As one of the planet’s most widely used resources, water is as precious a commodity as oil and gold.
Investors exposure to water has often been for defensive reasons, but the opportunities for alpha in this space is expanding.
Water covers 70% of the earth’s surface, but only 3.5% is freshwater. Considerable waste across households and agriculture is compounding a lack of freshwater.
A play on water
“Investment in water infrastructure is important,” said Bertrand Lecourt, senior fund manager at Regnan. “Water is not only essential to produce food but is also extensively used in industrial manufacturing, textile, energy production and materials in extraction.
He said simply, there is no economy without water.
According to United Nations Water, globally 44% of household wastewater is not safely treated.
“Managing water pollution with quality waste management and improving the way we manage wastewater are key solutions to addressing our water related challenges,” he added. “A circular and sustainable economy requires us to value wastewater.
“Water treatment and wastewater management are huge opportunities that will help transition to a more sustainable world.”
86% of people in urban areas have safely managed drinking water services, but only 60% of people in rural areas do.
Lecourt said that investing in water and waste companies improves both those figures and the lives of people who lack access to clean water.
Investors may be unfamiliar with investing in water and the manager added that regulated utilities are often perceived as the only ‘play on water’.
However, regulated utilities represent less than 20% of the investable universe and these businesses can pass costs to consumers and generate robust returns.
“Investment opportunities exist across the water value chain and different segments offer distinct fundamental exposure which prudent investors can access,” he said.
This includes pump and valve manufacturers, water treatment companies, water storage providers, network operators, metering and billing companies and wastewater treatment firms.
The issue with agriculture
Felix Odey, manager of the Schroder Food & Water fund, said that improving water usage is crucial when tackling the sustainability of the water system.
Ensuring there is enough water for a growing population will be crucial over the next 20-30 years.
Asia and the Pacific region have the lowest per capita water availability in the world, with groundwater use in the region predicted to increase 30 per cent by 2050.
“In our view, it’s impossible to talk about water without also talking about food,” said Odey. “Agriculture uses 65% of the world’s fresh water, but almost half of it is currently wasted.”
Pressure on the food system is compounded by a growing population.
“Irrigation is one way to solve this, agricultural yields double when irrigation is used, rather than relying on rainfall. But the challenge is to ensure that this is done efficiently so that water is not wasted,” said Odey.
“This is where technology has a crucial role to play. Greater investment is needed in irrigation and drainage systems as making sure they are adequately maintained is crucial to keeping them running efficiently.”
Food waste also wastes the considerable amount of water used in its production.
Around 44% of harvested crops are lost before they reach the consumer. Technology, according to Odey is the key enabler in reducing that waste.
For instance, soil moisture sensors can be used to check exactly how much water is needed, and when, for crops.
Source: WRI, FAO, OECD, USDA, BAML, Our World in Data, Schroders – 31 January 2022
Beef cattle are also responsible for a large amount of the harmful gas emissions from the food industry.
But beef production additionally consumes a vastly higher amount of fresh water than other sources of protein, such as pulses.
