Water is often overlooked as an investment. But while 71% of the Earth’s surface is underwater1, potable water – clean, drinkable water – is scarce, especially in water-stressed regions.
Water plays a crucial role in ~60% of global GDP2, touching all economic and social sectors in some form. However, its economic worth is not well understood. Unlike other commodities it cannot be substituted, and high prices do not ‘cure’ high prices. Water demand is mostly inelastic, albeit some discretionary uses are more price sensitive. Despite all of this, it is undervalued.
But how do we truly value water? Access to clean water and sanitation is a human right in of itself and “essential to the realisation [sic] of all human rights.”3 The absence of an agreed economic value to plug into financial statements and policymaker models condemns water to remain undervalued. But, applying numerical values to something so precious and fundamental to life can be reductive and distortive. Certainly, this is a more complex discussion than we can fully address here.
Our focus is on water in the U.S. economy. In this piece, we aim to increase awareness of the investment thesis (and why we believe it will strengthen) and demonstrate how water can be a solution for a diverse range of individual investors, whether seeking impact, alignment with climate change solutions, robust risk-adjusted returns, or an inflation hedge. We will also highlight ways to get exposure to the theme.
Why Water Is A Megatrend
Water investing is a multi-decade megatrend underpinned by capital spending that is both necessary and already underway.4 It’s not often the first ‘megatrend’ that comes to mind. Perhaps that’s AI? However, AI needs water. Many data centers are water-cooled, and the production of semiconductor chips requires ultra-pure H2O. There is no getting away from water. From agriculture to energy to industry to cutting edge technology, water is essential to U.S. economic growth.
So, it may be shocking to learn that we are incredibly behind with critical water infrastructure spending. For 2024, there is an estimated gap of $91 billion between actual spend and infrastructure needs, with only 66% of needs being fulfilled. By 2033, the cumulative gap could be over $1 trillion.5 The gap may continue to widen, but it cannot be avoided forever.
Globally, water infrastructure and sanitation are lacking in many developing countries, whereas infrastructure in developed countries is often outdated and in disrepair. The World Bank estimates that as much as $7 trillion is needed by 2030 “for global water infrastructure, if we are to meet our water-related SDG commitments and address decades of underinvestment.”6
Water and Climate
As climate-focused investors, our primary interest in water is its alignment with climate adaptation. The effects of climate change are directly observable via the hydrological cycle, for example via shifts in patterns of precipitation, faster evaporation in drier locations, as well as changes to the volume of water held in the atmosphere. The planet already experiences wet and dry extremes, which climate change exacerbates. Water investments are needed to adapt to ever more intense variations. For dry extremes, the focus is conservation, recycling, and desalination technologies etc. Whereas, in wet extremes, technologies such as drainage, pumps, and flood defenses will be key.
Numerous locations are facing water issues. Last year, Mexico City was lucky to avoid “all-out disaster” as insufficient rain led to “dangerously low” reservoirs, further compromised by leaking infrastructure. When the rain did arrive, returning the reservoirs to more than half of their capacity, it caused severe landslides.7 Barcelona also recently faced drought forcing local farmers to drastically reduce water use, and therefore the crops they could plant. Additional restrictions were placed on consumption across residential, commercial, and municipal uses.8
In the United States, some of our driest regions are popular with data centers, meaning droughts will bring them into competition with agriculture and residents. Take Arizona: Phoenix alone has more than 58, which, in aggregate, could be using up to 170 million gallons per day for cooling.9 While some data centers are moving to alternative cooling methods, some of those require more energy.
Water is inextricably linked with climate via the “water-energy nexus.”10 Water services and distribution are energy intensive. Around 12% of California’s energy use,11 for example, is dedicated to water distribution, and many energy generation sources require water.
Fossil fuels are also more water intensive compared to wind and solar. However, solving for water shortages via desalination will require significant energy. The U.S. is experiencing significant electricity load growth for the first time in decades, given data center proliferation and industrial uses, meaning the pressure to add more natural gas and other baseload generation is growing. Solving for carbon emissions does not necessarily solve for water. However, solving for water may generate more emissions.
So Why is Water Undervalued?
Water is a complicated resource. Demand may be greatest in areas of dense population, industrial activity, or farmland. Supply, conversely, may be dispersed across several geographies in disparate jurisdictions. As a result, water governance is a formidable task.
When water is priced, the value ascribed is often limited to the cost of the physical supply, excluding important environmental costs and other related resources.12 Water pricing certainly doesn’t comprehend water as a human right, nor its aesthetic and recreational value.
Unlike carbon emissions, for which there are standardized calculation protocols, increasing mandatory reporting requirements and markets for offsets, the landscape for water is not as mature. Data and reporting mechanisms need to improve if water is to be better understood, managed, and priced. Corporate internalization of water prices can help, but adoption has a long way to go. Investor coalitions such as the Valuing Water Initiative13 are working hard to ensure water is woven into decision-making across various stakeholder groups.
Per Matt Diserio of Water Asset Management, within the investment world, water has not received the deep scrutiny to which other commodities (e.g., agricultural products, metals, and fossil fuels) are subject. It has therefore not benefited from broad sell-side research coverage. Where it is covered, categorizations may be sub-optimal: water utilities are lumped in with other regulated utilities and testing and measurement services are grouped with medical equipment. Subsequently, there are few individuals who combine solid financial and water expertise.
The Investment Outlook
Challenges aside, the water theme is increasingly vibrant. There are multiple ways to invest, depending on an investor’s profile. In the public markets, while not the most exciting businesses, water utilities have several attributes that make them attractive. