BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Hi, everyone. Welcome to today's webinar. I'm Divya Mankikar, Global Head of Sustainability Market Engagement for S&P Global Sustainable1. Sustainable1 is for data analytics and intelligence on sustainability. And we're really pleased to be spending this hour with you all discussing water and investment themes around water. The title of today's webinar is Financing Sustainable Water. And before I introduce my guests, I just have a few housekeeping items that we need to go through. So we recognize that today's topic of the webinar is of great interest to many folks, and we want this to be as interactive as we can. So we encourage you to submit questions for discussion. [Operator Instructions]. And additionally, I'll be referring intersperse in the discussion to several reports that we've done, which leverages Sustainable1's research on water and so we encourage you to review those as well. Those are available in the resource widget. Finally, the webinar is being recorded and will be available on demand shortly after we conclude. If you encounter any technical issues during the program, please try refreshing your browser. And if issues persist, there is a Q&A widget to contact us, and a member of our team will be able to assist you. So now that all of that is out of the way, it's my pleasure to introduce you to today's panel. We're joined by Gian Franco Carassale from IDB Invest; Omar Moufti from BlackRock; and Ari Rajendra from S&P Global Dow Jones Indices. Before we ask them to join the conversation, we wanted to start with a polling question to allow all of us to understand what topics may be of most interest to the audience we have here today. And we have an massive audience already gathering, which is very exciting. So the question is, what water-related topic are you paying the most attention to? And the options are global water stress, regional water stress, wastewater management and pollution, water conservation and/or the impact of water unsustainable ag and food production. I can't actually see whether the poll is live on my side. So hopefully, you're able to see it on yours. Organizers, poll? Okay. Maybe we'll come back to that point. So today's session is on the 20th of March, the 22nd is World Water Day an Annual United Nations Day of Observance and time to think about the importance of freshwater in our lives. It's also a topic on which we've seen a lot of interest in investment, both from the standpoints of trying to understand risk management, how does water present potential or the lack of water to mud water present a risk to the private sector as well as an opportunity. And we understand that water is a silo to water utilities alone. There are many sectors that are dependent on water, both directly or through their supply chains. And so we're hoping to get into some of those themes today, including water risk management, water as a theme across sectors and opportunities related to that theme. So maybe we can start, please, with panelists, if you can each introduce yourself and how your work connects to this theme of water. We'll start with Gian Franco and then go to Omar and then Ari, please?

Thank you very much, and thank you for the invitation. And as you mentioned, Gian Franco Carassale, I'm the Lead for the Water & Sanitation Sector at IDB Invest. IDB Invest is a private sector arm of the IDB Group, where we lend to water utilities and operate across Latin America and the Caribbean in supporting the development of water sector.

Hi, everyone. My name is Omar Moufti, and I'm the Head of Thematics for the -- EMEA Head, I should say, for Thematics at iShares by BlackRock. And as a thematic investor, our role is to find themes that are oriented to long-term structural growth trends. These oriented towards the mega forces that are shaping the world in which we live. And we think water is a theme that has those characteristics.

Hi, everyone. My name is Ari Rajendra, and I am from S&P Dow Jones Indices. It's a real pleasure to be participating in this webinar here today. For those of you not familiar with S&P Dow Jones Indices, it's a division of S&P Global. It's a -- it's one of the world's biggest global resource in terms of index concepts, data and research when it comes to building sort of index solutions. So we create indices. And it's home to iconic indices, such as the S&P 500 and the Dow Jones industrial average. Now in terms of index creation, thematics is, as I said, we create lots of different indices. Thematics is one of them, and it's a big area of focus. And within the subsegment, just as Omar described, water is one of them. So we build water-related themes and other themes related to SDGs included.

Great. Thank you, all. It's great to have so many different perspectives on this. Starting with you, Gian Franco, I wanted to ask how water features as a theme from a development banks perspective. Just quickly from our own research, which is linked in the platform, we found through a couple of different reports that water stress and drought-free will increase in many parts of Latin America, particularly Southern Argentina, Northern Mexico and Northern Chile, and that may impact energy transition plans related to lithium extraction or green hydrogen, for example. And we also found that the number of Mexican states highly exposed to water stress is expected to almost double by 2050, leveraging our physical tests. But I wanted to get your perspective on why water is a relevant topic from a development banks perspective who focuses on the Latin American region and on lending to companies?

