WATER covers over two-thirds of the earth’s surface, but only a tiny fraction of fresh water is readily available for use. Recent reports indicate a looming crisis.
By 2030, global demand for fresh water is expected to surpass supply by 40 per cent.
As a result, billions of people are living without safely managed water and sanitation. It is estimated that 700 million people could be displaced by water scarcity by 2030.
What is causing this imbalance between water supply and demand?
Climate change, urbanisation, ageing infrastructure and pollution are among the many factors at play.
Increasingly, innovative technology also contributes to this challenge.
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Driving demand, impacting water
Semiconductors, crucial to the modern economy, drive investment in water. From cloud computing to automotive systems, their role is indispensable.
With investment in semiconductor fabrication plants soaring to meet growing demand, here is a lesser-known fact: Semiconductor manufacturing is highly water-intensive.
The global semiconductor industry consumes an estimated 1.2 million megalitres of water annually. Every step – from chip production to polishing, cleaning and cooling – requires water.
Ultra-pure water, in particular, is vital for maintaining chip cleanliness.
These challenges – along with the associated investment to address them – present opportunities for innovative companies offering solutions to optimise water usage in the semiconductor industry, enabling them to achieve more with less water supply.
Another area with high water intensity is agriculture, which accounts for 70 per cent of freshwater withdrawals globally.
In this regard, it is fortunate that innovative approaches such as “smart irrigation” integrate technology to optimise water usage and crop yields. The applications extend beyond farming to areas such as urban green spaces.
Investment implications
As active investors, we identify opportunities throughout the water value chain – including water infrastructure, treatment, efficiency and utilities.
First, water infrastructure is critical, covering a wide spectrum of projects and components. From specialised pipes, pumps and valves facilitating water transmission to the design and execution of infrastructure projects such as inter-regional transmission endeavours and flood defence planning, this sector offers diverse investment opportunities.
Second is the realm of water treatment, efficiency and testing. Here, investors can explore services and products enabling chemical or non-chemical water treatment, solutions enhancing water efficiency and products facilitating water quality testing.
Lastly, water utilities are a vital segment for investment. Water utilities companies provide essential services such as clean water, wastewater management and sewerage services. Widely known for their defensive nature, water utilities are highly regulated, which provides a relatively high degree of certainty over their earnings even during economic downturns, provided that they meet performance targets.
Measuring environmental impact
This theme may be particularly attractive for asset owners who wish to measure the environmental impact of their investments and alignment with the specific United Nations’ Sustainable Development Goal focused on clean water and sanitation.
An example is George Fischer, a Swiss company specialising in flow solutions for fluid transport across various applications. The company seeks to ensure leak-free delivery of drinking water and improve energy efficiency. One of its latest projects in Sao Paulo, Brazil helped the city save 75 billion litres of water annually by replacing 760 km of piping network.
Another interesting example is Ferguson, a US company providing products for heating, ventilation, fabrication and construction, to address water infrastructure challenges and offer high-efficiency solutions. Its solutions helped save approximately 1,350 megalitres of water in 2022.
Under the umbrella of investing in water resources, there is a diverse range of companies to choose from, offering a mix of both defensive and growth-oriented opportunities.
On the one hand, water utility companies that specialise in urban water supply possess defensive characteristics, with lower volatility and potential for higher dividends.
On the other hand, enterprises in water treatment, efficiency solutions and infrastructure often belong to cyclical industries. Many are categorised as innovation enablers, and thus hold bigger potential for structural growth.
By carefully selecting from the universe of listed companies with exposure to the water theme, investors can benefit from a portfolio that is well-balanced between economically resilient businesses and companies that are more growth-oriented.
Meanwhile, the challenges posed by climate change, ageing infrastructure and pollution issues, and the rising demand from growing populations and emerging water-intensive industries, should provide long-term growth drivers for companies in this sector.
The writer is co-portfolio manager, BNP Paribas Aqua fund
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