Of all the water around us 97% is salt water in the oceans. Another 2% is locked in ice. Sustainable water sources (lakes and rivers) that are accessible for mankind make up only 0.07% of water on the planet. This is a surprisingly small amount – if you could put that water into a ball it would be only 56 km in diameter (comfortably fitting between Wellington and Picton).
While the supply of water is restricted, the demand for water continues to grow. The UN predicts the world’s population (currently 7 billion) will exceed 9 billion by 2050, needing more water for drinking and growing crops. Food is a massive water user - for example producing one kilogram of potatoes requires 287 litres of water, while a single apple or glass of wine needs over 100 litres of water.
“Anyone who can solve the problems of water will be worthy of two Nobel prizes - one for peace and one for science” – Joh F Kennedy.
As well as population growth there are other important social trends to consider. In the developing world workers continue their drift from rural to urban environments. This requires new water infrastructure and the water usage per person rises.
Economic progress makes us more intensive users of water. Pouring concrete to build cities, processing aluminium, making silicon chips – an endless list of processes requiring vast amounts of water. Add to this climate change with wet parts of the globe getting wetter and dry parts getting dryer and you have to question where is this heading?
Thankfully humanity has proven to be quite adaptable to change. Companies are developing a range of new ways to use water resources efficiently. This requires better ways to irrigate crops without wastage, to recycle water, to capture run off and to sustainably manage a country’s water assets.
An investor can benefit from this by investing in companies around the world generating revenue from the water industry – including industrial companies, utilities and technology companies. A good investment analogy is the gold rushes of the 1850s and 1860s in New Zealand, Australia and California. You did not want to be in the river desperately panning for gold. One in a hundred of them would strike it big and the remainder worked hard for little reward. You wanted to invest in the industry supporting the gold miners – the suppliers of picks, shovels and tents. The same applies to water – think of investing in the wider water industry rather than owning rights to extract water from the ground.
There are two other good reasons not to invest directly in water rights. The first is that they are illiquid in the sense they can be difficult to buy and sell (as they are not traded on a market like shares). The second reason is that particularly in developing countries ownership of water rights is an issue fraught with concerns about fairness and social equity. You cannot price a basic human need at a level people cannot afford it.
When investing in something good (water) you want to know that you are actually “doing good”. This means screening out those companies that have poor environmental records or also have interests in alcohol, tobacco or armaments (some tech and industrial companies can be involved in diverse industries). The companies that remain have a water focus and potential to benefit mankind and the planet.
Into the future water faces a scarcity of supply and yet relentlessly growing demand. In short, there is a compelling investment case for water related companies.
Written by John Berry www.path.co.nz
Disclosure of interest – John is co-manager of the Pathfinder Global Water Fund, and is a fund manager, but does not give personal financial advice.