Solving the World’s Water Crisis

Solving the world’s water crisis: do investors hold the key to a sustainable solution?
By Chris Greenland, Fund Manager, Sanlam Real Assets Fund

As Thomas Fuller, the famous historian and author, once said, “We never know the worth of water till the well is dry”. All life on Earth depends on it, yet in the developed world water is taken for granted, potentially at our peril. As demand starts outstripping supply, could water security and sustainability become one of the greatest challenges of the 21st century?

Economic opportunities almost always revolve around supply and demand. The less we have of something that we want or need, the more we are prepared to pay for it. London property is a great example of that. A hundred years ago, properties that are now occupied by relatively wealthy people were originally built for the poor. And who knows how much we would have paid for toilet roll back in March if it came down to selling it to the highest bidder? But for something as crucial as water – something we all need for survival – what would happen if it suddenly wasn’t available?

The problem with supply

For those of us living in the developed world, where we rarely need to think about where our next glass of water is coming from, running out of this valuable resource might seem improbable. After all, around 71 percent of the Earth’s surface is covered in water. Unfortunately, though, the vast majority of that is saline and therefore not fit for consumption or supporting food production. Only around 3 percent of the world’s water is fresh, and 69 percent of that is unreachable because it is locked in ice caps and glaciers, while 30 percent is contained within inaccessible groundwater. That means that only 1 percent of fresh water is available for us to use, which is just 0.03 percent of the Earth’s water. Yet we rely on it for drinking, growing crops, powering industry and many other societal and economic necessities.

The problem with demand

The trouble is that water consumption has grown much faster than the population. Today, on a per capita basis, everyone is consuming significantly more water than we have done at any point in history. Aquifers are being tapped quicker than they can naturally replenish while climate change is leading to less rainfall across many parts of the Earth. Coupled with an explosion in population growth, this is set to bring about consequences – and soon.

According to the World Health Organisation, some 2.2 billion people do not have access to safe drinking water, and it won’t be long before this becomes a problem for many more. Half of the world’s population live in countries where water tables are falling significantly. According to experts, Sao Paolo, Melbourne, Jakarta, London, Istanbul, Tokyo, Beijing, Barcelona, Mexico City and Bangalore will all face drastic shortages in the next two decades.[i] By 2040, most of the world’s supply will no longer meet demand. Indeed, for some that challenge has already arrived. Cape Town was one of the first major cities to experience a water shortage that left four million people on water rations. As time goes on, this could become commonplace around the world.

What is the solution?

This is a colossal challenge, but not insurmountable. We just need to make it a global priority before it’s too late. As with renewable energy, the answer is in securing significant private-capital participation, and the best way of doing that is for governments to promise long-term financial support to the industry. It’s a win-win. The world gets sustainable water security, and investors can be confident in getting sustainable, secure and stable long-term returns.

There are already exciting investment opportunities in water all over the world. We have exposure to companies in Singapore, Chile, Australia, Canada, Africa, the US, Central American countries, the Philippines and the Middle East. It really is a global challenge. Research and development are centred on two key areas:

 

  • Water desalination offers a lot of promise, particularly in areas with large and growing populations. The technology uses reverse osmosis to remove salt and impurities from seawater by pushing it through filters and semi-permeable membranes. The result is fresh water. Today, companies are working with governments in both developed and developing nations to build and manage reverse-osmosis desalination plants to increase water security and alleviate water-stressed areas. From an investor’s perspective, these companies offer attractive characteristics as they are typically structured as government concessions with long-term, predictable, contractual revenue streams.

 

  • Wastewater treatment plants are used to recycle used water and are a huge opportunity for investors. According to UN Water, “The availability of safe and sufficient water supplies is inextricably linked to how wastewater is managed. Increased amounts of untreated sewage, combined with agricultural runoff and industrial discharge, have degraded water quality and contaminated water resources around the world. Globally, 80 percent of wastewater flows back into the ecosystem without being treated or reused”.[ii]

 

Clearly, this is unsustainable, but with a change in our collective global conscience, pressure is mounting to resolve the issue. And since companies in this industry can be structured as government-backed initiatives with multi-decade franchises providing stable and predictable returns, there’s no reason why investors can’t help to make it happen.

The Sanlam view

Giving every person in the world access to clean, fresh water is first and foremost a moral obligation. Indeed, one of the UN’s Sustainable Development Goals is to increase availability and access to safe drinking water. Sadly, this has still not been accomplished for everyone on our planet.

As we start to adopt a more sustainable and environmental outlook, now is the time for investors to step up and become part of the solution. Future scarcity of water poses a material threat, and if supply fails to keep up with demand, water will become less and less accessible to the wider population.  Much like climate change, solving the water crisis will require significant near-term action, and if investors can play a part in that, then that is what we must do.