The United Nations’ sixth sustainable development goal (SDG) is clean water and sanitation for all by 2030. While this suggests improved water infrastructure in the developing world, the right to clean water is universal — we must leave no one behind. The ongoing Flint water crisis, revealed in 2014 when the drinking water source for the city of Flint, Michigan, was found to be contaminated with lead, illustrates how water infrastructure investment is every bit as important in the developed world as it is in the developing world, and that no one should take access to clean water for granted.
Impax has been researching and investing in water and water-related companies since 1999 and running a dedicated water strategy since 2008. We have seen the universe of investable companies increase and accelerated growth of many of these companies, particularly in recent years. Climate change, pollution and a growing and increasingly urban population are key players in the water investment narrative, the benefits that innovation and technological development provide in this area are others. Governments, public bodies and private industry are all investing in new and upgraded infrastructure, and this investment momentum keeps gaining pace.
Leaving no one behind in emerging market regions such as China, India and Sub-Sahara largely requires the development of water infrastructure where it previously did not exist. It is a positive development driven in no small part by urbanization, growing populations and changes in consumption patterns that demand higher standards of living. This isn’t just about access to clean water and water treatment. Many items taken for granted by urban dwellers require a significant amount of water to produce. A hamburger, for instance, requires 460 gallons (2,090 liters) of water to make.1
In the developed world this narrative is more complex. Water infrastructure is largely in place, but it can be outdated, inefficient and/or struggling to meet modern water demands. Flint hit the news when water contamination came to light. The cause of the contamination was insufficient water treatment — lead was leaching into the water pipes — but this isn’t the full story. Flint had changed its water supply from Lake Huron and the Detroit River to the closer Flint River to save money. But the infrastructure in place was old and out-of-date, and officials failed to apply corrosion inhibitors to the water, which resulted in contamination of the city’s supply. The project to replace the lead pipes, which commenced in 2016, is ongoing and costs are running into the hundreds of millions of dollars.
The impact of climate change also plays to the “leave no one behind” narrative. In recent years there have been a number of severe periods of drought, such as the 2012–2016 California and the 2014-2017 Brazil droughts, and water shortages that have impacted farming yields and industrial productivity and resulted in loss of revenue for workers. In 2018, South Africa’s second largest city, Cape Town, with a population of about four million people, suffered its own water crisis. Rainfall, well below historical levels, brought the city’s main reservoir close to zero in March 2018. Cape Town resident use was cut from around 120 liters per person per day in 2015 to 50 liters at the start of 2018. However, it is notable that even after this dramatic cut in use residents were still using twice as much as poorer residents in the townships, with average use in normal circumstances at 25 liters per person. This highlights how much water use increases with wealth, as people gain access to such “luxuries” as flushing toilets and washing machines.
For officials and residents in all these regions, the long-term impact of climate change on water supply requires investment in a range of measures, the need to conserve and detect evident. Examples of other extreme weather events, like storms, represents a different priority, where protection and cleanup can be more pressing.2
The role that technology has to play should not be understated. It is being used to predict storms and to free space in the waste and drainage chain, to make irrigation techniques more efficient and to help consumers and industry become more aware of their water usage and wastage so they can use it more efficiently. Smart meters are a good example of how technology is changing this sector. There is now sufficient data received from these meters that suppliers can use to manage the supporting waste and supply infrastructure more efficiently. For instance, the data from smart meters can provide an early-warning signal and indication of leaks and their locations. This is the beginning of change; there is more to come, and investment is reflecting and will continue to reflect this.
The investment opportunities on offer are surprisingly diverse and resilient. Risk characteristics are comparable to equity markets and run through the global economy, across markets, sectors and regions. Water also provides attractive opportunities through the economic cycle, encompassing both defensive and cyclical businesses.
1 Friends of the Earth and Impax Asset Management. “Investing in Water: Tapping Into a Source of Resilient Growth.” Dec. 2016
2 Cotterill, Joseph. “South Africa: How Cape Town Beat the Drought.” Financial Times, May 1, 2018