The hidden gold of Italian water sector

Can investors be more attracted to invest in Italian water companies? Yes, says a new report promoted by Gruppo CAP, but only if the Italian water sector as a whole starts to change. And PNRR Recovery funds can be exactly what water companies now need to evolve and become more appealing, especially to ESG (Environmental, Social, Governance) finance. PNRR funds, says Gruppo CAP, can be used to start those innovation projects ESG investors want to see: infrastructure modernization projects satisfying sustainability and financial goals, at the same time optimizing water distribution networks.

Today, report says, Italian water distribution market is way too complicated for ESG investors. First, it's heavily fragmented, with more than 700 active companies. What's more, just the big ones are able to invest and diversify their technical skills, while smaller companies still depend on their bigger partners, creating market inefficiences. Other issues investors now fear: market regulations are too complex and not uniform enough, in many water companies governance seems... less than stellar, let's say.

That's why, even if the strategic role of water infrastructure has been reaffirmed recently at Glasgow COP26, "there is no real dialogue between financing and water sector", says Alessandro Russo, Gruppo CAP President and CEO. But also ESG investors have their homework to do, says Russo: they do not try enough to understand water companies and their potential. Specifically, that these companies "could be circular economy facilitators, creating positive partnerships with the whole Italian industrial supply chain".PNRR recovery plan will help closing the gap between investors and water companies, reserving 4.4 billion euros for water infrastructure development and fostering public-private alliances in the field. Potential investors hope that PNRR funds will immediately be used by water utilities to attain longterm ESG goals, like fighting water scarcity and pollution, or limiting climate change and urbanization. This, combined with more financial transparency and more realistic business plans, should convince ESG investors to open their pockets.

There are a lot of ways in which investors and utilities can engage, and many of them have not been explored in the Italian market. Local water companies usually borrow money from banks, but "water modernization" projects are longterm initiatives that can be funded via multilateral project financing, involving for example pension and sovereign funds. Or using sustainable loans and ESG bonds. With the usual caveat: big investors like to deal with big and stable companies. Better if they are at least partially private.