Water is the lifeblood of the world. Not only is it essential for basic human health and hygiene, but it also fuels industry, supports ecosystems and is a fundamental part of everyday life. So why is this vital resource not being managed effectively?
In many parts of the world water resources are under severe strain from overconsumption, pollution and the effects of climate change. Water security is not just a challenge for the emerging world, reliable water supplies are also compromised in the developed world.
Thankfully, regulatory developments, government support and business innovation are starting to tackle this issue, creating potential investment opportunities.
A triple threat to water security
Despite being known as the Blue Planet, only 0.5% of water on Earth is usable and available freshwater1 – meaning it can be used for agriculture, industrial and municipal purposes, as well as for consumption. Global demand for freshwater has risen sixfold since the start of the 20th century2 and is likely to outstrip supply by 40% by 20303.
Three core factors are driving this scarcity of water: higher consumption, pollution and the effects of climate change. Firstly, a growing global population is not only increasing the demand for drinking water, but is also placing other water-dependent processes such as agriculture and industry under strain. Secondly, over 80% of used water flows back into the environment untreated, often containing human waste and toxic industrial byproducts4, which pollute vital waterways such as rivers. Finally, rising temperatures pose profound challenges to secure, reliable water supplies – for every 1°C increase in average global temperatures, the UN projects a 20% drop in renewable water resources5.
Overcoming these challenges and meeting rising demand for water will require vast investment across the water industry’s value chain as well as technological innovation.
Upgrading ageing infrastructure
While water efficiency solutions are already helping to reduce per capita water withdrawals in advanced economies, ageing water infrastructure requires expanding and upgrading in many parts of the world. In 2020, the UN estimated that an additional US$260bn would need to be spent on water-related infrastructure each year to realise its Sustainable Development Goals concerning water by 20306. Such infrastructure spending should focus on the expansion of clean and wastewater systems and investment in better drainage solutions that can capture run-off and prevent surface flooding.
A tighter regulatory environment can help also address water quality issues throughout the water system, from water testing technologies to wastewater treatment.
Source: https://graham.umich.edu/system/files/pubs/Water-Sewer-Infrastructure-Funding-Gap.pdf
Investing across the water value chain
In the context of expanding water demand, limited supply and tightening regulations, opportunities for investors can be found across the water value chain. Yet, among the companies that operate water treatment and supply infrastructure, providing clean water, wastewater and sewerage services it pays to be selective. Given the increased regulatory and public scrutiny on the sector, it will be the utility companies demonstrating progressive water stewardship that will face lower regulatory risks in the form of potential fines or loss of social licence to operate and, therefore, present the most compelling investment options.
From an infrastructure perspective, the companies supplying the products and services integral to the end-to-end infrastructure in industrial, residential and commercial applications should see demand increase. This ranges from companies that make or distribute network equipment products like specialised pipes, pumps and valves that assist in water transmission, to the providers of groundwater assessments for flood defence planning.
Treating water to make it fit for human consumption or refined industrial processes is also a field that is experiencing expansion, involving a breadth of companies that design, manufacture and install technologies or facilities for the treatment, separation and purification of water.
Technology to solve water-related challenges
And then there are the solutions of tomorrow. Innovative technologies promise to play a critical role in helping address water-related challenges, creating new markets and tapping into structural demand growth.
Data and software solutions promise to improve the sophistication of water system management and modelling. ‘Smart irrigation’ techniques have been shown to vastly reduce water consumption in the water-intensive agricultural sector. In addition, nascent technologies are enhancing the reuse and recycling of water in industrial processes to help reduce the costs and operational risks for industries central to the modern economy.
It would be surprising to many that semiconductor manufacturing is an area that is driving investment in wastewater treatment and reuse. The industry uses an estimated 1.2m megalitres of water every year7, much of which is the ultra-pure water needed in the chipmaking process. As well as constructing water recycling plants next to new semiconductor fabrication plants, innovative technologies are being introduced that enable treated wastewater to be used as feedwater for the ultra-pure water systems.
Emerging solutions are also improving water treatment processes and the measurement of water quality, including detecting contaminants, such as microplastics. Governments and regulators are paying particular attention to per- and polyfluoroalkyl substances (PFAS), known as forever chemicals, as these have been shown to pose systemic risks to biodiversity and human health. While regulation is restricting their future use, the need to detect forever chemicals, remove them from treated water and safely dispose of them is creating opportunities for companies offering effective products and services, and confronting the issue has been estimated to involve more than US$250bn in spending globally8.
Investing in a more sustainable water supply
Addressing the unsustainable supply / demand dynamics of the world’s water supply is set to reshape the water value chain in the coming decades and represents an opportunity for investors to realise returns while also helping to address the water challenges faced in society.
At BNP Paribas Asset Management, the team behind our Aqua strategy has considerable expertise and experience in this sector, having started to invest in water-related industries over 20 years ago. Their deep understanding of the global industry and its technologies sets them apart, enabling them to carefully build a high-quality portfolio of stocks that is well balanced between economically resilient businesses and firms that are more growth-oriented.
As the water industry rapidly evolves and expands, our Aqua strategy seeks to tap into this source of potential growth.
References
[1] UN, 2023: Water – at the center of the climate crisis.
[2] Our World in Data, 2018: Water Use and Stress.
[3] Global Commission on the Economics of Water, March 2023: Turning the Tide – A Call to Collective Action.
[4]NRDC, 2023: Water Pollution: Everything You Need to Know.
[5] Council on Foreign Relations, 2023: Water Stress: A Global Problem That’s Getting Worse.
[6] UNCTAD estimates, 2020.
[7] Sustainalytics, 2017: Waste Not, Want Not – Water Use in the Semiconductor Industry.
[8] AECOM, June 2023.
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