The Rise of Water Investing

Clean water and sanitation for all is the subject of the United Nations’ sixth sustainable development goal, and an increasingly relevant topic to both emerging markets and the developed world. The need for water infrastructure is great in the developing world, and in the developed world, ensuring access to clean water is an ever-present issue, as recent crises have illustrated. This brings opportunities for investors.

In recent years, the universe of investable water-related companies has increased, and many of these companies have seen accelerated growth. Climate change, pollution and a growing, increasingly urban population all drive demand that innovation and technology can help fulfill.

Governments, public bodies and private industry are all investing in new and upgraded infrastructure, and the investment momentum keeps gaining pace.

Access and Changing Preferences

Emerging market regions such as China, India and Sub-Sahara require the development of water infrastructure where it previously did not exist. This development has been driven in no small part by urbanization, growing populations and changing consumption patterns that demand higher standards of living.

Aging Infrastructure

A great deal of the infrastructure in the developed world is outdated, inefficient or struggling to meet modern water demands. This was exemplified by the crisis in Flint, Michigan, where cost cutting led to insufficient water treatment and lead leached into the water supply. The project to replace the lead pipes, which commenced in 2016, continues¹ with costs running into hundreds of millions of dollars.

The Curse of Cotton

The falling cost of textiles and the explosion of fast fashion in recent years have created a ballooning — but largely overlooked — environmental impact. Producing textiles, especially cotton-heavy textiles, is water intensive. The European Union plans to focus on the textiles sector in 2020, and we expect the issue to rise in public consciousness.²

Climate Change

Climate change is impacting water security. In recent years, several severe droughts and water shortages have impacted farming yields and industrial productivity and have brought revenue losses for workers, such as the 2011–17 California and the 2014-2017 Brazil droughts. South Africa’s second largest city, Cape Town, with a population of circa four million people, suffered its own water crisis recently. Rainfall well below historical levels meant the city’s main reservoir was close to zero in March 2018. Cape Town residential water use was cut from around 120 litres (31 gallons) per person per day in 2015 to 50 litres (13 gallons) at the start of 2018. More recently, prolonged drought in Australia contributed to one of the deadliest bush fire seasons on record and unprecedented water shortages.³

For officials and residents in these regions, the long-term impact of climate change on water supply requires investment in a range of measures, including conservation and leak detection.

An Ocean of Opportunities

The investment opportunities in water are surprisingly diverse and resilient. Risk characteristics are comparable to equity markets and water runs through the global economy, across markets, sectors and regions. Water also provides attractive opportunities through the economic cycle, encompassing both defensive and cyclical businesses.

In our view, water-related investment opportunities fall into three major areas of focus: water infrastructure, water treatment and water utilities. We expect companies offering water efficiency solutions such as smart meters to increasingly penetrate not only the residential and municipal areas but also business and agriculture. We also anticipate that a whole range of industries, such as pharmaceuticals and semiconductors, will increasingly seek products to help them reduce the amount of water used in their operations. Thus, we expect the companies that provide such solutions to benefit.

Leakage is a problem in many existing and outdated water infrastructures, and as these systems are repaired and replaced, we expect companies that provide solutions in this area to gain traction, including those in metering, leak detection and software solutions.

Technology and innovation play key roles in reducing water consumption. Smart meters, for example, can help utilities manage the supporting infrastructure more efficiently, and provide an early warning sign of and location of leaks. Public entities and private industry globally are investing in upgrading their infrastructure and this investment momentum looks set to continue.

 

Article by Justin Winter, Portfolio Manager, Director, at Impax Asset Management, where he analyzes investment opportunities for the firm’s investment strategies. He is a member of the portfolio construction team for the Impax specialists and water strategies, and he is co-manager of a product that combines these strategies. Justin has specialist research experience in both renewable energy and water, having worked at New Energy Finance and as a consulting engineer specializing in water issues and environmental impact statements.

Footnotes:

[1] Nicole Trian, “Australia Prepares for ‘Day Zero’ – the Day the Water Runs Out,” France24, Sept. 19, 2019.

[2] Impax Asset Management, “Impax’s 2020 Vision: An Outlook for Investors in the Sustainable Economy,” Jan. 2020.

[3] City of Flint, Michigan, https://www.cityofflint.com/gettheleadout/