Water could be the new oil
Investors can play a role in averting a looming crisis for one of our most precious resources
Human existence is based on water and air. While water in the broad sense may be abundant around the globe, the same cannot be said of fresh or clean water.
Clean water is critical for the production of most goods and services in some capacity, and without it the world as we know it would simply struggle to function.
There is a widening gap between the demand for clean water by humans and industry and the supply. Access to clean water is becoming harder and more expensive due to over-consumption, pollution, environmental degradation and climate change. If these trends are allowed to continue then within the next decade there will be a critical shortage of clean water and competition for it will not just be between sovereign nations but between cities, neighbourhoods, industries and companies.
When we speak of global economic growth, we should be aware that this growth directly places additional stress on water resources. Global economic growth is synonymous with population growth, urbanisation, industrialisation and increases in production and consumption.
As global wealth increases, the population’s consumption pattern becomes more energy- and water-intensive. More people can afford to buy meat, build larger homes, and use motor vehicles and other energy-consuming devices, all of which involve increased water consumption for production and use. Consequently, the world is expected to face a shortage of 40% by 2030 under a business-as-usual scenario, as estimated by UNESCO.
Global economic growth will underwrite the demand for clean water in the decades to come. This presents an opportunity for investors to help fund solutions to the worsening problem and earn respectable profits along the way.
Companies involved in water-related businesses stand to grow in the coming years. Investors can hand-pick listed water-related companies on major stock exchanges or, alternatively, gain exposure through active and passive index funds. The allocation to water in portfolios could be framed within the sustainability context or as part of an allocation to a broader natural resources theme.
It is quite possible to get diversified exposure to a broad basket of water-based listed companies involved in activities such as supply, treatment and purification to well drilling and infrastructure construction.
The long-term risk and return prospects for investing in a broad basket of waterbased companies look appealing. According to data published by S&P, the S&P Global Water Index exhibited higher absolute and risk-adjusted returns than the broad-based global equity benchmark over the period from December 2006 to August 2020.
As demand for clean water rises and the problem of mismanagement of supply sources become amplified, the opportunity for investors to make a difference through commercial investments will get bigger and broader.
Zach Riaz is an investment manager and director at Banyantree Investment Group, with responsibilities across equity and multi-asset strategies. See banyantreeinvestmentgroup.com.