Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 175

Liquid asset benefits agriculture and the environment

Impact investing might be a new buzz phrase, but it’s here to stay. Estimates of the amounts that will be directed towards impact investing over the next decade run as high as $32 billion in Australia and US$1 trillion globally. This article looks at an example of an impact investment.

A delicate balance

The Murray-Darling Basin is one of the largest and most important river basins in the world, sustaining $19 billion in agricultural production and providing one-third of Australia’s food supply. Increasing global demand for Basin-grown almonds, walnuts, hazelnuts, olives, table grapes and dried fruit combined with decreasing water supply and a three-year depreciation of the Australian dollar mean investment in irrigated agriculture is expected to accelerate over the medium term.

While domestic and export markets make the Murray-Darling one of the world’s most productive river basins, it is also one of the most vulnerable. Decades of engineering, over-allocation of water entitlements and the drying effects of climate change have significantly reduced runoff to rivers, creeks and wetlands. As a result, 80% of the Basin’s ecosystems are now in poor or very poor health.

Its rivers and creeks are the lifeblood of many Australian farmers, but its wetlands are also home to endangered fish, mammals and birds. And therein lies a problem: there’s not always enough water for both.

The Australian water market

Australia has a large and most sophisticated water trading market. A water entitlement is a perpetual or ongoing entitlement to receive exclusive access to a defined share of water from a consumptive pool. Entitlements are classified according to their seniority or security, with those classed as higher ‘security’ or ‘reliability’ receiving priority in gaining access to water in a given year.

A water allocation is the volume of water allocated to an entitlement, which can be accessed and used or sold in a given period. Water allocations are announced by the relevant water authorities throughout the year based on volumes held in storage, inflows and seasonal expectations. Water allocations can be traded within and between connected rivers in Victoria, South Australia, and NSW.

Over recent decades, federal and state governments have implemented a series of regulatory reforms that aim to provide investment certainty and encourage efficient water deployment. Key regulatory reforms include: the separation of water ownership from land title; development of a nationally compatible water market; and the establishment of a cap on water extraction from the Murray-Darling Basin.

Investments that meet the challenges

To help meet this challenge of enough water for both the environment and agriculture, the Nature Conservancy and Kilter Rural developed the Murray-Darling Basin Balanced Water Fund, a world-first investment model generating returns to investors while providing water security for people and nature.

The Fund acquires permanent water entitlements and distributes annual allocations between agriculture and nature on a ‘counter-cyclical’ basis. When water is scarce and agricultural demand is higher, more water is leased or traded to irrigators. When water is abundant and agricultural demand is lower, more water is made available to wetlands. This novel approach seeks to reinstate the wetting and drying rhythms that occurred naturally across the Basin before it was interrupted by the development of irrigation infrastructure.

The Fund’s financial returns are generated by the capital appreciation of its water entitlements, by proceeds from the long-term lease of water to irrigators and by the sale of annual water allocations not used for environmental watering.

Up to 60% of the Fund’s entitlement portfolio is currently under long-term lease to irrigators. By entering into a lease with the Fund, irrigators achieve the same level of water security as they would with ownership, while also receiving a capital injection into their businesses. This capital is often used to pay down debt, expand farming operations or improve water-use efficiency. 

Outcomes to date

The Fund’s first capital raising closed oversubscribed in December 2015, raising almost $22 million from investors and $5 million in debt from National Australia Bank’s agribusiness division. A second raising of up to $73 million is currently open.

The initial capital from the first raising was fully deployed to entitlement purchases covering 8,322 megalitres (8.3 billion litres) of high-reliability water entitlements across NSW and Victoria, with leases established on close to 60% of the portfolio.

The Fund’s largest transaction to date is a long-term water purchase and lease-back agreement with Murray River Organics (MRO), a pioneering horticultural business near Mildura in Victoria, focused on the production of organically certified dried vine fruit. MRO has developed an innovative process to quickly and efficiently convert unprofitable wine grape vineyards to profitable dried vine fruit varieties which enables a significantly faster path to full production at a much lower capital cost than a greenfield development. The transaction delivers stable lease income for the Fund, and provides capital and secure water, allowing MRO to expand to meet its growing domestic and export demand.

In addition to the agricultural and financial returns achieved to date, the first environmental watering supported by the Fund has been completed, with 950 megalitres of Commonwealth water delivered to the Carrs, Cappitts and Bunberoo (CCB) wetland system west of Wentworth in NSW. The progress of the Fund is being monitored with an eye to developing similar models elsewhere including Chile, China, and the United States.

The Murray-Darling Basin Balanced Water Fund is one of the many impact investment transactions that will be featured at this year’s Impact Investment Summit Asia Pacific. To learn more about the Summit, view the programme here.

 

Rich Gilmore is Country Director of The Nature Conservancy Australia. For information on the Balanced Water Fund, see www.kilterrural.com. Cuffelinks offers this article as an example of new opportunities arising in impact investing. We have no opinion on the investment or environmental merit of the transaction, and investors should undertake their own enquiries.

 


 

Leave a Comment:

     
banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.