber, lumber). Soft commodities, due to their durability, are more volatile assets. Consequently, the supply of soft commodities is highly subject to weather conditions and in the long term will be heavily impacted by climate change.

We will focus on ETFs related to soft commodities, and for comparison, we will divide them into 4 categories: Forestry, Agriculture, Water, and Ocean.

The most sustainable soft commodity ETF – Water and Ocean ETFs

We will now investigate the soft commodity ETFs available in each category and compare their sustainable performance using ESG ratings.

This is Part II, where we look into Water and Ocean ETFs

In Part I we looked into Forestry and Agriculture ETFs.

Most of the soft commodity ETFs presented below have not been created as ESG ETFs, therefore it is expected that their sustainability performance will be subpar.

Water ETFs

When it comes to soft commodities ETFs, water ETFs are the most popular category. There are 8 water ETFs available among US and EU markets. Invesco has 3 water ETFs (PHO, CGW, PIO), while the other ETF issuers have one water ETF each; IH2O from iShares, FIW from First Trust, EBLU from Ecofin, WAT from Lyxor, and GLUG from L&G.

iShares Global Water UCITS ETF (IH20)

At the top of the list, we have the IH20 available for European investors, with almost USD 1.8 billion in AUM. The IH20 ETF follows the ‘S&P Global Water Index’, which invests in 50 global companies with exposure to the water sector. The iShares IH2O is the European equivalent to Invesco CGW ETF since those ETFs follow the same index.

ESG: IH2O has an MSCI ESG rating of ‘A’ and high carbon intensity of 269.6 tCO2/M$ sales. Among its top 10 holdings, Algonquin Power & Utilities Corp. is the company with the highest ESG risk, score, 38.7 out of 50, according to Sustainalytics.

Invesco Water ETFs: Invesco Water Resources ETF (PHO), Invesco S&P Global Water ETF (CGW), Invesco Global Water ETF (PIO)

Invesco brings 3 options of Water ETF. The 100% North American PHO, which follows the ‘NASDAQ OMX US Water Index’ and has almost USD 1.4 billion in AUM, and two smaller global options tracking different indexes: CGW ETF (USD 849 million in AUM) tracking the ‘S&P Global Water Index’, and PIO ETF (USD 240 million in AUM) tracking the ‘Nasdaq OMX Global Water Index’.

ESG: All 3 Invesco water ETFs have an MSCI ESG rating of ‘A’. However, while PHO has the lowest carbon intensity of the 3 Invesco water ETFs (72 tCO2/M$ sales), it also has an ‘F’ for gender equality. CGW gets an ‘F’ in firearms due to its exposure to Olin Corp. According to Fossil Free Funds, PIO is the only Invesco water ETF without ESG issues lower than ‘B’.

Lyxor World Water UCITS ETF (WAT)

Lyxor offers a water ETF option for European investors with WAT. With more than EUR 800 million of AUM, this ETF tracks the ‘World Water Index CW Net Total Return’. The index “tracks the world’s 30 largest companies operating in the water infrastructure, utilities or treatment sectors, who derive at least 40% of their revenue from water-related activities”.

ESG: WAT ETF has a good MSCI ESG rating of ‘AA’ and carbon intensity of 122 tCO2/M$ sales. WAT ETF’s top holding is the Swiss company Geberit AG, which according to Sustainalytics, has a low ESG Risk Rating of 11.8 (out of 50 possible points).

First Trust ISE Water Index Fund (FIW)

FIW is a US-based ETF with USD 740 million of AUM. The ETF tracks the ‘ISE Clean Edge Water Index’ which is comprised of companies that have a substantial share of their revenues from the potable and wastewater industry.

ESG: FIW gets an ‘A’ as MSCI ESG rating. On the other hand, Fossil Free Funds gives it a ‘D’ in gender equality, due to its exposure to Mueller Industries, and an ‘F’ in weapons, due to its exposure to AECOM.

L&G Clean Water UCITS ETF (GLUG)

GLUG, from Legal & General, is a small EU-based water ETF, with less than USD 100 million in AUM. By tracking the ‘Solactive Clean Water Index NTR’, the GLUG ETF is the odd one in the list. The index focuses on; i) utility companies with a minimum water revenue share of 90%, ii) engineering companies with a minimum water revenue share of 50%, iii) companies with expertise in technology or digital, and a minimum water revenue share of 5%. The result is a water ETF with very few overlaps when compared to the other water ETFs on the list. Out of the top 10 holdings of GLUG, only IDEXX Laboratories is present in another water ETF (FIW).

ESG: Regarding ESG, GLUG has an MSCI ESG rating of ‘A’ and the second-lowest carbon intensity in the list (116 tCO2/$M sales), only higher than the carbon intensity of the PHO ETF.

Ecofin Global Water ESG (EBLU)

The smallest water ETF on the list is EBLU with less than USD 30 million in AUM. Ecofin Global Water ESG ETF is the only water ETF in the list to follow an ESG-focused index, the ‘Ecofin Global Water ESG Index’. The index has an interesting strategy:

• Purity: companies with at least 50% of the revenues from water industry-related activities
• Sustainability: minimum ESG score of 48 from Sustainalytics for at least 80% of the index market cap
• “Investibility”: minimum liquidity turnover of 0.15 and market cap of $400 million for two consecutive quarters

ESG: Consequently, EBLU ETF receives an MSCI ESG rating of ‘AA’ and has strong ESG companies within its top 10 holdings. Five of the top companies have a Sustainalytics ESG risk score below 20 (low risk): Geberit AG, Ferguson PLC, Xylem, Severn Trent, United Utilities Group PLC.

Ocean ETFs

Ocean or Blue Economy ETF is still an unexplored category by ETF issuers. There is only one ocean ETF available in the US & EU markets, and it is from BNP Paribas.

BNP Paribas Easy ECPI Global ESG Blue Economy (BJLE)

In July 2020, BPN Paribas launched in Europe, as part of its ‘Easy’ series, the BNP Paribas Easy ECPI Global ESG Blue Economy (BJLE). The ETF tracks the ‘ECPI Global ESG Blue Economy (NR) Index’ with selected companies that focuses on the sustainable use of ocean resources, including coastal protection, eco-tourism, recycling, human capital, and corporate governance.

The result is a well-diversified ocean ETF, with 51 stocks, distributed among the sectors of ocean logistics (e.g. Kuehne Nagel), offshore wind (e.g. Siemens), water management (e.g. Veolia), and fish production (e.g. SalMar).

ESG: The BJLE ETF has a good MSCI ESG rating of ‘AA’. However, due to its exposure to marine logistics, and related fossil fuel consumption, we should expect a carbon intensity above average.

Which soft commodity ETF should a sustainable investor buy?

Out of the 9 water and ocean ETFs presented, only two ETFs have an ESG mandate. Those are the water ETF, Ecofin Global Water ESG (EBLU), and the ocean ETF, BNP Paribas Easy ECPI Global ESG Blue Economy (BJLE). Due to its novelty, BJLE still does not have an MSCI ESG rating, but we expect that it will be an ‘A’ or higher. EBLU has an MSCI ESG rating of ‘AA’.

Among the water ETFs, the Lyxor World Water ETF (WAT) also reaches a high MSCI ESG rating of ‘AA’ and can be an alternative to EBLU, for investors based in Europe.

Most sustainable water and ocean ETFs

• Water: Ecofin Global Water ESG (EBLU)
• Ocean: BNP Paribas Easy ECPI Global ESG Blue Economy (BJLE)

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