This article was written by Impax Asset Management, a specialist asset manager investing in the opportunities arising from the transition to a more sustainable global economy.
The theme of this year’s World Water Day on 22 March is “leaving no-one behind”. This sentiment applies to both emerging markets and the developed world and offers investors a deep well of diverse investment opportunities.
The United Nation’s sixth sustainable development goal (SDG) is to ‘ensure availability and sustainable management of water & sanitation for all’ by 2030. The need to develop water infrastructure in the developing world is understood, but access to clean water, as the ongoing Flint water crisis illustrates, is an issue for the developed world, too.
An ever bigger and broader investible universe
Impax has been researching and investing in listed water-related companies since 1999 and has been running a dedicated water strategy since 2008. In recent years, we have seen the universe of investable companies increase and accelerated growth at many water sector companies.
Climate change, pollution and a growing, increasingly urban population all drive demand that innovation and technology can help fulfil. 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
In emerging market regions, such as China, India and sub-Saharan Africa, ‘leaving no-one behind’ mainly requires the development of water infrastructure where it previously did not exist. It is a positive development driven in no small part by urbanisation, growing populations and changes in consumption patterns that demand higher standards of living. This isn’t just about access to clean water and water treatment. Many items taken for granted by urban dwellers require a significant amount of water to produce. A hamburger, for instance, requires 660 gallons (2 090 litres) of water to make.
A great deal of the infrastructure in the developed world is outdated, inefficient and/or struggling to meet modern water demands. This was exemplified by the water crisis in the town of Flint in Michigan in the US, where cost-cutting led to insufficient water treatment and lead leaching into the water supply. The project to replace the lead pipes, which started in 2016, is still continuing, with costs running into hundreds of millions of dollars.
Climate change is impacting water security. In recent years there have been severe droughts and water shortages that have impacted farming yields, industrial productivity and meant loss of income for workers, such as the 2012–16 California and the 2014-2017 Brazil droughts. Most recently, South Africa’s second largest city Cape Town, with a population of some four million, suffered its own water crisis. A lack of 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 per person per day in 2015 to 50 litres at the start of 2018.
For officials and residents in these regions, the long-term impact of climate change requires investment in measures including conservation and leak detection. Other extreme weather events such as storms represent a different priority. Here protection and clean-up can be more pressing.
An abundance of opportunities
The investment opportunities in water are surprisingly diverse and resilient. Risk characteristics are comparable to equity markets generally. The opportunities run through the global economy, across markets, sectors and regions. Water provides attractive opportunities throughout the economic cycle, encompassing both defensive and cyclical businesses.
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 early warning signs and the location of leaks. Public entities and private industry globally are investing in upgrading their infrastructure and this investment momentum looks set to continue.
For further reading, see also Impax Asset Management ‘Investing in water: tapping into a source of resilient growth’