As water is becoming increasingly scarce in some places due to climate change, it can soon be traded on the stock market for the first time. The world‘s largest derivative exchange, CME in Chicago, wants to be the first to launch a ‘water price‘ later this year.
It is a market for so-called forward contracts. These are contracts in which buyers and sellers fix a price – of water in this case – on a certain date in the future. Large consumers of water and investors can thus cover themselves against drought and therefore more expensive water in the future, is the idea. Or speculate on it.
The water price at the Chicago Stock Exchange is’ derived ‘from actual transactions with water in California. Investors do not buy the water physically, but do buy off the risk of a price increase. The English word for derived is derived. That is why contracts of this kind are also referred to as derivatives.
It is very common in commodity trading and financial markets to work with derivatives. For example, ‘the‘ oil price is also based on futures contracts.
Still some obstacles
The first reaction of a stock guard dog is positive. “Derivatives linked to the price of water are becoming essential for companies and investors to face the growing risks of climate change,” said a major US regulator this week to the Financial Times.
However, there are still a number of obstacles before the price of water in the financial markets plays a significant role. “There is no world market for water,” says Mary Pieterse-Bloem of ABN Amro. If a reservoir in California is empty, for example because forest fires are extinguished, that does not mean that we also have a problem here in the Netherlands, Pieterse-Bloem argues.
“ I suspect that the California-based water price is not universally usable. That’s quite a pity, but the utility for companies in California will certainly be there.”
“ With oil you also have North Sea and American oil, responds Thijs Knaap of pension investor APG, which invests hundreds of billions of pension money from ABP, among other things. The prices of these two types of oil regularly vary a few dollars a barrel. In the long run, he thinks there could also be different water prices.
APG trades in, among other things, oil, coffee, metal and sugar derivatives. “These are fine pieces in an investment portfolio,” says Knaap, but APG has no plans to trade in water derivatives. “There are important moral objections to it. The last thing you want is to take advantage as people die of thirst.”
Another problem with water is that it is often difficult to determine who the water actually belongs to, says Knaap. “With coffee and oil, it‘s easier.”
Euronext, which, among other things, is running the stock exchange in Amsterdam, does not intend to introduce water derivatives in Europe. “We do not see the advantages of developing financial products within our market by putting a price tag on an elusive product like water,” says Dirk Donker, head derivatives of Euronext Amsterdam.
Yet Knaap also sees positive points in the introduction of water at the fair. “When water is easier to trade, you can say that companies that use very much have a motivation to save water when the price rises. That’s what you can see with CO2, he mentions as an example.
According to Knaap, a higher water price can also stimulate investment in new sources.