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The Drought to Come
Water Barons, Chamath, and the ESG Case for speculating on a scarce resource
The Giver of Life
Drawn wells have the sweetest water - Persian Proverb1
A friend and sometimes collaborator with the ESG Hound spent the last few months putting together an absolutely fascinating report. This investor spent 10 years in banking and currently works for a private construction firm. His thesis was posted here:
At over 100 pages, It’s an absolute monster of a report. I suggest you read at the minimum the first few pages (the “Elevator Pitch”). It makes a fascinating, compelling economic and business case to go long a specific publicly traded equity: Vidler Water Resources Inc (ticker: VWTR). I won’t ever top the author on corporate finance or commodity economics, so I don’t really have too much to add on that.
What the ESG Hound is curious about is the underlying business, as it touches Water. Water is the giver of life and every major early civilization across the world grew up along a fertile river for a reason. Man can go weeks, months, even years without food. A few days without water and you’re dead. Not to mention other obvious benefits: hygiene, agriculture, as well as constant mechanical force that drove shipping and milling. Water is important. And as an environmental engineer and project manager in private industry, this topic impacts our operations as well.
Water is also highly regulated. Images of the Cuyahoga river, that runs through Cleveland, Ohio catching fire one too many times was a major driver for formation of the EPA and the Promogulation of the Clean Water Act. Water is not only scares, it effectively moves toxins and chemicals and life. Dirty water kills fish. Dirty water kills crops. Dirty water can’t be drunk.
Over the ensuing decades, state and federal regulations popped up addressing surface water pollution, ground water pollution, ground water use, hazardous waste disposal, water cleanup, water reinjection and oil spill prevention. Not all regulations are perfect, of course, but most people agree they’re necessary to keep the limited fresh water supply clean.
Supply Shock and Water Barons
To the ant, a few drops of rain is a flood - Japanese Proverb2
Anyone who’s known me for any length of time knows I’m intensely skeptical of Silicon Valley VC/Tech Bro culture. Perhaps no one personifies this cultural and financial phenomenon than the (in)famous Chamath Palihapitiya, CEO and Founder of the controversial Social Capital Venture Capital Firm.
What’s maddening about Chamath, to me, is that if you dig beneath the PR campaigns (Bitcoin, Stonks, Tesla, SPACs) he’s a fascinating and interesting individual with a lot of interesting things to say. He received lots of flack for criticizing the impact of social media, going as far as to call Facebook one of many “tools that are ripping apart the social fabric of how society works.” Calling Chamath a hypocrite, given he made a large portion of his wealth as an early Executive of the company, has become the standard and perhaps predictable pushback from his critics. I don’t think that’s fair, though.
I am someone who is interested in ESG, not as a marketing rubric, but rather a way society can direct market capitalism in a way that improves society somewhat (or at the least, minimize harm from consumption). That sounds like a fairy tale, especially to someone who tends to be cynical, as I myself am. But we have to be willing to accept that maybe not everyone is always “talking their book” at all times, which is hard to do. But if you listen to interviews with Chamath that don’t touch on topics that involve meme stocks or reddit or CNBC segments, he seems quite earnest in some of his beliefs. He’s a very smart person, and he’s got a megaphone and a grip of cash so maybe: we should listen?
On to the topic at hand:
I’d normally avoid a podcast produced by and starring exclusively West Coast tech millionaires like the plague, but I’d been talking water and a friend insisted I listen. And I did. And it was fascinating. The first 25 minutes of the episode is an excellent discussion on the ever worsening California drought. The second segment covers nuclear energy and virtue signaling; it is good as well, but since it’s not relevant to this post, I will skip for the time being.
The topic of discussion is in the tweet thread posted below:
Chamath demonstrates keen understanding of the root causes (human development, climate change, the water cycle). The long term solutions are muddled, and short term solutions are hard to pin down and act upon.
Chamath: I‘ve been looking at water investing for awhile (sic) there’s a real problem when I looked at this; my team found some interesting opportunities… largely it evolves around owning water rights, and then basically selling them back to the state when states get into difficult situations. The problem is: I think it’s politically intolerable, let’s just say somebody like me to own those kinds of water rights
Jason: To be a water baron, yeah
Chamath: I think it’s no bueno.
This exchange is especially interesting because he interrupts Jason (Calacanis), talking about taxation and technology as the savior. Those are long term plans, and while certainly worthy of long discussions, Chamath steps in with short term alpha. Vidler Water Resources likely will be a big beneficiary of this type of supply shortage.
Chamath acknowledges the messaging side of it, and this is where I think he’s top tier among Rich Guys on CNBC. Carl Ichan is his exact opposite in this manner. He is all alpha and his messaging is “make money. That’s all that matters.” Ichan has taken the public perception of a hedge fund vampire, turned the dial up to 11 and ran with it. Ichan knows his audience and he plays up to it.
Chamath generally walks the tightrope of Making Money vs Not Being Evil in the press like a pro. In January, he made a killing on GameStop share options and then got invited by Alexandra Ocasio-Cortez to have a Twitch discussion about how Wall Street Is Bad for Regular Joes.
I agree with Chamath that on a surface level, making money on speculating on water supply when people are suffering is, what we at ESG Hound call: “not a good look.”
But I think the reality (and potential) is a lot deeper than that.
Chamath is wrong (and long?)
And from the same podcast
Chamath: …then the idea I had was like well maybe what we should do be doing is buying these things (companies with water rights) and sticking them in a foundation so that we can guarantee water for people in certain states. Maybe that flies, I’m not so sure
The question is: has Chamath decided to go down that road? Well, there’s some compelling evidence out in the open on Twitter:
Chamath proposed last year to start allocating billions towards investing in climate.
I found this tweet a bit after the VWTR report went live:
Turns out it’s Social Capital’s research team mulling the idea right out in the open.
Is Chamath/Social Capital buying water plays for his foundation? If he isn’t: should he?
The ESG Case for Water Stockpiling
One of my biggest issues with ESG investing, as it’s commonly understood, is that it’s little more than advertising.
There are two main routes for this manifested to date:
“We bought a bunch of stocks with good ESG scores (thanks S&P), dropped them into a fund with an added management fee” - Nestle has an ESG score of 72/100 and Philip Morris has a 74. I have many thoughts on this topic to come but let’s just say there are problems there.
“We only buy certain stocks (solar, EVs, tech) because the public associates them with being green.” - This one is a bit more hit or miss, but many activities required for the survival of humans (manufacturing, mining, food production, oil etc) have massive environmental impacts. We can (and should) focus on sustainability and incremental improvement, but if ESG is to become an all encompassing requirement instead a little niche in the market, we must have better ways to choose where we deploy capital.
I think one of the most interesting aspects of Chamath’s June 2020 announcement is that ESG-style Investing can become activist investing.
In other words: buy companies with valuable resources, patents and skills and force them to act in a certain way.
Vidler Water has resources in the lower Colorado River Basin. Arizona has the lowest and least senior water rights per the 1922 Colorado River accord and a growing population. Drought would hit them hard, and states would assure that agriculture and residential needs are met first.
What about the rest of the supply chain? Here are some water hungry projects and companies:
The TenWest Link project - a decades long power transmission project to increase grid redundancy, as well as increase solar capacity across the Southwest (including SoCal and Arizona). Construction will require water; this is one of the first industries impacted by shortages
Intel/TSMC chip plant- A plant powered largely by solar will be constructed here. These chips would be manufactured by Americans, provided much needed domestic supply chain security and will used in all sorts of technology. A large user of water
Mining- Arizona is one of the biggest domestic producers of infrastructure materials (sand, gravel) as well as copper. There are additionally lithium and other rare earth metal reserves that can be exploited to move forward green projects. The need for water in this industry is required for extraction as well as to mitigate air emissions (via dust).
The Pitch - For The VC
Here’s the pitch: simply put, buy the water, own the water.
You have alpha. This much is obvious as the potential economic gain in a limited, critical, supply during a supply is massive.
More importantly, you have the leverage. Leverage is power. Chamath knows this, as I think most of us do. The question is: “does he have the will? Can he spin the PR on this to get the AOCs of the world on board?”
If you’re the investor in ESG or a forward thinking VC, here’s how you could deploy that leverage
Arizona is a fabulous place to situate data centers, as there is abundant renewable energy availably and the region is not prone to disasters such as floods, hurricanes, tornadoes or earthquakes. A VC fund (or Microsoft or Google or Amazon) would need access to senior water rights
Raw materials needed for green infrastructure (from concrete to panels and wind turbines) are abundant in the state and water rights could help determine which of these mining projects are prioritized
You can use the water rights and donate the supply to a non profit. The risk of households losing water rights is basically non-existent in the next decade, but tons of small businesses and non profits could be at risk.
So you can easily make this play both generate alpha and forward your agenda. So is Chamath two steps ahead of me, yet again, as when he bought Tesla convertible debt in 2017, knowing full well that they wouldn’t be allowed to fail, no matter how precarious their balance sheet was?
Big tech may already be working on cornering the market. The question is: should you too?
I do not trade individual stocks. I have no position in VWTR, either in common stock, options, grants, bonds, NFTs, lootboxes and have no intention to do so anytime in the future. I was not compensated for this work by any third party. This post is just my viewpoint and is extremely not investing advice.
The Routledge Book of World Proverbs, Jon Stone (2006)
As They Say in Zanzibar: Proverbial Wisdom From Around the World, David Crystal (2008)