On a planet where 71% of the surface is covered by water, it seems unlikely that water security should be a concern. Yet, with only 1% of that water being of drinkable quality and accessible[1], the safety of our water supply has become a critical issue.
A more robust water supply chain will require infrastructure upgrades and advancements in how water is treated. Developments that will increase opportunities and evolution for investors who know where to look.
Improving access
Water scarcity is a threat to our welfare across many fronts. Primarily it is essential to life, through direct consumption and its integral role in the production of food. Poor water quality can also cause diseases such as cholera. It is also an important economic driver, with many industries reliant on high water volumes. The World Bank estimates that by 2050, water scarcity could cost some regions 6% of gross domestic product[2].
Access to water is essential for maintaining water security – yet this is threatened by population growth and climate change, as well as being hampered by poor governance and inadequate infrastructure. Although this challenge is most acute in Sub-Saharan Africa, where half of the population lacks access to safe drinking water[3], water shortages also impact wealthier nations. In the US, parts of California frequently face droughts and Phoenix Arizona habitually experiences supply shortages.
To ensure everyone has access to safe, healthy and reliable water, the world’s water systems must be upgraded. This will involve a significant increase in investment and will create investment opportunities among companies implementing smart irrigation systems, pipe companies, monitoring water quality, treatment and tracking usage and leaks.
Upgrading infrastructure
The first step in improving the security of water access is to renew and replace ageing water and wastewater infrastructure. 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 by 2030[4].
Much of this spending will serve the developing world, where rapid urban growth often outpaces infrastructure, leaving millions without basic water and sanitation services. However, water infrastructure in the developed world was largely built in the late 19th and early 20th centuries and desperately requires an upgrade. Leakage and burst water mains have been estimated to lose 27,000 megalitres of treated water in the US each day – enough to fill over 9,000 Olympic swimming pools[5].
Aside from government investment – the 2021 US Bipartisan Infrastructure Law has assigned US$55bn to improve water-related infrastructure – a high proportion of funds for these upgrades will come from the consumer through higher water bills. But in a world where households are already facing higher energy and food costs, the rising cost of water will present a further financial challenge.
The need to upgrade ageing infrastructure as well as build new water supply facilities is creating long-term Investment opportunities throughout the industry’s value chain – from the utility companies managing water supply infrastructure to the suppliers of products and services that enable water savings and efficiency.
Improving water quality
Alongside water stress, the quality of water is becoming an increasingly important topic. Safe, clean water should be taken for granted but this isn’t always the case. In 2022, at least 1.7 billion people globally used drinking water sources that were contaminated with faeces[6]. Once again, the deteriorating quality of water is not solely a problem for developing nations, freshwater sources worldwide are increasingly being polluted by a series of contaminants.
Some of the decline in water quality can be attributed to extreme weather events – both droughts and floods are harmful to water quality; but man-made pollutants are also finding their way into our waterways. These contaminations range from agricultural and urban pollutants to microplastics, metals, hormones and pharmaceuticals. In particular, per- and poly-fluoroalkyl substances (PFAS) commonly known as “forever chemicals”, are increasingly being found in drinking water and are harmful to human health.
As a result, water quality standards are becoming increasingly stringent around the world. In the US, the Clean Water Act regulates the discharge of pollutants into waterways and the Safe Drinking Water Act ensures the quality of drinking water. The EU’s Drinking Water Directive, which came into effect in 2021, seeks to reinforce water standards and tackle emerging pollutants at source.
Compliance with tighter regulations will involve vast investment, supporting companies offering water purification, treatment, testing and recycling solutions.
Thirsty new industries
Water shortages are not just a challenge for our well-being; industry has long been a significant consumer of water and new water-intensive industries are adding to demand.
The link between energy generation and water has been around for a long time, with water being a major component for coal-fired power generation plants. However, cleaner forms of energy generation and transportation are also indirectly linked to high industrial water consumption. Lithium is a key element in wind, solar and geothermal energy systems, as well as in the production of electric cars, but extracting and refining lithium is very water-intensive. It takes about 1.5 million litres of water to make about a tonne of lithium. To put this into context, a Tesla car contains about 60 kilograms of lithium, so one tonne equates to just 16 cars[7].
Similarly, carbon capture and sequestration (CCS) is considered an important technology to reduce carbon emissions and remove CO2 from the atmosphere. However, these technologies typically involve significant water consumption during their energy-intensive capture process. And within the technology sector, the manufacturing of semiconductor chips is highly water-intensive, while the shift from air to liquid cooling systems in data centres – integral for AI and related technologies – is placing a further strain on supply. For example, in 2022, Microsoft’s annual water consumption was nearly 1.7 billion gallons[8].
Innovative water management solutions can play a role in addressing the efficiency and sustainability challenges associated with water-intensive processes – businesses are increasingly trending towards closed-loop systems that re-use and recycle water in industrial settings.
Conclusion
The safety and quality of the world’s water supply are of paramount importance. The need to enhance infrastructure, improve access and quality – and meet growing demand – alongside the ratcheting of regulation, provide long-term growth drivers for businesses operating in the water sector.
Which is good news for investors. And the opportunity in this sector is surprisingly diverse and resilient, encompassing both defensive and cyclical businesses and spanning geographies, sectors and different end markets.
At BNP Paribas, the in-depth understanding of the water industry and its technologies really sets the Water strategy team apart. This means that across the rapidly growing water value chain, our experts ‘ diverse perspectives are able to uncover the areas of opportunity that others may miss and avoid those companies that fail to meet their environmental responsibilities.
[1] https://education.nationalgeographic.org/resource/earths-fresh-water/
[2] Why Global Water Security Matters in 2024 | Earth.Org
[3] Water woes: 13 undeniable facts about Africa’s water scarcity – Greenpeace Africa
[4] UNCTAD estimates, 2020
[5] American Society of Civil Engineers, 2021: Report Card for America’s Infrastructure
[6] https://www.who.int/news-room/fact-sheets/detail/drinking-water
[7] https://viewpoint.bnpparibas-am.com/talking-heads-investing-in-water-from-chips-to-lithium-to-pfas/
[8] How to manage data center water usage sustainably | TechTarget