Thank you. Thank you very much. And yes, in addition to the stressful that water stress that we are seeing due to climate change and the reasons that you've just mentioned or they have been going on in the case of Atacama for centuries, the approach from the IDB Group, in general, including the IDB public sector arm and the private sector arm is more -- globally more regional to address the challenge that are common across the whole sector. And also starting to focus very much on the mitigation and adaptation to climate change at the same time. Water is an access to safe water is key, is one of the sustainable development goals that drives a mission of the IDB Group. And if you think about water, the -- 60% of the child mortality of kids below 5 years could potentially be significantly reduced by access to safe water that is caused by the diarrhea, the large part of the mortality is caused by diarrhea. It could be addressed by a child access to safe water. More than 80% of all communicable diseases in Latin America are caused also or could be preventive with access to safe water. So -- and we still have in the region 160 million people that lack access to safe water, including 40% of the rural population in Latin America and the Caribbean. So -- and this is across the entire Latin America and the Caribbean region. It's not affecting just one particular community. Of course, in cities and other more developed economy, the situation is not that great. But in -- across the sector, we see as efficiency on access to safe water. And there's a central team for our institutional like this to continue to work in the sector and drive the agenda to provide universal access to both water and sanitation to all people living in Latin American and the Caribbean.

Thank you for that context. And I guess, building on that, how does IDB Invest see water as a potential investment theme and opportunity? And how does it figure into the due diligence that you all do?

The theme -- because there is such an infrastructure gap in terms of -- when you think we always talk about the infrastructure gap in Latin America, right, in terms of transportation, access to electricity, et cetera. But nothing is wider in the infrastructure gap vis-a-vis the developed economies than the Water segment, right? As I mentioned, 40% of the rural population, 160 million people have access to safe water. If you look at the utilities in the region, roughly 45% of the water that is produced or portabilized by the utilities is lost literally in the networks. So there is a huge problem there. So in that, that context in order to address that gap requires billions and billions and billions of financing, right? So it is -- that is a theme in a way that is the opportunity that we see in order how to address it. And that can only be addressed through a combination of support from governments to the ones we saw in guaranteed loans through our public sector window and increasingly through the participation of private sector players. So in some certain economies, this is being aggressively addressed. Just in the case of Brazil, for instance, passed a law to make it mandatory to have universal access to safe water, and that is pushing all the states -- sovereign states to aggressively engage the private sector, and we are seeing transactions that are taking place for billions of dollars and $2 billion or $3 billion transaction, which we have never seen in Latin America before, and this is happening on and on, like start seeing Sao Paulo, Rio de Janeiro, Manaus you will start seeing these big cities that are addressing the water mandate through private sector investment. And at the same time, we are seeing new contractual modalities to address the problem in the water sector by engaging the private sector through nonrevenue water schemes that involve participation of private sector and the use of frontier technologies. In some cases, to address water stress and to address prepared economies for the ongoing climate change, we are seeing the development of the salinization plants with improved technology and then make it more affordable to end users, where the private sector will lead that process because they have the technology. So from our point of view, we try to operate across the board to private sector entities and companies through concessions of PPP schemes with -- through supporting utility operators, which is 90% owned by the government in Latin America of those -- to develop this type of contractual frameworks. And through -- and to all of them, we provide lending or investment of technical assistance to make this investment happen. Our focus continues to be -- we see opportunities on the billions and our focus to continue to be on mobilization. We know that the entire capital of the IDB Invest will not be able and the IDB Group in general will not be able to address the needs. So we -- for us, a central theme of our institutional strategy is to try to originate this type of transaction, try to structure this type of transaction to make it bankable for the private sector, institutional investors and commercial banks that will tag along together with us and participating in this type of investment. And that's the central theme that we do at IDB Invest.

Perfect. Thank you so much. And I have other questions for you to come back later. But I wanted to bring Omar into this discussion, too. So one of the conversations we recently had, which is available through our podcast, ESG Insider, is an interview with the Head of Water.org, who mentioned that about 1/3 of the water that goes into infrastructure is lost often because you're pumping it from remote locations and treating water and this whole process also has a huge carbon footprint. So he was talking about the opportunities that we have to improve water infrastructure, utilization of water. And I know that BlackRock has been working on water as an investment theme. So how -- from your role, how do you see this as a theme and potential opportunity?

