Water Infrastructure Investing—Much Less Boring Than You Think!
As systemic risks like climate change, resource degradation and scarcity, and widening inequality continue to advance, demand for solutions is accelerating. Innovative companies addressing these risks are leading drivers of long-term economic growth. Investing in these innovative solutions is your best opportunity to preserve purchasing power and create wealth for your clients.
Systemic risks have a material impact on everything, including their effect on the economy and everyone’s investment portfolio, and they are intricately inter-connected. Outcomes of economic, environmental, geopolitical, societal or technologic risks do not occur without one affecting and exacerbating the others. In “The Global Risks Report 2018,” the World Economic Forum ranks extreme weather events as the number one most likely risk to occur, and it is number two in terms of overall impact on the economy. The only risk higher on the list of potential economic impact is weapons of mass destruction.
By 2025, two-thirds of the world’s population is expected to be living in severe water stress conditions. While this global issue might seem too far removed for immediate concern, the impact of water stress is already being felt today in the United States. Right now, 20-40 percent of the U.S. population is living in areas where people have to compete for insufficient clean water supplies. And that’s widely expected to worsen in the next few years.
As recently as March 2018, experts predicted water shortages in Texas as early as 2020. As residents of Austin are all too well aware, this has already come to pass. In October, an emergency city-wide water boil notice was in effect for more than week, and store shelves were bare of bottled water.
The nation’s drinking water and wastewater infrastructure is aging and overburdened. As the American Society of Civil Engineers reports in “Failure to Act”: “Failures in drinking-water infrastructure can result in water disruptions, impediments to emergency response, and damage to other types of essential infrastructure. In extreme situations caused by failing infrastructure or drought, water shortages may result in unsanitary conditions, increasing the likelihood of public health issues.” In other words, systemic risks are interconnected. The report concludes that if these trends persist, water and wastewater infrastructure in the U.S. will require $126 billion in investment by 2020 just to remain functional.
There are clear links between dwindling water supplies, the economy, and markets. In Water: Structural Demand Growth Creates Investing Opportunities, the authors write, “While the concept of ‘peak oil’ has been debated for decades, ‘peak water’ is now receiving more attention as limits on global water supply become more challenging. Water is fundamental not just to the health of the earth’s ecosystem, but also to the health of global economic activity. Unlike oil, there are no alternative sources for many of the industrial uses of water.” Research articles can help inform investment managers who are willing to investigate which market segments are either already experiencing outsized growth or are poised to in the near future.
How does an informed investor take advantage of these mega trends?
With water there is only so much that can be done. You can invest in companies making clean water from salt or contaminated water. You can buy shares in companies measuring water supplies and where they are needed so that they can be used more efficiently. And you can invest in infrastructure to ensure that what is produced is not wasted before it is consumed.
Within the investment theme of water production, one company flying under Wall Street’s radar is Consolidated Water. They have been pioneering desalination technologies in the Caribbean for many decades, and they are about to break ground on a large desalination plant that will serve the greater San Diego and Tijuana areas. Consolidated Water also uses solutions like solar power and propellers in their water pipes to generate electricity for the plant. Desalination is very energy intensive, which is why it has historically been an expensive solution. Renewable energy-powered fresh water creation will be key infrastructure in many regions.
Once clean water exists, companies need to be good stewards of it. Water custodians like California Water Service Group—which provides water and wastewater services to millions of Americans—does just that. They are the only publicly-traded water utility that is actively fighting fracking interests throughout the state. In doing so, they are really only doing their job—protecting precious clean water supplies—and no other water custodian is doing at California Water’s level. Water custodians also tend to be more defensive than most equities, so they can be a handy arrow in a portfolio manager’s quiver during volatile market conditions.
Similarly, once clean water exists, there also needs to be infrastructure that prevents wasting it before it is consumed. In the United States, six billion gallons of treated water is lost every day due to leaky pipes, which translates to a shocking one out of every six gallons—completely wasted. America’s water infrastructure needs to be updated with products that automatically detect leaks and assesses pipe conditions all along the route, like those produced by Mueller Water and Xylem.
Water infrastructure investing can also focus on technologies that measure and manage water resources and systems to maximize their efficiency. Badger Meter, Itron and Xylem are all poised to take advantage of the country-wide shift from manual water management to automated metering and decision-making. They offer comprehensive solution sets that measure, manage, and analyze water use, then automatically change the water supply’s destination without waiting for a human to take action.
Water creation, custody, measurement and management are fundamental industries of the world economy that are ripe for investment and innovation. Intelligent allocation of capital into these sectors may yield superior returns, and that’s never boring.
This article should not be construed to be investment, legal or tax advice. At the time this article was written and published, some Green Alpha client portfolios held long positions in Consolidated Water (ticker CWCO), California Water Service Group (ticker CWT), Mueller Water (ticker MWA), Xylem (ticker XYL), Badger Meter (ticker BMI), and Itron (ticker ITRI). These holdings do not represent all of the securities purchased, sold or recommended for advisory clients. You may request a list of all recommendations made by Green Alpha in the past year by emailing a request to any of us. It should not be assumed that the recommendations made in the past or future were or will be profitable or will equal the performance of the securities cited as examples in this article. Not all Green Alpha separate accounts or our sub-advised mutual fund held the stocks mentioned. To inquire whether a specific Green Alpha portfolio(s) holds stock in any particular company, please call or email us. For more information, please visit https://greenalphaadvisors.com/about-us/legal-disclaimers.