Water is a natural resource that is often taken for granted. As fresh water grows scarcer, it could represent an opportunity for investors.
Investing in Water for a Sustainable Future
The world is facing critical water shortages, and companies that focus on addressing the growing water crisis could represent key long-term growth opportunities.
Water is essential to the production and delivery of nearly all goods and services. Many businesses are reliant on a sufficient flow of clean water to operate and realize their growth ambitions. Overconsumption of water, water pollution, environmental degradation, and changing climatic conditions are making clean water an increasingly scarce resource.1 As the world population grows and competition for water resources between industry sectors intensifies, nations are set to experience a 40% shortfall in water by 2030.
As these demands for clean water increase, companies involved in water-related business activities stand to grow in the coming years. Markets seem to be rewarding these companies as well. Listed companies involved in water-related business activities, as represented by the S&P Global Water Index, have historically exhibited higher risk-adjusted returns than the broad global equity market.
Given that companies can have multiple business segments and not all may derive from water-related business, it is helpful to separate those with pure exposure to water and those with mixed exposure.
Companies involved in water-related business activities can be split broadly into three types.
The first is water utilities companies, which are responsible for treating and distributing drinking water to the public. Many water utilities companies operate in an environment of limited competition as a result of government regulations. Hence, they are regarded as stable businesses with the potential to generate consistent, stable cash flow streams, with lower volatility than other industries. These companies also tend to pay reliable dividends, which can be attractive to many investors.
The second is water infrastructure providers, whose products and services are related to the construction, planning, design, or engineering of infrastructure that improves water efficiency and delivery.
The third is companies that supply equipment, technology, or services for the treatment, separation, or purification of water. This category also includes companies that promote water conservation and the efficient use of water, such as meter solutions and leakage detection. All these companies represent the areas of development that could help to solve the growing water crisis.
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