Water represents, perhaps uniquely, an economic, societal and environmental risk, with the World Economic Forum citing ‘water crises’ as among the most pressing global risks in terms of impact (2017 Global Risk Report).
Lack of water has an immediate and catastrophic impact on human, societal and economic viability. Globally, water use is growing at twice the rate of population growth and is already unsustainable, not least, as population growth is at its strongest in areas of acute water shortage or stress, such as parts of Asia and North Africa.
A business risk
Industry and commerce are wholly dependent on a reliable source of water to ensure manufacturing processes are not interrupted. In many cases, water is a ‘shared resource’ with indigenous communities requiring thoughtful withdrawal and use. The CDP water survey is a helpful snapshot in illustrating how water shortages are already impacting business. Over a quarter of companies said they had experienced detrimental impacts from water risk already, and over half expected water restrictions to impact operations within the next six years. Over half of those responding had also set targets and goals to reduce the impact of water stress.
Risks arise from the direct use of process water in manufacturing (e.g. semi-conductors or beverages) and through the supply chain. Companies sourcing fresh or water intense commodity crops (such as cotton) are particularly exposed. In industry, mining, power generation and electronics require a generous water supply; for instance mining companies can use between 800 and 3,000 gallons of water to extract and process coal; up to 6,000 gallons of water may be needed to make one tonne of paper in the least efficient plants.
Unlike carbon though, water has been slow to gain the attention of company management and only a relatively small minority of companies have begun to develop appropriate responses to a risk this acute.
Counteracting water scarcity
However, the water demand-supply imbalance also presents opportunities, especially via technology and engineering plays, and through solutions such as desalination, smart-metering, variable pumps and improved recovery and leakage reduction. There are opportunities too in brackish water recovery in the oil and gas sector, where the US alone produces 800bn gallons a year. Dry cooling power systems require around 90 per cent less water, and improved solutions are already being seen in water treatment, testing, piping and leak detection.
Strongest growth is expected to be seen in the process control and management segment, whilst regulated utilities continue to exhibit strong cash-flow and dividend yield. McKinsey & Co. has estimated that between now and 2030, $7.5 trillion of investment is needed globally to keep pace with demand forecasts, to respond to climate change, and to replace life-expired infrastructure. The total water market is put at $625bn, with the World Economic Forum (WEF) saying that for every $1 of investment, an economic return of between 5-25 per cent is generated. We view the substantial water value chain as presenting significant investment and sustainability opportunities, going far beyond well-known water utilities such as Severn Trent, United Utilities or Pennon Group.
Investing in innovative water solutions
We believe there are compelling investment opportunities in companies providing solutions to resource scarcity across the water sector, driven by five long term trends: inadequate supply of water; increasing demand driven by population growth industrialisation and urbanisation; increasing regulation and government support, and increasing investment in infrastructure to address urgent global need; and increasing investment in technology solutions to facilitate more efficient use of resources.
EdenTree is well represented across the value chain. We hold Impax Environmental Markets (in the Amity UK Fund) which is a Fund investing in long-term macro-economic themes including water. Water scarcity presents strong opportunities in industries focused on water conservation, accessibility and affordability. Analytical equipment, piping, metering, purification and testing are key areas of potential growth. The global science and technology innovator Danaher Corporation, which is focused on improving quality of life around the world, including its leading role in water testing equipment is just one such company.
Elsewhere there has been a renaissance in desalination technology, which is now at scale globally, driven by urgent necessity in regions such as India, Israel the Middle East and southern Europe. Spanish infrastructure giant Acciona is a leader in the desalination space that we particularly like. Advances in filtration and membrane technology are replacing chemicals, and ultraviolet disinfection is replacing the use of chlorine in water purification treatment.
Leakage is known to be a particular challenge in developed markets where infrastructure is ageing, and in the developing world owing to poor or substandard installation. It is estimated that 1.7 trillion gallons are lost annually in developing urban environments according to the US Geological Survey. Companies with proprietary technology reducing leakage play an important role in preserving limited resource. Companies such as Pure Technologies, Mueller Water and Pentair operate in this well-developed space.
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