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Capital Acumen Issue 30

The Global Water Crisis

As California (and the world) grows thirstier, investors are looking at water in a new way.

Dry corn field with young corn plants

The United Nations predicts that about half the world’s population will be living in areas of high water stress by 2030, with some of the poorest and fastest-growing regions the most affected.

A major driver of future water stress will be the rapid growth of demand in the emerging world. Emerging nations in Asia, Africa and the Middle East face a combination of rapid economic growth, underdeveloped water sanitation and treatment infrastructure, and some of the lowest per capita supplies of freshwater in the world. A total of 70% of the global increase in demand through 2030 is expected to come from just Asia and Africa, with around half of that occurring in China and India alone.1

Emerging nations, when added together, are likely to experience some of the world’s most severe water shortages in the years to come. It’s not a stretch to say that the future of the emerging markets — and therefore the global economy — revolves around an adequate supply of water.    

California’s Crisis

With tremors in emerging markets, fears of Fed tightening and a structural slowdown in China, investors have plenty of worries keeping them awake at night. But it’s the catastrophic drought in California, and its emergence as a harbinger of the global water crisis, that may carry the most risk to the global economy over the medium term.

In its fourth year, the drought has punished the Golden State, greatly reducing groundwater and snowpack levels and causing billions of dollars of lost economic output. In 2015, it’s estimated that the drought has cost the state nearly $3 billion in direct and indirect costs, according to a report from the University of California, Davis.

Here is a look at the state’s increasing drought level, documented each year in the first week of January. The graphic below documents the drought level from 2011 to September 2015, according to the U.S. Drought Monitor, 2015.

Drought map for California

Taking Action

The response in California has so far focused mostly on curbing demand, including the use of statewide rationing, imposed in July. But more important for the long term are plans to increase the supply of freshwater, through water treatment, desalination or retention.

On a larger scale, some 17 desalination plants are in the planning stage, including a $1 billion plant in Carlsbad, Calif., that’s scheduled to open in late 2015. Nationwide, billions of dollars could be spent on the U.S. water infrastructure over the next decade.

Collage detailing the breakdown of global water
Carlsbad Desalination Project
A young girl carrying water
Desalination plant in Chile
Former coast of the Northern Aral Sea
Child diving into water at the base of a Dam in Karnataka

A range of global investments, both public and private, will be required in water services and infrastructure over the course of several years, in both emerging and developed economies.

This should benefit companies involved in related industries — primarily water monitoring, wastewater treatment and liquid purification services — as well as those that provide industrial equipment for fluid handling, such as pumps, valves, filters, seals and water analysis instruments.  

With California pointing the way to a world of water scarcity, water-related investment opportunities seem likely to proliferate.

A water chart detailing items to gallons of water

The New York Times, 2015; Fortune, 2011. (Latest available data.) 

Why Invest in Water?

 

  • Corporate investment: Global multinationals have invested over $84 billion in water management over the last three years, including Ford Motor Co., Google, Intel, Nike, Nestlé and many other firms;13 it seems that they will continue to do so.
  • Spending: Billions — if not trillions — of dollars are likely to be spent on water in the coming decades.
  • Investors are watching: Water scarcity remains a key interest with firms such as U.S. Trust.
  • Falling supply: The U.N. says there could be a 40% global shortfall in available freshwater by 2030, based on current levels of water productivity and scheduled investments in water infrastructure.
  • Rising demand: Demand for water services and infrastructure is growing as quickly as 14% per year in the oil and gas sector and 7% in the food and beverages sector.    

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