Yes, absolutely. So what you're referring to is, what's often if it is nonrevenue water. So effectively, water that is lost through the system, and that is among many of the aspects that needs to be improved, where there are efficiencies to be made. And I think that speaks to one of the growth angles behind that because that is what we're dealing with. When we look at these sort of themes, ultimately, although water describes itself in many different growth categories, that's infrastructure investing ESG, SDG, purpose-driven investing and, of course, thematic investing. Ultimately, as when it comes to investing in listed public equities, which is my area, it is about performance. And water has delivered a steady compounded returns over time with relatively low volatility, and that's been driven by some of these structural demand factors behind that. So they're covering that infrastructure drag gap, which is both a long-term structural one, but one driven by population growth by rising standards of living, but also there's a long-term cyclical angle to it in that many of the -- a lot of the infrastructure that was built, especially in the so-called Western Hemisphere, is reaching the end of its natural life span. And there is a need to reinvigorate investment in this space and update the infrastructure, renew the infrastructure behind that. I think that what's interesting, why we think this is a very attractive long-term theme is the multiple angles of demand growth. So there's that natural angle that I meant. There's those -- that cyclical long-term cyclical one. And there is maybe even shorter structural growth drivers. From a policy perspective, we're seeing policymakers step into the fray to help bridge that gap. We've seen water being emphasized in the Jobs and Infrastructure Act in the U.S. There are also components related to order in the European Commission's budgets. And we're also -- I think it's also worth mentioning some new growth drivers there. So the AI and data center and the usage of data centers, all of this is very water intensive to call those big data centers. And semiconductor manufacturing is also a very water-intensive industry. So these are resulting in some new growth drivers emerging. And so all of this are some of the factors that investors are trying to access via the listed equity space.

Thank you. It's really helpful. And you mentioned at the end there about investors accessing this theme via listed equity. What are some of the themes or reasons rather that clients are interested in discussing potential investments in the theme of water and how are you seeing those drivers of demand materialize?

So water is a very long-standing investment theme, especially in the European arena. So by our estimates, there's about $28 billion worth of assets invested in water funds, whether that is index funds, ETFs, or active mutual funds there. And it's one -- a theme that's been around for the longest time. I think, historically, many investors have seen this as primarily a play on that emerging market theme of growing infrastructure spending there. But clearly, the implications are much broader. There's a need for -- a growing need for water investment in developed markets as well. Whether it's because of population growth, changing requirements, industrialization, but also weather volatility has been a big factor there. So ensuring as well that we have the right amount of water at all times. And that, again, is calls for greater investment in water infrastructure. I think on the policy side, there are also factors such as -- in the real-world policy side, I should say, water treatment, how we discharge water, has -- is increasingly a focus from the environmental -- on the environmental side of things. And there's been significant investments there ensuring that the water that is discharged back into our ecosystem can be made cleaner. So all of these, I would say, are some of the structural growth angles that investors are trying to tap into.

Understood. And finally, coming over to you, Ari, I wanted to understand from you a little bit more about how you're viewing activities by public companies and whether there is something interesting that you're seeing from an investment perspective related to water. We -- just as background, another resource that's in the Resource Tab is looking at our Corporate Sustainability Assessment, or CSA, survey that we issue from Sustainable1 every year. And looking at the 2022 reporting, we assessed several hundred food beverage and food retailing companies and found that fewer than half of those have a public commitment related to sustainable agriculture and about 42% of those provided detail related to sustainable agriculture that was sort of easily to -- easy to access and often the concerns about sustainable agriculture related to water as well, not exclusively water, but that's one of the major themes. So curious, from your perspective, how you're seeing public companies respond to all of these concerns, but also opportunities around water?

