Recent issues of The Wall Street Journal (September 12th’s edition ran “ESG Does Neither Much Good nor Very Well”) and The Economist (July 23rd’s cover was “ESG: Three Letters that Won’t Save the Planet”) illustrate a growing backlash against “ESG” even as scrambled supply chains suffer further interruptions from droughts and flooding. A 60/40 portfolio, made up of the SP500 SPX and the Barclays U.S. Aggregate, lost 16% in 2022; after 2008’s 21% loss, this was the second worst performance since 1976, Barron's reports. Seemingly disparate recent headlines relating to ESG, water troubles, and market trends may in fact offer opportunities for investors. The water industry, in particular, warrants a closer look.
Global water security is a significant impact and investment opportunity. The World Economic Forum lists finance as a key to achieving global water security as called for within Sustainable Development Goal 6 on water and sanitation. Investors may in particular seek opportunities in initiatives related to irrigation, distribution, and water treatment, and especially now, as investors look for recession-proof businesses to help portfolios during periods of market and economic weakness. The public sector alone is unable to bridge vast gaps in water-related investment. The Environmental Protection Agency notes that water infrastructure in the United States needs over $400bn in new investment to achieve water security for the future. Many countries face the same problems, prompting even the World Bank to support water utility privatization. European countries, such as the United Kingdom, France, Portugal, Spain, Italy, and Switzerland, are all beginning to spearhead privatization initiatives of water management companies with success.
Not everyone agrees that water should be under private control. Thomas Stephens, an environmental justice activist, told listeners of Democracy Now that “the very essence of life itself, water, is being privatized and being subjected to a corporate bottom-line approach that is in violation of the human rights of the people, [especially] the most vulnerable people” While the privatization of the water industry can improve overall water security, less equitable access to water can result. The Guardian underscores that “water isn’t a private commodity, but a necessity of life, making access to it a public good. And steps need to be taken to ensure that access remains open.” Private water suppliers generally operate their businesses with little economic regulation and tend to raise prices. Thus, growth in private water companies could lead to socioeconomic inequities and, on a global scale, create conflict between developed and developing nations. Nevertheless, as Israel shows, a solution may exist. Improving security solely by increasing supply will be extremely difficult and expensive. Instead, governments will need to focus on managing demand by raising the price of water. Israel charges a high price for water but achieves its goal of water security while remaining fair to its people by subsidizing water costs for those on social welfare. Water’s high price encourages Israelis to conserve water or implement technological advancements to improve water-use efficiency. By contrast, water is extremely cheap in most other parts of the world. Low prices, while convenient for consumers, lead to immense waste. Israel has a remarkably low leak factor of about 7-8%, because it is cheaper to fix leaky pipes than waste water. In contrast, some areas in the United States have supply systems that lose up to 50% of the water flowing through them.
Other niche opportunities for investments by private capital investors lie in the development of cutting-edge technologies that monitor how water is used and provide insight into best practices for water security. McKinsey found that “Israel has leveraged its culture of innovation to establish itself as an international hub for water-technology development, increasing its water security while establishing a local multibillion-dollar industry.” Given the inherent scarcity of water, technological innovations made by these companies are indispensable. Desalination, wastewater treatment, and water recycling technologies are all areas with high growth potential. In fact, the water and wastewater treatment market is projected to grow from USD 301.77 billion in 2022 to USD 489.07 billion in 2029 at a CAGR of 7.1%, according to one study. In sum, investors are positioned to create positive change while simultaneously generating consistent returns. Water investments, with appropriate safeguards to protect the most vulnerable, can have real impacts on sustainability goals, address water security crises, and may produce solid financial returns.