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Supply & Demand Challenges

The water crisis starts on the demand side. As population growth across the globe continues to rise more than 1% each year and standards of living improve in many parts of the world, water usage will increase as well.  The OECD estimates that “40% of the world’s population live in water-stressed areas, and water demand is expected to rise 55% by 2050”, which will leave nearly 10% of the population without regular access to clean, affordable water. The supply of fresh water is limited in large parts of the world; however, efforts behind initiatives including desalination, recycling, catchment, policy and education will help to begin addressing the widespread impacts of water insecurity.   
 

Companies Leading the Way on Water

As water scarcity will likely pose a great risk to people and the environment in the future, companies have recognized the need for good water stewardship. A few examples:
  1. Xylem leverages technology to develop innovative water solutions and has emerged as a leader in this space. They support utility companies in the delivery of clean water, and they help businesses in other sectors use water more efficiently. Xylem is focused on addressing key water issues including scarcity, affordability, and water-related emergencies.
  2. Utility companies are also improving their water related practices. Through its regular business operations, Essential Utilities is working to protect the environment while also tackling water scarcity, affordability, and aging infrastructure. The company continues to work on enhancing their water treatment to be sure that clean, safe water is delivered back into local rivers and streams. Additionally, they have committed to restoring and preserving water stressed areas and wetlands in their local communities.
  3. Companies in other industries have also identified the need to focus on water conservation. Unilever, for example, has been setting aggressive water reduction goals in their factories, and they have already surpassed their 2020 target to reduce their water withdrawal per ton of production by 40% over their 2018 baseline measurement. Since 1995, they have achieved an absolute water reduction of 81.6%. Currently, their water stress assessments help them determine which areas represent a short- or medium-term risk to their operations and the surrounding communities. In total, Unilever has undertaken about 600 water related projects as part of their continuous improvement program. In addition to benefiting local communities, their water conservation efforts have helped the company reduce its energy usage; as Unilever uses less water, they require less energy for heating, pumping, and treating the water. 

Water Investments in Sustainable Portfolios

Water-related investments often fit well into a sustainable portfolio. Reliable access to clean water and sanitation is crucial to good health and is listed as one of the 17 Sustainable Development Goals established by the United Nations to end poverty and protect the planet from further harm. 
 
Investors can add water exposure to their portfolios in several ways: 
  • As previously discussed, there are a few individual companies, often in the industrial or utilities sectors, that can provide exposure to water-related investments. This can include water conservation or recycling, solutions for increased water use efficiency, or infrastructure and manufacturing products that are less water intensive.
  • Mutual funds and exchange-traded funds (ETFs) are another way to add water-related exposure to a stock portfolio. The two types of funds hold a basket of securities, which can reduce portfolio risk through increased diversification. While many funds are more heavily weighted to industrial and utilities companies, others may also include companies that are leaders in reducing water usage in their operations.
  • Bonds can also provide a source of water exposure for both taxable and municipal portfolios. Corporate bonds may be issued by a company with water-related exposure, such as a utility. Municipal bond proceeds are often used for water and wastewater treatment facilities or for the improvement of community infrastructure, such as water mains or meters.   
  • Green bonds, an area of increasing issuance, may also have a focus on water and conservation. For example, a recent bond issued by Central Arkansas Water will focus on providing clean drinking water for the Little Rock area. A portion of the proceeds will also be used to purchase forested areas around reservoirs. This will not only preserve wooded areas but allows them to act as a natural filtration system for water supplies.     

Conclusion

The need for water conservation and recycling and the more efficient use of water will increase in importance as water scarcity continues to become a larger issue worldwide. Solutions and infrastructure will be needed for areas where an adequate supply of clean water is not available, particularly in poorer areas of the world. Companies with water-intensive operations will need to adapt to using less water. Products that require little to no water, such as next generation shampoo or detergent, will be more in demand.  All these factors offer opportunities to investors from both a fundamental and sustainable investment perspective.  By allocating capital toward the solutions providers and the best stewards of water (and away from the less responsible users), sustainability-oriented investment portfolios can encourage attentiveness to greater improvements in water usage and conservation.