Yes. Thanks, Divya. It's interesting you mentioned the CSAs and there was something I was also going to bring up. And from the perspective of an index provider, like S&P Dow Jones Indices, we are thinking of about data and data sets and access to information as to how that can sort of translate to potential investment-based indices. And with respect to public listed companies, I think it's already been mentioned, the topic of water affects industries across the board. So it's fairly far reaching. And I think some industries more than others. If you look at the list, and this is already mentioned, I think, agriculture is well up there with -- from what I've seen 70% of freshwater supply goes into agriculture. And there's also a risk of water pollution through leakage and fertilizers and things of that sort. As also the food and beverage industry, which relies on water for manufacturing purposes. Even the fashion industry, I'm sure I read somewhere that it takes thousands of liters of water to make a pair of jeans, for example, because of cotton. So again, that works itself upstream. So I mean, again, there's more industries such as the meat industry, the paper and pulp industry. So public companies are increasingly recognizing the importance of corporate stewardship when it comes to their business operations and supply chains and recognizing the need for investors who may make decisions based on these factors. And to that -- and this is sustainability assessment. And again, the sustainability assessment underpins, S&P Global's ESG scores. And what it is, it's a survey that goes out to companies and companies get assessed on various different factors, where it's industry-specific across the 3 dimensions of ESG, environmental, social and governance. So there are thousands of questions and this rolls up to the ESG score. And in this questionnaire, water is one of them. And here, companies are questioned with respect to various aspects of their water practices, consumption, risk, management and what investors can do with this is use this type of information, and information is difficult to get out there to make more informed decisions. Now from an investor standpoint, we talk about companies from a consumption perspective. And Omar has mentioned about companies that get revenue, I guess, products and services related to water. So if we move up to sort of what we call, I guess, the core water companies, you've got the infrastructure companies, for example. Now these are the type of companies such as wastewater treatment companies, reservoirs, pipelines. Now these companies from an investor perspective benefit from government contracts and potential investment initiatives like the IRA, for example, right? So -- and we move to utility companies. There's also the benefit of steady income streams and also dividend yield. So from an income investor standpoint, it could be beneficial.

Right. And so maybe we can dig in a little bit into the structure of the index that you and Omar are referring to. I was curious -- well, and also I wanted to remind the audience that they are welcome to begin submitting questions through the Q&A widget as well. But I think it would be interesting to learn a bit more about the water index and how it is structured, both in terms of what factors you might be taking into account and what industries are relevant for this index. Are you going -- are you able to maybe start us off on that subject, Ari, and maybe then we can come to Omar with a similar question.

Yes, sure. I can start with that. And I guess, when we're thinking about investing in water, we can think both from a risk and opportunities perspective. And we think about risk, we think about the impact of climate change, poor water management practices, water scarcity, water pollution, nonadherence to policies. And when we think about that type of investment is primarily mitigating risk. It's reducing your exposure to companies which are -- have high water, so to speak. And when we shift to the opportunity side, you think about where you could see direct impact in terms of what actions could actually lead to material sort of financial implications and positive impact of the societies, right? So -- and Gian Franco has mentioned about the sort of leakage rates at 45%, which is staggering. So thinking about infrastructure companies and utilities and the opportunities that they have to upgrade their infrastructure. In some instances, their legacy infrastructure currently in place, which is not able to deal with harsh climate conditions, and also the element of improving innovative -- bringing in technology -- innovative technology to enhance supply and efficiency. The reason I talk about this is I'm sort of building up to why the sort of the composition of the global water index that we have. So you've got infrastructures and utility. And part of that value chain is also the materials and equipment that supply into the water-related businesses. So coming back to the Global Water Index that you just mentioned, Divya, it is -- the objective is to measure the performance of water-related businesses, and this is made up of 2 main clusters, which is the water infrastructure and utilities and you have water equipment and materials. So water infrastructure and utilities is, obviously, it's largely made out of the utilities and you have companies that are involved in wastewater management as well. In the water equipment and materials, we have the water purification companies. We've got control equipment companies, piping, fittings, et cetera, that actually feed into the water business. So those are the 2 clusters that we have. And the way the index design is to ensure allocation into 50% into each cluster. And what we do to identify these companies is to use a highly granular revenue data set that identifies companies that have at least 25% of revenues that come from these segments. And the final aspect, which I just want to point out, is the thematic curiosity. So clearly, each company may have varying degrees of purity with respect to water. So what we do is, if a company has 100% of revenue towards water-related businesses versus a company which may have 25%, then their weighted accordingly, the 100% revenue company will be weighted more.

