Water is commonly thought of as fundamental to life, but water usage is also pervasive across industry. So, when it comes to the pressing issue of water scarcity, we should not just focus on government policy and infrastructure, but also on how companies manage their water utilisation. And there are exciting investment opportunities to be found in businesses creating innovative solutions to use water more efficiently.
Water: a crucial industrial resource
The United Nations has warned that global demand for fresh water will outstrip supply by 40% by the end of this decade. This increased pressure on water resources is being driven by multiple factors including the climate crisis, population growth and changing consumption patterns.
However, the gap between supply and demand is also being exacerbated by waste. It is estimated that around 1.7 trillion gallons of water are wasted globally each year, with much of this wastage being attributed to ageing and inadequate infrastructure, and inefficiency in how water is used. Clearly, this is a topic of great importance and potential for investors. Expenditure on global water infrastructure and repair is expected to grow by over 6% per annum up to 2030.
The theme of water stress also cuts through to commercial economic activity. Water is used broadly across the economy, there is almost no economic activity has doesn’t have water involved in it at some stage. Around 19% of total water withdrawals are used for industrial purposes, such as the production of clothing, paper, food and energy. Unlike energy, water is not a commodity that can be easily substituted or displaced by technology. Consequently, companies increasingly recognise that water scarcity is a matter that can’t be disregarded.
Innovative water solutions
The business of water is becoming a billion-dollar market in itself, with advanced technology becoming ever more prominent. Digital water management uses blockchain, artificial intelligence, digital sensors and smart meters to enable water quality and control, as well as to remotely monitor and manage responsible water use. In particular, intelligent water solutions are being harnessed by the agricultural industry to enable real-time monitoring of irrigation systems, as well as using satellites to better assess the needs of crops. The improved processing of wastewater can be a cost-effective option for many businesses and desalination processes – such as low-pressure membrane technology – are also gaining traction in line with the growing demand for high-quality water; the desalination market is expected to more than double in size by 2031, with an annual growth rate of 9%.
Optimising water management for chip manufacturers
It may be surprising, but the production of semiconductors – a vital component in most digital devices – is heavily reliant on water. Water is used to rinse and clean the silicon wafers used in microchip manufacturing – but this process can’t use just any water, it has to be ultrapure water which is thousands of times purer than drinking water. And this process is wasteful – it takes around 1,400 -1,600 gallons of municipal water to make 1,000 gallons of ultrapure water; semiconductor fabrication plants can use up to 5 million gallons daily. The need to reduce water consumption and ensure greater sustainability is prompting manufacturers to invest in better water facilities – so that water can be reused for the cooling of equipment and recycled as feedwater for ultrapure water systems.
This issue is gaining greater urgency as many nations look to re-shore semiconductor manufacturing. In the US, the Biden administration’s CHIPS and Science Act is bolstering the US semiconductor supply chain through incentives. It is estimated that for every new semiconductor facility, 5-8% of funding will be spent on water infrastructure, either to produce ultra-pure water or to reuse water via a closed-loop system. Amid the growing demand for semiconductors, the long-term potential of this water-based theme is compelling.
Cleaning up forever chemicals
A consequence of business has created another long-term opportunity for water solution innovators. Water supplies have become contaminated by so-called forever chemicals.
Technically known as per-and poly-fluoroalkyl substances (PFAS), these chemicals have been used by industry since the 1940s due to their effectiveness in resisting water, grease and stains, as well as putting out fires. The downside of these ‘forever chemicals’ is that they don’t break down in the environment and heavy use has seen them leach into water systems over time. Human exposure to PFAs is universal – studies around the world have shown that nearly everyone has some form of contamination in their body. And their environmental presence is widespread, PFAs have even been found in the Arctic. Worryingly, research has linked these chemicals to a variety of health issues, and is already leading to several legal suits where settlements could eventually be on a par with those previously paid out by the tobacco and asbestos industries.
Yet, the need to remove these contaminants from water supplies is creating a significant tailwind for water solutions. The opportunity set is broad and includes consulting on resolution plans, the manufacturing of testing equipment and producing filtration products to remove these chemicals from the water supply.
Empowering effective water management
The issues around water scarcity and how we manage water usage require immediate, as well as long-term, solutions. With consumers, governments and businesses sharpening their focus on this important theme, the opportunities for investors are proving to be both diverse and resilient. In particular, the water value chain offers investors exposure to both defensive and cyclical opportunities, across the world and across a wide range of industries.
At BNP Paribas Asset Management, our Aqua Strategy is dedicated to companies whose activities are primarily related to water management: water infrastructure, treatment and purification, and municipal services. These often-high-quality companies can offer attractive growth prospects and also help to deliver a more sustainable future.
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