The issue of water scarcity has long been thought of as one facing the developing world. Yet with the increasing impact of climate change coupled with a huge rise in the global population, water shortages are becoming a crisis near and far.
Indeed, here in the UK, demand is far outstripping supply. So much so, it is predicted by the Environment Agency that London and the Southeast could run out of water in 25 years. Water shortages bring an array of negative impacts, including economic with Thames Water estimating the cost of severe drought to London’s economy to be £330m per day.
As evidenced here in the UK, these issues are not being solved quickly or efficiently enough. The regulatory environment for water companies has become too complex and they are not sufficiently incentivised to invest in their infrastructure. This is required to both reduce water leakage and ensure wastewater is treated appropriately.
As a result, we have become accustomed to losing incredible quantities of water through leaky pipes, and sewage discharges polluting our coastlines and waterways, including precious chalk streams. There are thought to be only 200 of these streams globally with 85% in England.
On a global scale, the picture is even more troubling. Sadly, UN Sustainable Development Goal 6 – ‘clean water and sanitation for all’ – and its underlying targets are not on track to be achieved by the 2030 deadline. To meet the targets the pace of progress will need to significantly accelerate, with a:
- Six-fold increase in current global rates of progress on drinking water,
- Five-fold increase for sanitation, and a
- Three-fold increase for hygiene.
These stats and predictions are highly alarming although there is a glimmer of hope. Thanks to tireless campaigners such as Feargal Sharkey, the issue of water quality and scarcity is now firmly on the public agenda here in the UK. For investment managers, engagement is one way to influence and public interest can help determine the engagement priorities.
Tighter regulation needed
But it is at the political and regulatory level that the greatest change is likely to be delivered. Regulation is not currently being enforced rigorously enough on the UK water companies. We think a tightening of the regulation, and importantly, better enforcement would likely underpin progress along with providing opportunities for investors.
Should companies be mandated to upgrade their infrastructure and manage water in a more efficient and responsible way, or face fines, other companies that supply the equipment for this will be big beneficiaries.
The growth potential of companies that provide water efficiency solutions is vast. This extends beyond bringing the water companies into the 21st century as demand is set to increase too. Pretty much all industries need water and some need it in far greater quantities.
Additionally, electrification and the rise of artificial intelligence are increasing the demand for semiconductors and this will drive further water demand as it is a key component of the manufacturing process. Creating the semiconductors used in our phones, computers and cars, requires a process where the microchips are rinsed in ultrapure water. To make this you need a lot of ordinary water. The more water is required in the future, the larger the demand will be for products and services that ensure end to end processes efficiently use it.
Water is not just required for drinking and sanitation. It is a critical resource in the manufacturing and industrial processes that have become vital to our way of life. As a result, we need to be promoting solutions that facilitate the efficient use of water as that is going to be vital to ensuring supply and demand are in sync.
We see a number of companies, such as Veralto and Xylem, operating in this space, producing smart meters, flow instrumentation, and IT platforms to manage water use data, and many other innovative solutions.
We are at a critical point if we are to meet the UN goal to ensure clean water and sanitation for all by 2030. Expected increases in investment, along with potential changes to the regulatory environment, will hopefully prove a catalyst for change and present an attractive opportunity for investors.