There are a group of stocks that investors are injecting money into that fit a particular criteria.
ESG, which measures the level of a company’s Environmental, Social, and Governance responsibility, is increasingly being considered in investment decisions.
And investors considering ESG for their investments are increasingly scooping up U.S. water utilities like Aqua America (NYSE: WTR), American States Water Co (NYSE: AWR), and American Water Works (NYSE: AWK), three stocks that have surged to record levels, beating both the S&P 500 and other utility stocks.
So far this year, Aqua America and American Water Works are both up around 35%, while American States Water is up nearly 41%, compared to the S&P 500’s gain of about 20% and the XLU Utilities Sector SPDR’s rise of 22.5%.
“A lot of those ESG funds use water utilities as a proxy of water scarcity,” said Angie Storozynski, managing director and senior analyst at Macquarie Capital. They have been doing particularly well because there is this additional environmental oversight.”
There are a shortage of publicly traded water utilities globally, which makes companies like these top picks for ESG funds over other utilities like electric or gas.
“[Water utilities] all have acknowledged the inflow from ESG funds,” said Evercore ISI analyst Durgesh Chopra. “Clearly, it’s a driver.”
Storozynski notes that the concern of water scarcity is a misguided investment angle as most of the publicly traded water utilities in the U.S. are companies located in the Northeast where lack of water supply isn’t an issue like it is for many other parts of the world.
For an investor wanting to make a play on water scarcity, then American States Water Co is the best option as the company is based in California, which has been plagued by drought for years.
U.K.-based Impax Asset Management portfolio manager Siddharth Jha says that it invests in securities that it believes offers solutions to water-related challenges across the world.
“The idea that solving environmental challenges, in particular in this case, water challenges can lead to better earnings growth is central to our investment thesis,” Jha said.
Impax is the eighth-largest shareholder of Pennsylvania-based Aqua America, and the fund considers ESG criteria when assessing companies, though it doesn’t go so far as to label itself an ESG fund.
Of the three, American Water Works has a slightly better ESG rating than its peers. The New Jersey-based utility implemented a comprehensive ESG strategy a little over two years ago, and now has resources and staff to promote its ESG-related goals.
“We are confident that through focused attention on ESG and transparency that our ESG score will become yet another differentiator for us vs. our competitors,” said Ruben Rodriguez, senior director of external communications at American Water Works.
Janney Montgomery Scott analyst Michael Gaugler is bullish on two of the three and recently issued Buy ratings for Aqua America and American Water Works.
Gaugler raised his price target for American Water Works to $153, indicating possible upside of 25% over the next twelve months, while his research report made a case for how this utility could rise another 135% over the next decade if interest rates stay low and if the company continues to deliver dividend hikes.
The analyst raised his price target on Aqua America to $70 – 51% higher than Thursday’s closing price. Gaugler also said that Aqua America shares could surge 177% over the next decade for the same reasons American Water Works could see a similar gain.