Sustainable Investing: Water

By Aline Wealth Management on June 27, 2018

Water is among the most basic and critical natural resources for our survival. In the United States we tend to take the availability of this resource for granted. However, global challenges have increasingly threatened the water sector. For investors, it is imperative to realize that there exists an opportunity to invest in this sector for both financial returns and social good. This socially responsible investment (SRI) provides a mechanism for investors to align their portfolio with their values.
GLOBAL CHALLENGES FOR WATER
Water resources are being threatened by a rapidly growing population. In 2015, the World Economic Forum’s Global Risks report listed “water crises” as the world’s top impact risk. Ultimately, it is a simple supply and demand problem. The fresh water supply is becoming increasingly scarce while the world’s population continues to grow. Fresh drinking water equals less than 2.5% of the world’s total supply and demand is increasing (expected to grow at 40% over the next 20 years). Agriculture alone consumes 68% of available fresh water. Approximately 10% of the world’s population lack access to drinking water while 2.5 billion people lack access to adequate sanitation. The global population is anticipated to balloon to 10 billion by 2050. Additional demand comes from industrial sources. Water is needed for hydropower generation and production processes. Water scarcity results in disruptions to operations and ultimately leads to higher costs.

Climate Change and Pollution
Growing carbon and water footprints are impacting water quality and quantity. The natural ecosystems are being disrupted resulting in extreme weather events such as the California draughts and wildfires. The economic impacts are tremendous. California alone suffered an estimated 2.2 billion dollar loss due to the 2014 draught. The issue is exacerbated by pollution into rivers, lakes, and oceans. This results in further reducing of the usable water supply and increased climate disruption. Approximately 5 million deaths per year are the result of contaminated water.
Infrastructure
Infrastructure in the US has been given a failing grade—leaking water pipes and increasingly dangerous water output. In fact, in the US leaking pipes account for the loss of 1 gallon out of every 6 gallons of water as it moves from the treatment plant to the customer. An already limited water supply is being wastefully diminished during the distribution process. It is estimated that to sustain the growing US population at least 1 trillion dollars must be invested in infrastructure projects over the next 20 years.
A NATURAL FOR VALUE INVESTORS
For the value investor the water sector is a logical fit. There is no substitute for water. As such, there exists inelastic demand whereby higher prices do not limit use—customers must have the product and cannot postpone use. Opportunities exist to invest in water-focused corporations and water-focused infrastructure projects. Examples include water purification companies and treatment plants. Water-focused corporations are not hurt by inflation, recession, competition, changing preferences, or inventory loss. There exists a strong history of consistent growth under all conditions. As an added benefit, water sector investments fit into the SRI lens. That is, putting investment capital to use for social good without sacrificing returns. (Source: Sonen Capital, 2016)