investment viewpoints

    Clean water solutions for a thirsty world

    Clean water solutions for a thirsty world
    Alina Donets - Portfolio Manager

    Alina Donets

    Portfolio Manager
    Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

    Pascal Menges

    Head of Equity Investment Process and Research, Client Portfolio Manager

     

    Natural capital includes all of the earth’s natural resources including freshwater reserves and aquatic ecosystems. Demand for water is increasing just as its supply is being degraded by urbanisation, plastic waste, mismanagement of agricultural chemicals and thermal pollution. We make the case for investing in water solutions to help preserve this vital aspect of natural capital as one of the engines of our economy.

     

    Need to know:

    • Humans rely on water but this resource is being pushed to the limit by population growth, unsustainable usage and pollution. Rising water demand is coinciding with the increased degradation of aquatic ecosystems 
    • Commercial water solutions to these problems exist – and they are exposed to strong sources of demand
    • Our Natural Capital strategy focuses on companies that promote water efficiency, enhance water quality or undertake protection measures to ensure healthy waterways

     

    Addressing water scarcity and pollution

    Nature is one of the most vital and productive assets in our economy today. However, decades of human overconsumption and waste habits are depleting the world’s resources at a rapid pace. If measures are not taken now, we will soon reach a point where the damage will be irreversible.

    Water solutions are a key to addressing the excessive, inefficient and irresponsible use of water, and redressing how it compromises the aquatic ecosystems underpinning economic activity. We assess the commercial solutions available for improving water efficiency, quality and protecting water bodies to avoid scarcity in certain regions.

    Our Natural Capital strategy aims to fill a gap in the investment universe for harnessing and preserving the productive and regenerative power of nature. Water solutions are aligned with the transition to a circular bio-economy, one of four investment sub-themes and growth opportunities underpinning our strategy.

     

    FIG. 1 Four investment themes drive the Natural Capital strategy

    Source: LOIM. For illustrative purposes only.

     

    A thirsty world

    Unsustainable water usage and pollution are features of humanity’s population growth and economic development. We have pushed this vital resource to its limit.

    Humans rely on water every day. Global water use has increased by a factor of six over the past 100 yearsand continues to grow steadily at a rate of about 1% per year.2 This is driven by:

    • Population growth
    • Rising wealth, which enables higher consumption
    • Industrialisation
    • Agricultural irrigation
    • Urbanisation, which results in high water intensity

     

    Current global water demand has been estimated at about 4,600 km3 per year and is projected to increase 20%–30% to 5,500-6,000 km3 per year by 20503. Can this be matched by supply?

    The global population is expected to increase from 7.7 billion in 2017 to 9.4-10.2 billion in 2050, with two-thirds living in cities. Over the same period, world GDP is expected to increase by a factor of 2.54. On a shorter timescale, agricultural and energy-production activity, which are both water-intensive, are expected to increase roughly 60% and 80% respectively by 20255, creating further demand.

    The present rate of water withdrawal must be compared with the maximum sustainable level. At about 4,600 km3 per year, this limit has almost been reached6. Without innovative solutions, water supply will run dry.

     

    A broken planetary boundary

    Aquatic ecosystems – lakes, rivers, oceans and wetlands – are habitats for large varieties of organisms. For instance, freshwater bodies occupy 1% of Earth’s surface but are home to more than 10% of its species. Sadly, the number of species they support has declined 84% since 19707, largely due to excessive water extraction and pollution.

    Marine ecosystems have been similarly degraded due to urbanisation, plastic waste, mismanaged use of agricultural chemicals and thermal pollution caused by human activity or climate change8. Freshwater use, one of the nine scientifically proven planetary boundaries defining a safe and stable global environment for life, has already been breached in regions across the world.

     

    FIG. 2 Freshwater use is one of the planetary boundaries that has been transgressed

    Source: LOIM analysis; based on Rockstrom et al (2015), updated based on Transformation is Feasible Report by Randers, Rockstrom et al (2018).  For illustrative purposes only.

    1) IPCC Global Warming of 1.5C report (2019)
    2) World Wildlife Fund and Boston Consulting Group (2015)
    3) BBC/EPA
    4) FAO (2015)
    5) UNEP (2016)
    6) Living Planet Index
    7) OECD (2016)
    8) Trucost (2013)

     

    Quality is critical

    With water demand intensifying and resources constrained, efficient use and distribution – as well as management of water quality – is paramount. Degraded water quality is largely correlated with areas of population density and economic growth. Since the 1990s, water pollution has worsened in almost all rivers in Africa, Asia and Latin America9. Water quality is expected to deteriorate further in the coming decades, compromising the aquatic ecosystems, the economic activity they support, and human health.

