Now and in the coming years may be a good time to invest in water. About 2 billion people worldwide don't have safe drinking water, and the United Nations expects that number to increase due to population growth and climate change. Lack of water will contribute to other challenges, such as affecting the food supply, increasing severe droughts and declining water security.
As a chief investment officer and financial adviser, I embrace the importance of finding sustainable business models given the changes ahead. There is also the likelihood that sustainable businesses will receive, over time, a valuation premium.
This is a proverbial triple-play: growing cash flows through sustainable business models, increasing market-based valuations multiples and doing the right thing for the long-term viability of our planet and way of life. The tricky part is: how? With an abundance of opportunity available, let's explore five ways you can sustainably invest in water, an inelastic good that has no substitutes and increased scarcity.
The demand for clean water is ever-increasing due to population growth, urbanization and climate change. In addition, there are substantive barriers to entry into this sector — from land ownership to technology and capital investments.
Investing in a water-related fund is one way to get started, as there are index exchange-traded funds (ETFs) and mutual funds related to the water sector. It's relatively well diversified, but knowing which subsection of the industry you're investing in is essential, just as with any industry.
When you are researching options, make sure that the fund, index or the company offering an individual stock gets more than 50% of revenues or profits directly from the water sector.
Many years ago, I suggested that the telephone bill (landline) would become a less necessary monthly expense and the homeowner's water bill (which back then no one even cared about) would become more front of mind as its costs increase. Using my home finances as a guide, this has come to pass. We've eliminated the landline expenses and are amazed by the increases in the water bill, a cost we didn't consider decades ago.
Investing in a water company (or any utility) is interesting because they're able to have pricing power and pass along increased costs to the consumers who use their products and services.
In the U.S., water companies are very fragmented, with as many as 50,000 water districts owned by small enterprises, families, communities or counties. These smaller entities are finding it increasingly difficult to effectively manage their community's needs, given their aging infrastructure, increased testing regulations and the effects of climate change. They don't have access to capital that larger entities do. The fragmented nature of the industry is what allows for investment opportunities.
Water Testing and Metering
Water testing includes physical, chemical and microbiological testing to meet the demands for the consumption of bacteria- and chemical-free water. Water metering looks at the volume of water residential and commercial buildings use.
There is a growing demand for advanced metering systems to avoid water leakages and waste, including combining technology and water metering. The smart-water-metering market is expected to reach $9.6 billion by 2024 (up from about $5.9 billion in 2019).
Smart meters have data loggers, sensors, communication devices and data management systems that transfer information on demand. The focus is on digitizing water-metering systems because they help avoid water leaks and loss. Over the next few years, there will be an increased opportunity to invest in technology related to water metering.
Only 3% of Earth's water is freshwater. Most of the water worldwide is seawater, which is undrinkable unless treated. The treatment process to remove the salt and minerals for drinking is called desalination.
As the demand for drinking water increases worldwide, so will the need for desalination. According to Adroit Market Research, the global water desalination market is expected to surpass $27 billion by 2025.
The effects of climate change have led to droughts in various parts of the world. Aside from protecting our current water supply (infrastructure), we also have to consider where to get more water, which is where desalination comes into play.
However, desalination is very energy-centric and costly to build and manage. Emerging technology within the desalination sector is promising, especially for investors.
Our nation's infrastructure in the water field is especially troublesome, as we have recently seen failures of several municipal water systems in places such as Jackson, Miss. This is not surprising given the years of warnings of warnings of poor water infrastructure by engineers and infrastructure experts — in both private and public sectors.
The water infrastructure includes anything that helps treat and deliver water from its source to homes and buildings. This complex infrastructure includes groundwater wells, reservoirs, storage tanks, dams and pipelines.
According to the American Society of Civil Engineers, a water main breaks every two minutes, resulting in an estimated loss of 6 billion gallons of treated water daily, which is the last thing we need.
In November 2021, President Biden signed the Infrastructure Investment and Jobs Act, which allots $55 billion for federal drinking water programs and expanding water infrastructure. At least $15 billion of the budget will go toward replacing lead water pipes, resolving (and hopefully preventing) issues similar to those in Flint, Mich.
Signing this bill into law demonstrates the apparent demand for clean water. It's clear now that voters see clean drinking water as a right, and after years of putting it off, now is the time to take care of the infrastructure that provides it.
For more than 15 years, we have advocated the water sector investment case. This resource is increasingly under supply stress. As consumers of water in all its forms and through myriad industries and sectors, we should understand the importance of this vital resource.
The economics of water is compelling. Water is an inelastic demand good — that is, consumers will continue to pay the increasing costs since no one can go without water. Simply stated, there are no substitutes. This is why water, as an essential commodity, is a worthy investment focus for anyone with sustainability or longevity in mind for their portfolio.
ALINE Wealth is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS®, is the Chief Investment Officer and Founder of ALINE Wealth, a wealth management firm that specializes in providing clients with financial planning advice for every stage of their lives. Along with Peter’s deep financial wisdom, he adds considerable acumen in philanthropy, helping clients navigate family trusts, institutions, and nonprofits.
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