#SRI — 22.03.2019

Blue Investing: Challenge and Opportunities

Water is the source of life, covering 70% of the planet’s surface. It is vital, not only to human body, but also to agriculture, industrial production and environment sanitation. Yet, excluding saline water and fresh water frozen in glaciers, ice and snow, there is only less than 1% left of it which is fresh and suitable for human consumption. Despite appearances, water is a limited resource.

Blue Investing: challenge and opportunities I BNP Paribas Wealth Management

WATER SCARCITY – EXPLAINING THE FACTS

The current amount of fresh water available is used by almost 8 billion people and is shared quite unevenly among them. To illustrate, an average United States citizen consumes 340 liters of water a day[1], whereas nearly 10% of the world’s population does not even have access to drinkable water[2].

Moreover, while the quantity of freshwater available on the planet stays roughly constant because of the natural water cycle, the global demand for water is rising, due to new challenges such as population growth, global urbanisation, rise of living standards and climate change. The world’s water consumption has doubled over the last 30 years[3].

Overall, the world’s current water use is poorly managed. Globally, countries are facing losses due to leakages, ageing infrastructures, and pollution, dangerously curbing the world’s already limited water supply. Every year, 32 billion cubic meters of treated water are lost due to leakages[4] and 75% of the world’s available freshwater supply is unsafe for consumption due to contamination or pollution[5].

If we do not act quickly, the world may face huge sanitary issues, in addition to a deep shortage of water supply. In 2030, an estimated 47% of the world population will experience severe water stress[6], and it is expected that countries in emerging markets will be the most heavily affected.

HOW TO SOLVE THE PROBLEM?

The first step in solving, or at least mitigating the water crisis is a strong change in global mindset to rethink our water use, helped by both cultural change and tightening of regulations. But calling for better management will not be enough, if not backed up by sizable development of technologies and investments from private and public sources. Domestic consumption accounts for only 8% of the global consumption of water. In contrast, industrial consumption accounts for 23% and agriculture consumption for 69%[7]. Therefore, innovation and technological progress are also highly needed in both the industrial and agricultural domains, and will not be possible without corresponding investments. The World Bank today estimates that water sanitation services require investments amounting to US $144 billion[8] per year up to 2030.

But how should we invest in water when this commodity’s price does not even represent a thousandth of its real value? Today, governments are less and less able to answer demand for water due to political instability, lack of resources or ageing infrastructure. They therefore turn to private actors, who progressively get more involved in the water cycle. Consequently, investing in water can mean investing in businesses offering key advances in solving the water crisis. When looking for potential opportunities, we  have identified three main areas, each one providing a huge range of attractive water-related investment opportunities:

1. REDUCE USE

This domain consists in reducing water consumption by cutting losses due to leakage or low efficiency of techniques. Indeed, governments are starting tackling the wasteful use of water, creating business opportunities for companies making advances in technologies such as leaking management, storm water overflow, next-generation sensors, monitoring equipment, and smart cities. Smart irrigation can also represent persuasive investment opportunities.

2. REDUCE WASTE

This second domain consists of transforming waste into resource by treatment and recycling, preventing water from leaving our fresh and drinkable water cycle. It can regroup different innovations in sectors of water reuse, quality, and environmental services sector. One can see investment opportunities in technologies for waste water collection and its treatment (filtration and purifying techniques and quality monitoring and testing) and redistribution. From a regulatory perspective, governments are likely to lower tolerance levels for output water from industries. As a part of its Water 10 Plan[9], China directed $300 billion directed to address water pollution

3. RAISE SUPPLY

This last domain regroups technologies that increase the water supply, adding and providing new fresh drinkable water to our water cycle. Indeed, to cope with the rising demand and the development of cities in relatively dry areas, providing water is technologically challenging. Investments in pumping system, filters, desalination plants, or stocking and transportations projects and infrastructures could represent interesting opportunities for investors. Many countries may also have a growing interest in purifying water techniques. Simple solutions such as water purifying tablets can be an effective solution to raise water supply.

A LONG TERM STRATEGY 

Water is a global investment theme, applicable to many end markets, sectors, and regions. Water demand being generally unaffected by geographic area, economic conditions, political developments or changing consumer preferences, and water quantity being finite against our unlimited development, at BNP Paribas Wealth Management[10], we believes investing in water has a long-term prospect, growth potential, whether in developed or emerging markets.

Investing in company stocks isn’t the only way to participate in this global investment theme. Different investment funds and ETFs are focusing on water, offering exposure in water-related companies at each step of the water cycle. Their approach can offer the insurance of a positive impact and an active sector re-shaping via active engagement. Investing in water-related green bonds, although still low in proportion, can also help governments to finance high-scale development projects.

However, one should keep in mind that investing in water projects is not directly synonym of positive social impact. In developing countries, some water-development projects tend to reallocate access to water, to the detriment of fragile local populations. A tense geopolitical context can also result in conflicts related to water, compromising the smooth progress of local projects. Such parameters can compromise the positive impact on populations. Therefore, conducting an extra-financial analysis of companies and projects, supported by external agencies or professional investors, is essential to ensure a positive impact, and that investments do not benefit to unfair, exploiting and controversial companies, bad environmental, social and governance practices and compromised projects.

CONCLUSION

In 2015, the United Nations highlighted the emergency of solving the water crisis via the Sustainable Development Goals 6 ‘Clean Water and Sanitation’, but investing in water can have a much further-reaching impact, helping feeding the humanity, avoiding serious conflict, and making sure that no one stays left behind.

[1]https://www.marketwatch.com/story/a-long-term-bet-on-an-essential-commodity-with-a-limited-supplyand-its-liquid-2018-03-22

[2] United Nations Development Program – Goal 6: Clean Water and Sanitation – Key figures

[3] Water 2030 Global Water Supply and Demand model, 2030 Water Resources Group (2009); “OECD Environmental Outlook 2030”, OECD

[4] The Challenge of Reducing Non-Revenue Water in Developing Countries, The World Bank Group, December 2006

[5] The United Nations Educational, Scientific and Cultural Organization

[6] Water stress occurs when the demand for water exceeds the available amount during a certain period or when poor quality restricts its use. European Environment Agency, Water Glossary 

[7] FAO. 2016. AQUASTAT website. Food and Agriculture Organization of the United Nations (FAO).

[8] World Bank, Understanding Poverty – Water Strategy, 4 Oct 2018

[9] China Water Risk | New water ten plan to Safeguard China’s Water

[10] BNP Paribas Wealth Management is the business line name for the Wealth Management activity conducted by BNP Paribas.

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