Water as an investment theme is often overlooked, we (the human race) have set a goal to ensure the availability and sustainable management of water for all (Sustainable Development Goal 6). This is quite a feat considering only 3% of the water on Earth is fresh water and only 0.26% of that is concentrated in lakes, reservoirs and river systems where water is most easily accessible for our economic needs.
The Earth’s water supply is not evenly distributed across the planet; there are large surpluses and deficits. The world faces a significant water gap which the UN predicts could be around 40% by 2030. This refers to the growing disparity between the world’s demand for water and its available supply, which has significant implications for both human populations and ecosystems. The International Food Policy Research Institute forecasts that current water management and use, could negatively impact global GDP by 45% by 2050.
When water availability in a country exceeds the water requirements for food production and domestic use, the country is viewed as being in water surplus. Dr Malin Falkenmark (hydrological scientist) suggests that a water surplus country is one which has more than 1,300 cubic meters of water available for food production and domestic use per capita per year.
Which countries have this? Currently 166 countries have water surplus. Of these, 62 countries could be viewed as having an abundance of water with 10,000 cubic meters per capita per year – more than seven times the basic requirements. Seven countries have in excess of 100,000 cubic meters per captia, per year: Republic of Congo, French Guiana, Greenland, Guyana, Iceland, Papua New Guinea and Suriname. Greenland has 10,578,950 cubic meters per capita per year.
The United Nations estimates that global water demand will increase by about 55% by 2050, partly driven by population growth up to nearly 10 billion by that time, which will come with significant urbanisation. Urban areas are particularly challenging for water management due to the high concentration of users and often limited local water resources. In many urban areas, up to 30-40% of total water supply can be lost due to leakage in old and inefficient piping systems. This isn’t just a developing market issue – if anything richer countries waste more water, which is relatively cheap compared with for example energy or other utilities. In the UK, we lose around 25% of our water to leakage through old pipes.
MIT has forecast that 52% of the world will live in water stressed areas by 2050. This is likely to affect around 5 billion people living in countries experiencing high water stress. About 4 billion people already experience severe water scarcity during at least one month of the year. North Africa, the Middle East and India are the key areas.
Water consumption naturally increases with population growth which increases demand not just domestically, but also in agriculture and industry. Agriculture is by far the largest consumer of global freshwater and accounts for around 70% of total withdrawals.
Industry also consumes significant amounts of water. Manufacturing a single smartphone, such as an iPhone, requires a significant amount of water, largely due to the water-intensive processes involved in producing its various components. According to a study by Friends of the Earth, it is estimated that approximately 13,000 litres (over 14 tonnes) of water are used to make a typical smartphone. As of April 2023, there are an estimated 6 billion smartphones in the world, so that is 78 trillion litres.
Around 60% of this is “grey” water (relatively clean recycled wastewater from for example washing machines, or desalination but not toilets), 28% is “green” water (this is naturally present in the soil and comes partly from rainfall) and 12% is “blue” water (freshwater extracted from groundwater, lakes and rivers).
These figures account for the entire manufacturing process, which includes the extraction of raw materials, refining those materials, and the actual assembly of the device. The water footprint is largely due to the production of semiconductors and other electronic components, which involve water-intensive chemical processes. Additionally, the mining and processing of rare earth metals, gold, and other materials used in smartphones also contribute significantly to the overall water usage.
Climate change affects weather patterns and reduces water availability, as does pollution, adding to the scarcity of water. Climate change is expected to alter precipitation patterns, potentially reducing renewable surface water and groundwater resources in most dry, subtropical regions by as much as 10-30%, as per the Intergovernmental Panel on Climate Change (IPCC). On pollution over 80% of the world’s wastewater is discharged into the environment without treatment, contaminating usable water supplies, according to the UN.
The consequences of this are:
1. Water scarcity, which can lead to crop failure, energy shortages, and economic disruption.
2. Health risks including dehydration and waterborne diseases.
3. Environmental impact including loss of biodiversity and the degradation of ecosystems.
4. Social and political tensions, which can lead to increasing social inequalities and conflicts over water resources.
This means there is a need for solutions and efficiencies around water conservation, sustainable waste management, investment in infrastructure, pollution control, technology and innovation, and climate change mitigation.
Addressing these issues will require concerted efforts at the global, national, and local levels, encompassing policy reform, investment in infrastructure, technological innovation, and changes in consumption patterns.
There are many direct and indirect ways to invest in water. It has become a favourite theme of Michael Burry of Big Short fame. He has been investing in water-rich farmland, which grows food and then transports it to water-poor areas. This redistribution of water resources is less contentious, which will make it more profitable and sustainable.
Other potential investment options would include beverage providers, utilities, water treatment/ purification firms, and equipment makers, such as those that provide pumps, valves, and desalination units.
There are a number of water indices:
• The Dow Jones U.S. Water Index consists of 29 companies that are affiliated with the water business and have a minimum market capitalization of $150 million
• The ISE Clean Edge Water Index – represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks
• The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor’s 1500 Utilities Index; this index comprises just two companies, American States Water and Aqua America
• The S&P Global Water Index falls into two areas: water utilities and infrastructure, and water equipment and materials
• The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services
Water is classed as a commodity, so it can be good for portfolio diversification, and partly with this in mind we have held the Regnan Water and Waste fund at Hawksmoor since early 2022. Regnan is part of JO Hambro. The same team previously managed a similar fund at Fidelity, which we had held since early 2020 and we followed the managers across to Regnan, where they have significantly outperformed their old fund.
Regnan Water and Waste is a global equity fund, which invests in companies across the value chains of both water and waste, with at least 80% purity of these themes at the portfolio level (it is 93% currently) and 40% at the company level. It is a fairly concentrated portfolio of 35-50 holdings with c.60% water and c.40% waste exposure. The portfolio is constructed around ‘core compounders’ (c.50% of the portfolio), ‘medium-term winners’ (c.30%) and ‘emerging winners’ (c.20%). The managers look for low correlations between stocks and sub-sectors, typically keep portfolio turnover low, and have a bias towards medium-sized companies.
We like actively managed funds, but other options are available. We also cover direct equities such as water utilities Severn Trent and United Utilities, plus there are many available ETFs, such as the iShares Global Water ETF. Interestingly this has a higher cost than our actively managed fund (65bps expense ratio vs 50bps OCF on Regnan) and has also underperformed the Regnan fund since Regnan’s inception. There is a long way to go to secure the water needs for the future, but with investment into new technology, research into less water intensive practices and effective management of water resources it can be achieved.
Robert Fullerton – Senior Research Analyst
Emily Cave – Trainee Research Analyst
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