As sustainable investing grows in popularity, investors often ask us what they can do to position their portfolios to make a positive social and environmental impact without sacrificing potential returns. Our answer is always the same: Consider making a dedicated allocation to water as an investible theme.
The societal benefits of investing in water are clear. One-in-three people globally lack access to safe drinking water, a shortfall contributing to the avoidable deaths of nearly 1,000 children daily. Along with this human toll is a costly economic drag: The millions of lost hours spent seeking potable water could instead be used for education and other productive activities that could lift countless people out of poverty. Our water crisis is so severe that the United Nations lists “Ensuring access to water and sanitation for all” as one of its 17 Sustainable Development Goals. However, achieving that goal requires a massive buildout of infrastructure driven by a massive marshaling of investment capital.
The need for water-related investment is not limited to the developing world. Over the next decade, billions of dollars will be spent on water infrastructure in Europe and the US, where demand for water outpaces supply, driven by population growth, the expansion of agriculture and more water-intensive consumption as living standards continue to rise. Factors such as industrial growth, the increasing number of data centers or the electrification of transport will inevitably result in more water needed for power generation needs. Already in the US, power generation makes up 40% of total freshwater withdrawals, on par with water used for irrigation in farming.
As the world industrializes, electrifies and grows in population, water consumption has increased by more than 150% in the past five decades while supply—mainly from rainwater—remains static, and unevenly distributed, leaving locals with few choices to address water shortages.
The most obvious two choices are to proactively address this imbalance by protecting existing freshwater resources from misuse and wastage, or by making water use more efficient. Various technology and product solutions are available, but both approaches require initial capital outlays in addition to the billions of dollars that will be required simply to maintain existing water infrastructure in countries like the US, where much of the existing infrastructure is more than 100 years old. The environmental benefit to investing in water resources preservation is also obvious, given its essential nature and the fact that no substitute exists.
Our water challenges are exacerbated by climate change, which is resulting in more severe weather patterns including prolonged droughts, flooding and unseasonal temperatures. As a result, places that once had adequate water might now require significant infrastructure upgrades to weather storms and meet individual and industrial needs. The good news is that we can fix these problems if we apportion enough public and private capital to build out and improve water infrastructure globally. As such, investors can help meet this need for capital by investing in the long-term structural growth of the water sector while helping fix one of our most pressing environmental problems.
So, how can investors deploy capital? We see three areas where investors can become part of the solution while also benefitting from the upcoming investments to address water shortages:
- Increasing access to water: Companies that distribute water to growing populations, improve water storage capacity or help to covert salt or wastewater into useable water
- Improving water efficiency: Companies with products that allow customers to reduce their water footprint without loss in productivity, i.e. by reducing wastage or fixing leakages.
- Enhancing water quality: Companies that help to manage wastewater, often by recovering some of the huge amount of water flushed down drains or toilets, or companies which help to ensure our drinking water is and stays safe for consumption.
By targeting these areas, investors can access a potential source of long-term growth at risk levels that have historically been lower than other types of growth stocks. Unlike many other growth areas such as tech innovators, companies in the water segment tend to offer already well-established and cash-generating business models with strong client relationships that are not easily disrupted, given that the reliance on sufficient and safe drinking water creates high barriers to entry.
Of course, like all investments, water-related companies carry their own asset-specific, idiosyncratic risks. For that reason, investors should stick to fundamentals and diversify their holdings across companies, regions and sectors. There are over one hundred companies globally across these categories, offering enough options to construct a diversified portfolio of pure play water holdings.
These characteristics make water-related companies an ideal target for investors looking to incorporate sustainability into their portfolios. However, investors looking to capitalize on this opportunity should move quickly. Infrastructure is at the center of the political agenda in the US, where the Biden administration is planning a $2 trillion infrastructure investment. Europe, China and other locations are increasing investment, too. This spending has the potential to trigger a flood of projects aimed at replacing old, hazardous lead pipes and upgrading water infrastructure from its current old economy brick-and-mortar state to a more automated, smart, digital, 21st-century iteration.
There is an even more compelling reason for investors to act now. As a society, we are long overdue to address the problem of water access. We know how to solve it; all we need is the will and the capital. Investors can help with both. By stepping up now, investors can reap the potential financial rewards while also driving positive impact in an area where it is needed most.
A column by Andreas Fruschki, CFA, Head of Thematic Equity at Allianz Global Investors; and Alexandra Russo, member of the Thematic Equity team at AllianzGI, based in New York.
Hear more from Andreas and Alexandra at AllianzGI’s virtual Sustainability Day event on May 12.
Andreas Fruschki, CFA, is a portfolio manager and Head of Thematic Equity with Allianz Global Investors, which he joined in 2005. In his current role he is responsible for multiple global thematic equity funds, including AllianzGI’s SDG-aligned fund range. Fruschki's experience includes running the European Equity Research Department of AllianzGI.
Alexandra Russo, CFA, is a product specialist of the Thematic Equity team at AllianzGI, based in New York. She joined Allianz Global Investors in 2012 and has held various roles in marketing, operations and investments. Currently, Russo also dedicates part of her time to analysis related to sustainable issues relevant to the team's SDG strategies.