    It’s estimated that 80% of all industrial and municipal wastewater is released to the environment without treatment, detrimentally impacting ecosystems and human health10. Nutrient and chemicals loading in waterways – particularly from agriculture, pharmaceuticals, and personal-care products – is the most prevalent water-quality challenge, and in some regions is often associated with pathogen loading11.

    Beyond high water consumption and deteriorating water quality, land use and land-use change driven by humans majorly impacts hydrology at local, regional and global levels. Overgrazing, soil degradation and surface compaction lead to increased run-off and evaporation rates and lower water storage in soils. This is detrimental to the water-provisioning services of grasslands, such as improving water quality12  and attenuating flood and drought risks.13

     

    Strong demand for water solutions

    Our future does not have to feature water scarcity, pollution and the degradation of aquatic ecosystems. Commercial solutions to these problems exist – and they are exposed to strong sources of demand.

    USD 11.7 trillion globally must be invested in water infrastructure over approximately 20 years to meet supply and sanitation needs14. This is not limited to pipes, pumps, and treatment facilities: the benefits of natural systems in slowing stormwater flows, storing water and cleansing runoff are gaining greater recognition. Complementing traditional  infrastructure, these green solutions include wetlands, rainwater harvesting, grassed roofs and street swales, which are vegetated channels used to mitigate stormwater flows.

    The environmental and economical imperative of sustainable water usage, and its role in the circular bio-economy, make water solutions is one of four sub-themes in our Natural Capital strategy. Within this, we focus on three challenges:

    • Efficiency. Today, agriculture accounts for 70% of global water use, industry consumes 20% and households 10%. With growth in demand across all three verticals, reducing the water intensity of industrial, farming or human activity is essential.
    • Quality. Contaminated water should be treated at the source of pollution – for example, in manufacturing plants, before being distributed to wastewater treatment systems. But prevention is better than cure: using fewer or no chemicals in practices like agricultural fertilisation, and eliminating plastic where possible from economic activity, would greatly enhance water quality.
    • Protection. Ensuring human activities do not damage aquatic ecosystems by protecting watersheds and other areas vital to healthy waterways. If they have already been compromised, restoring their health is essential.

    The circular bio-economy harbours companies developing or providing water solutions whose products and services meet efficiency, quality and protection challenges. We believe companies oriented towards services such as smart irrigation systems, sustainable stormwater management and ecosystem restoration are poised to capture strong demand and provide attractive investment opportunities.


    Sources

    1 “Modeling global water use for the 21st century,” by Wada et al.. Published in Geoscientific Model Development in 2016.
    2 AQUASTAT.
    4 OECD.
    5 “World agriculture towards 2030/2050,” by Alexandratos, N. and Bruinsma, J. Published by the Food and Agicultural Organisation in 2012; and the OECD (2012).
    6 “Peak water limits to freshwater withdrawal and use,” by Gleick, P. and Palaniappan, M. Published in Proceedings of the National Academy of Sciences in 2010; and “A global assessment of the water footprint of farm animal products,” by Hoekstra, A. and Mekonnen, M. Published in Ecosystems in 2012.
    7 “Freshwater biodiversity,” by the WWF. Accessed April 2022. ).
    8 “Aquatic ecosystem and biodiversity: a review,” by Irfan, S. and Alatawi, A. Published in the Open Journal of Ecology in 2019.
    9 “A snapshot of the world’s water quality: towards a global assessment,” published by the United Nations Environment Programme in 2016.
    10 “Wastewater: the untapped resource,” published by the UNESCO World Water Assessment Programme in 2017.
    11  “A snapshot of the world’s water quality: towards a global assessment,” published by the United Nations Environment Programme in 2016.
    12  “Identification of rural land management signals in runoff response,” by McIntyre, N.  and Marshall, M. Published in Hydrological Processes, vol. 24 issue 24, in 2010.
    13 “The impact of upland land management on flooding: insights from a multiscale experimental and modelling programme,” by Jackson et al. Published in Journal of Flood Risk Management in 2008.
    14 “Charting our water future,” published by the 2030 Water Resources Group in 2009.

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