A Change of Flow in Global Water

 In Market and Investment Insights

George Crowdy, an Investment Manager within the Global Sustainable and Responsible Investment (SRI) Team headed by Hamish Chamberlayne, examines the challenges of providing a safe and reliable water supply and explains how better and increased use of data and technology provides reason for optimism.

Key Takeaways

  • The water crisis is accelerating around the globe, resulting in increased scarcity, widespread pollution and rapid declines in biodiversity.
  • Data and technology could play a significant role in reducing water wastage caused by outdated and ineffective infrastructure in the water industry.
  • We see a long runway for growth in businesses that are providing solutions to the environmental and social challenges created by the global water crisis.

An accelerating global water crisis is evidenced by its increased scarcity, widespread pollution and rapid declines in biodiversity. The sixth of the United Nation’s Sustainable Development Goals (SDGs), Clean Water and Sanitation, is focused on addressing the issues preventing clean, accessible water for all.

The Waterless West

Within the United States, the issue of water scarcity is both a social and environmental problem. A lack of supply is being met with high demand, which is causing an increase in water bills. According to watchdog organization Food & Water Watch, an estimated 15 million U.S. citizens were recorded as living without a water service in 2016 as shortages drove up water bills. The southwestern United States – already arid due to the “rain shadow” effect of being situated on the leeward side of the Rocky Mountains – is now gripped by a crisis that could soon spread as other waterways become less able to replenish their resources to meet growing demand.

Horseshoe Bend or Bathtub Ring?

The Arizona region of the Colorado River, where Horseshoe Bend is located, is suffering from a 19-year drought – its most severe in 1,250 years. Lake Mead and Lake Powell, two major lakes in the Colorado River Basin supplying millions with water and irrigation, are drying out as higher temperatures reduce the water content of mountain snow packs, creating ever-lower levels for the rivers and streams that depend on snow melt. In addition to the near-certainty of water shortages impacting the populations and agricultural production of California, Nevada, Arizona, New Mexico, Colorado and Utah, the pernicious drought in California from 2011-2017 caused the death of approximately 62 million trees in 2016 alone.

Conversely, another example of shifting and more extreme weather patterns is seen in the Midwest, which has experienced heavy flooding since March. Snowfall in the region was followed by high temperatures, resulting in the snow melting at such a rapid pace that it could not be absorbed by the ground. As of May, the flooding was estimated to have caused $12 billion in damage, impacting homes, businesses and agriculture, and displacing residents.

Sometimes Bad News is Good News

While there is no quick fix to the challenges mentioned above, outdated and ineffective infrastructure is responsible for the loss of billions of gallons of water. Technology provides reason for optimism in this regard.

The water industry is viewed as something of a dinosaur when it comes to effective use of data and technology. Part of the reason for this is the highly fragmented nature of water utilities, which often do not have the scale to deploy technology broadly, and part is due to a cultural reluctance to change. Another headwind to technology and data adoption has been that start-ups, which typically develop new technology, have been too small (and therefore too risky) for water utilities to work with.

Fortunately, the tides have begun to turn as both utilities and residential customers better understand the benefits of data and technology. In North America, nonrevenue water (i.e., water that is produced but is subsequently lost or otherwise unaccounted for) can account for 20% to 30% of a utility’s output. Nonrevenue water can be a result of leaks, unauthorized use (e.g., theft and tampering) and inaccurate billing. Smart metering and infrastructure monitoring technology helps address this problem, providing not only a financial benefit to the utility but also an environmental and social benefit by reducing water wastage.

Crises such as the lead poisoning in Flint, Mich. had the impact of damaging the public’s trust of utilities but also increasing the public’s focus on water quality. There has subsequently been an increase in demand for home filtration systems, which has had the positive impact of moving households away from purchasing single-use plastic water bottles.

Growing public awareness of water shortages and water quality issues has additionally put greater pressure on municipalities and corporations to be responsible users of water. In the U.S., one example is Las Vegas, where in 2008, 70% of the city’s water supply was being used to irrigate residential lawns and the city’s 60-plus golf courses. The growing water crisis led to the South Nevada Water Authority’s “Cash for Grass” rebate that paid homeowners $1.50 for each square foot of grass that was replaced by water-efficient landscaping. Similarly, a strict limit of 2.1 million gallons of water per acre annually was imposed for irrigating all golf courses to encourage, where possible, desert landscaping to replace grass.

Investing in Water

It is possible to find companies that are providing solutions to the environmental and social challenges created by the global water crisis. Some of these companies are focused specifically on helping residential, municipal and industrial customers address water quality, infrastructure inefficiencies and water shortages. Given the scale and scope of global water issues and the impact water has on human health and social and economic development, we see a long runway for growth for these businesses that are addressing such a large and essential need.

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The opinions and views expressed are as of the date published and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

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