Investing in water – a waterfall of opportunity or just a big drip?

Over the last few years, the investment landscape has seen a significant shift towards sustainable and essential resources, with a rise in green bonds, clean energy funds and sustainable ETFs. More recently, attention has turned to water, and as global awareness of water scarcity and its critical role in our lives grows, so too does the interest in investing in this invaluable resource. Indeed, research by BNP Paribas Greenwich revealed that 23% of thematic investors rank water among their top three priorities. However, does investing in this asset really…hold water? 

The case for investing in water 

The surge in water investment is driven by a combination of factors, not least of which its essential role for life – but why are we seeing such a rising tide in appetite, and why now? 

• Growing global demand 
  As the global population continues to grow, so does the need for clean water. Urbanisation and industrialisation further exacerbate this demand, creating a pressing need for sustainable water management solutions. 

• Regulatory support 
  Governments worldwide are implementing policies and regulations to ensure sustainable water use and management. Initiatives like the European Green Deal and the UN Sustainable Development Goals are also driving investments into water infrastructure and technologies.  

• Climate change 
  The impact of climate change on water resources is profound. Increased frequency of droughts and floods disrupt traditional water supply systems and melting glaciers and altered river flows further reduce freshwater availability.  

• Overuse of water resources 
  Agriculture, industry, and domestic sectors often consume more water than is sustainably available. This is combined with the problem that industrial discharges, agricultural runoff, and untreated sewage contaminate freshwater sources. 

These considerations alone explain the swell of interest in this asset class, not to mention the (relatively) low volatility of investing in water, especially when compared to the broader market.  

Asset managers, globally, are therefore employing diverse strategies to invest in the water sector, be that through investing in companies that provide water services; infrastructure funds that build and maintain pipelines, treatment plants, and storage facilities; or technology companies that develop much-needed innovative solutions to address water scarcity. They assert that water can be a strong diversifier for portfolios, given its relatively stable demand and high potential for long-term returns. This is coupled with its positioning as a sustainable choice, particularly suitable for those who seek to align their portfolio with their values. 

Not all plain sailing 

Of course, no investment comes without some risks and some managers believe that this asset may be heading for choppy waters: 

• Greenwashing risks 
  Some investors have piled in to water, assuming it automatically ticks the “responsible investment” box. However, the now well-documented sewage spills across the UK are anything but responsible. Those who invested into water utilities in the name of sustainability will have been left high and dry. 

• Rising CapEX 
  Faced with a heady combination of more droughts, more floods and record rainfall, our ageing water infrastructure is on the verge of a breakdown.  This means that water storage and drainage systems worldwide need to be upgraded – an expensive exercise and one in which the actual returns are not obvious. 

• Clean water’s dirty secret 
  Cleaning water is incredibly carbon intensive. Currently, the electricity required to produce safe drinking water accounts for 2% of global greenhouse gas emissions – similar to that from global shipping. On top of that, let’s not forget the emissions from all the new infrastructure needed. Water is most definitely not high on the net-zero list. 

Time to dip your toe in the market? 

While the tide may be turning on interest in this asset, investing in water isn’t a sure bet. On the surface, investing in water may seem quite compelling – it’s an essential, growing, and resilient sector with vast potential for innovation and development. However, when you dive a little deeper, the short-term picture is challenging and for those seeking a sustainable home for their money, water still has some work to do. 

What’s clear, however, is that water scarcity is only increasing, and as one of the most pressing challenges facing our planet, the need to invest in water is only flowing one way.