Investing in sustainable water solutions for the future

November 15, 2019 15:06
As static supply meets growing demand for fresh water, inevitable water shortages cannot be expected to fix themselves. Photo: Reuters

The water investment theme offers an opportunity for an active investment approach due to the diversity of the underlying players, and an immunity to political and sentiment-driven volatility given the value of water as a social commodity.

A water-focused investment strategy provides exposure to environmental and social factors, enhancing the appeal of the investment proposition. Alignment with selected Sustainable Development Goals, and an ESG (environmental, social and corporate governance) risk-management overlay, make it especially appropriate for sustainability-oriented investors.

An investment theme in smooth waters

Water as an investment theme is neither new nor does it require lengthy explanation to grasp the basic investment thesis: as static supply meets growing demand for fresh water, inevitable water shortages cannot be expected to fix themselves. The fact that cities such as Cape Town are still unable to secure water supply in periods of even minor drought illustrates the magnitude of the problem and the lack of attention that has been paid to water infrastructure.

The government of Cape Town warned over a decade ago about the need for new water sources by 2015 – but little has been done since. Today, solutions and technologies exist to connect water-rich regions with water-scarce areas, or to improve water usage efficiency. However, after so many decades of warnings and multiple reports pointing to the growing risk of water shortages, necessary infrastructure investments still have not been made. What are the reasons behind?

1. The risk of experiencing actual water shortages builds up slowly over time, making it difficult to predict and easy to ignore.

Water demand is mounting because of multiple factors such as urbanization and population growth in water-scarce regions, rising water intensity of industrial processes, high-output farming practices and consumer lifestyle changes. These factors are slow and insidious, but in combination they result in a very powerful trend. If left unaddressed, severe disruptions to farming, industry, and everyday domestic life are inevitable.

2. Upgrading water infrastructure is costly and requires serious commitment.

The majority of the water network is invisible to the average citizen, who is more concerned with the quality of public services at the point of use than with the entire water cycle. At the same time, politicians fear popularity loss from an increase in water fees to finance long-term projects such as construction and overhaul of wastewater treatment plants or sewerage filtration technologies. As a result, the upgrade schedule can easily get kicked down the road.

High debt levels and the resulting austerity, along with the lack of revenues for many municipalities following the global financial crisis have also contributed to further delays.

While the issue of water infrastructure investments is not new, it clearly remains unaddressed, and the problem continues to grow; this slow progress makes water an underappreciated and under-addressed – and hence attractive – investment theme.

Characteristics of water investing

Water is an attractive defensive investment theme with prospects for high growth, which remains protected from the wider political and economic volatility.

Investing in water is different from investing in other commodities, as water itself is not a tradeable asset. Water is a commodity with high social value and one that is extremely sensitive to environmental factors. The relationship between the demand for clean water and the security of its supply is the main reason behind the United Nations’ focus on the preservation of and access to water resources within its SDGs framework. Addressing these goals requires significant improvements in infrastructure and technological innovation.

While rainfall comes “for free”, clean water out of the tap does not. Providing a city or a farming region with water requires major investments along the entire water supply chain – this is where the value for investors is generated. Only a few countries have achieved the level of sophistication where water is routinely safe to drink or can be released back into the environment, leaving a lot of investments yet to be completed, especially in emerging markets.

Collection wells, pumping stations, filtration solutions and the treatment of sewage water are only a few examples of the equipment needed to operate the complex system of fresh and waste water. Components that reduce water loss and further improve its quality in the delivery chain ensure that clean, dependable water can be provided at affordable rates for everyone. Companies offering these technologies stand to benefit, and will have a positive impact on the lives of billions of people.

Improving water use practices is also key. Environmental and social pressures force industrial and agricultural users to reduce the amount of water they consume, as well as the level of water pollution and contamination produced. Companies addressing the consumption efficiency challenge enjoy fundamental, secular, social, and political support to ensure ongoing demand for their products and services.

The water theme offers exposure to social and environmental returns as it is fully aligned with the SDGs of the United Nations. The integration of ESG factors into the investment process, acknowledging the benefits of responsible investing, may further contribute to the long-term outperformance potential of such a strategy.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.