The focus on water treatment, infrastructure and supply could lead to a $1 trillion market by 2020;
Look to these areas for the investment opportunities.
Global freshwater risk is growing, but will it prove a chokepoint to world economies? And can addressing water risks provide investment opportunity?
Because water is central to agriculture, energy, and is, along with sunlight, the primary basis for life on earth, the topic can be intimidating for advisors and their clients. But it’s also one of the most dynamic and potentially profitable investments for years, if not decades, to come.
Why? Primary catalysts are huge, and a decades-long underinvestment has led to degradation and other sustainability issues, providing opportunity for innovation to address these needs and issues.
For advisors looking to add sustainable and impact investments to client portfolios, water is a particularly relevant issue. Thankfully, it’s also a topic that’s being discussed in proportion to its potential outcomes.
The World Economic Forum, for example, named “water crises” as its No. 1 global financial risk in 2015 in terms of impact, and their eighth highest risk in terms of likelihood. In addition, the 2030 Water Resource Group has predicted a 40 percent global water deficit by 2030 if current conditions continue to prevail.
How big is the opportunity in the short term?
A Merrill Lynch report noted that by 2030, global food demand is set to increase by 50 percent, energy demand by 50 percent and water demand by 40 percent. The necessary focus on water treatment, management, infrastructure and supply could lead to a water market worth over $1 trillion by 2020.
A trillion-dollar market emerging in just the next five years sounds like fertile investment ground. So, where should advisors look in terms of identifying opportunities in water investments?
Monitor and Measure It
With the rate of demand now exceeding the available supply of potable water worldwide, perhaps the single most important action to take in addressing global freshwater risk is to know what’s in our freshwater, how much of it we have, where it comes from, how much makes it to its intended use, and how much we need for given purposes. In other words, monitor it.
It’s important, because water safety of both publicly and privately owned reserves and sources is at risk globally right now, including in the United States. And it’s not just in Flint, Mich. USA Today recently reported that as many as 63 million U.S. citizens were exposed to potentially unsafe water more than once during the past decade. The report looked at 680,000 water quality and monitoring violations from the Environmental Protection Agency and concluded that decades of industrial and farming pollution, and aging water plants and pipe systems have taken a toll on local water systems.
How do we know all that? Monitoring. In many ways a water problem is a data problem. Interesting investment opportunities today lie in the Internet of Things combined with distributed sensor and meter networks, all backed by the ability to efficiently and accurately interpret big data.
Measurement and the ability to carefully use water in agriculture and other industries means big savings of this valuable resource. Here again, automation, Artificial Intelligence, machine-learning and connectivity will change our present systems in incredibly beneficial ways. Above all, precise measurement and flow control will allow water managers to use much less water without sacrificing any use cases. As the industry saying goes, what we need is “more crop per drop.”
Make More of It
As supply strips demand, desalinization, along with treating municipal and farm wastewater, is the principal way to get fresh water not dependent on precipitation or aquifer depletion. That is translating into a global water desalination market that will exceed $26 billion by 2025, according to Hexa Research. Places such as deserts and islands, whose water needs exceeds their precipitation footprint, have been pioneers in this field. One example: A Cayman Islands firm with a long track record of providing potable water to islanders is beginning to do larger scale business, beginning with a large desalination plant in Rosarito, Mexico, which will ultimately deliver 200 million gallons a day to northern Mexico and Southern California.
Transport It, Store It (Infrastructure) and Treat It
Moving water provides opportunities in advanced materials, energy capture and recapture, loss prevention, wastewater and rainwater treatment and more. The issue, and potential opportunities, are immense. Estimates for modernizing U.S. water systems range from $384 billion, according to a 2011 EPA study, to a whopping $1 trillion estimate by the American Water Works Association to simply restore underground pipes.
Make Agriculture Smarter
The two most promising approaches to making more efficient use of freshwater in agriculture, apart from crop-per-drop comments above, are indoor farming and both the indoor and outdoor raising of saltwater-loving plants known as halophytes.
Indoor farming is a clear path forward. Consider: Indoor farms can be very close to population centers, they’re naturally organic, and most importantly, they are vastly more water efficient than outdoor farming. Opportunities exist in many areas, including hydroponic equipment providers, specialized REITs and many more.
Halophytes, a variety of 2,600 plant species that grow in waters of high salinity, may provide another long-term solution for farmers and the planet. One perennial species called seashore mallow could have a variety of applications, from biofuel to animal feed to industrial chemicals, according to an Aeon Media Group article on the subject. A saltwater-thriving breed of rice as well has recently been developed in China, which “could prevent food scarcity as global climate change floods the world.”
Opportunities abound to make tactical and strategic investments along the various value chains that affect water. All macro indicators—from the global population going to nine billion to more meat consumption to urbanization to climate change—impact the availability and quality of water.
One caveat to potential water investors—there’s no shortcut. The new popularity of water-themed investing has given rise to multiple funds, exchange traded funds and other vehicles buying water-related companies, with the effect that many of these stocks have arguably become overvalued. Take your time, look for value and make sure the fundamentals are sound.
Water is a commodity resource the world has taken for granted, but that has now changed and this change will accelerate dramatically in the coming years and decades. There are few long-arc trends that truly define our underlying realities the way water does. Creative application of careful financial analyses should result in good outcomes for the long-term investor.
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