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This year’s exceptionally hot summer in large parts of the planet has highlighted the precariousness of a finite resource – clean, consumable water – that we too often take for granted…Allianz SE
Water, too much or too little of it, always makes headlines. Last year, historic floods in Houston jostled with a multi-year drought in California for media attention. This year, that Californian drought has fueled a summer of devastating wildfires, while Cape Town in South Africa is approaching “Day Zero” – a point when the drought-stricken city’s taps runs dry.
Seasonal and regional fluctuations in water supply have plagued civilizations for centuries, but the issue is becoming more earnest and deadly with climate change. The fact that major cities like Cape Town and even London, which is experiencing lower-than-usual rainfall, and prosperous states are struggling to secure their water supplies illustrates the magnitude of the world’s water infrastructure problem.
In 2015, the World Economic Forum ranked water crises as the most worrying global threat, more dangerous than terror attacks or financial meltdowns, and more likely to occur than the use of weapons of mass destruction.
Population growth, urbanization and rising consumption levels topped off with climate change are increasing the divide between supply and demand at an alarming rate. According to the 2030 Water Resources Group, there is a 40 percent gap between existing water supply and expected demand in 2030.
Solving the problems created by this imbalance goes beyond providing enough drinking water. Domestic needs make up just 8 percent of global water use, with industry accounting for 22 percent.
By far, the largest water consumer is the agricultural sector, which accounts for around 70 percent of worldwide use. This is a problem. The United Nations says that by 2050, agriculture will need to produce 60 percent more food globally and double its output in developing countries to satisfy a growing population and increased standard of living.
There are three main solutions to addressing water scarcity: countries must expand their access to water supplies; increase the efficiency of access; and improve the quality of the water provided. These can be achieved by encouraging investment in innovative companies specializing in water technologies – from delivery systems to desalination plants to wastewater management.
Unlike other natural resources such as oil, gold or coal, it isn’t possible to invest in water directly. Instead, investments can be made in companies that provide infrastructural solutions like pumps and pipes, or firms that produce water treatment systems or efficient irrigation technology.
One area that has seen a recent uptick in investment is desalination plants. With 97 percent of the world’s water in oceans, turning saltwater into freshwater is a popular – albeit energy-intensive and costly – choice in hot, dry countries with large coastlines. A 2015 Frost and Sullivan study expects desalination plant capacity to double by 2020. By 2025, the percentage of the population consuming desalinated water could jump to 14 percent from 1 percent today.
The replacement of aging infrastructure will also be an area of increased investment over the coming years. A prime example is the U.S., where a large proportion of water pipelines are now 100 years old, meaning they are nearing or have already passed the end of their useful lives. According to the American Society of Civil Engineers, there are now on average 650 water main breaks in America daily.
Spending on water infrastructure has been on a decline for almost a decade in the U.S., but with delays in investment no longer possible, local authorities are beginning to act. Upgrading won’t come cheap, though: the American Water Works Association says the country’s buried drinking water infrastructure needs more than $1 trillion worth of spending over the next 25 years.
Even for companies not directly involved in industry, water is becoming an increasingly important factor for investment. Water footprint assessment tools mean businesses can now get a more accurate picture of where and when water is used in their operations – and those of their suppliers – allowing them to address process weaknesses. By disclosing the information alongside energy and carbon footprints, this information also gives investors greater insight into a company’s business model when analyzing environmental, social and governance (ESG) criteria.
Some firms are using the data to set themselves ‘water targets’. Beverage giant SAB Miller, for example, is aiming to use 3 instead of 3.3 liters of water per liter of beer. Pepsi, Gap, Nike, Chevron and Dow are among the major companies that have launched significant initiatives to better manage their water usage, boost profitability and help communities.
For years, there has been some discussion as to whether water is “the new oil”. The analogy isn’t accurate; oil can be replaced by something else, but we are yet to find a substitute for water. This makes water Earth’s most important resource.
Growing demand for water is serious, but the Earth possesses adequate resources, and solutions do exist: we know how to divert water from abundant locations to regions where it is scarce; to transport and store water securely; to turn salt water into freshwater; and to manage drought and coordinate crop patterns.
But there are still too many countries where the infrastructure simply isn’t up to scratch. This can only be solved with time and investments that will ensure future livelihood and life.
About the author: Andreas Fruschki is a lead portfolio manager and an analyst with Allianz Global Investors, which he joined in 2005. He is the Director of Equity Research Europe and also has research responsibilities for European industrial companies engaged in water-related industries and clean technology.
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