Thank you. Omar, do you want to add to that?

Sure. I can -- I mean, just I think Ari has covered it very well. Maybe one thing I think that's just broadly appealing about it is that dual focus on that infrastructure side, that foundational infrastructure side. These are typically the utilities, monopolistic businesses, and as much as we don't usually, it doesn't make sense, often to have 2 water systems in the same area that tend to have good inflation pass-through. And on -- that's the one hand, these more defensive-type companies. And on the other hand that those more cyclical and growth-oriented equipment manufacturers that feed into, of course, those infrastructure companies. And that's what I was touching on earlier is the balance between the 2 that -- the balance between the cyclical and defensive from a returns perspective has helped or to be a steady compounder relatively, I should say, steady compounder of a theme, and that's something that is attractive for many investors.

That's great. Thank you. Gian Franco, I know that IDB has been addressing water in due diligence and also in financing, I believe, through issuance of a blue bond related to the Marine realm. It's a different angle of this topic of investing in the water theme. Would you be able to tell us a little bit more about that, the due diligence and the bond side of things?

Yes. You can see us probably more on the dealerships on the blue bond because, typically, blue bonds has been done through the public sector side of the bank through debt swaps, which are supported by sovereign guarantees. In our case, on the private sector arm of IDB, when -- given the situation of the sector in Latin America, when you see the sector, you see, as I mentioned before, 90% of the water operators are government-owned utilities. And the vast majority of those suffer from weak corporate governance standards and lack of transparent regulatory frameworks or they have a politically driven or not necessarily professionally managed. So in just only a few of that universe is commercially run with professionals and the things that will make them eligible for financing from commercial banks or institutional investors. So when we approach the sector, water utilities we make emphasis on corporate governance. In addition, a lot of emphasis on corporate governance for this water utilities. And of course, in addition to the commercial viability of the transaction, making sure that the regulatory framework is predictable and that the water utilities, there is a desire for both the water utilities and the political authorities to transform these water operators in commercially run and that they operate without a certain autonomy that is required for these utilities to develop. So we make a lot of emphasis on that aspects. In addition to the other aspect that are more rational to every transaction, environmental and social and so on. Now on private sector, because the transaction that we support are not necessarily only corporate financings to water utilities, but we do a structured finance through PPP schemes. We have a valid case of the transaction we just closed in Rio de Janero. We provide also advisory to this water utilities in new contractor modalities like nonrevenue water schemes, not only just for the financing stage to the private sector entity that is contracting with the public utility. But working with a public utility to define the framework how this can be done, right? And how these studies are required prior to a potential operation in pace. And we do it with always in a concept with sustainability. When we talk about nonrevenue water and the 45% of the water leakage that we have in the networks in Latin America, we try to be very cautious when pushing for investments and what we see investments that are looking to increase water production through desalinization. There is always a temptation that you can address the water program by producing more water, which is very costly, particularly through technology like desalinization or even pure purification. And when a significant part of the problem can be addressed by making the existing infrastructure more efficient or repairing the existing infrastructure that is in place in these water utilities because those will give you the quick gains in term of efficiency and productivity and improve revenue collections through application of new technology like smart metering, for -- engaging with the private sector to reduce water losses in the network and nonrevenue water. And then -- and because we do it where we see that, that as a part of a key component of adaptation for the water sector, particularly a situation of stress like we were seeing in the region that you mentioned, but more and more in Northern Mexico, when we see the requirement from the manufacturing base that is in Northern Mexico for water. It needs to -- we need to see a significant improvement on the use of water and the efficiency on the use of water through recycling, through repurpose of that water or other things that do not require necessary potable water. And a lot of emphasis is also done in that aspect. But broadly speaking, we have a situation of, as I mentioned, a significant participation from the governments through it's entities that creates its own dynamic, but increasing participation in some places more aggressive through the private sector. And those we can have more standard -- in the standard way that a bank will operate with the public utilities we hold hands and we look for those utilities that want to be independent, they want to create -- become autonomous and they have -- where they have their own ability to fund themselves over time to address the infrastructure gap and not necessarily relied on an ongoing basis from the support of government through cluster for storing utilities.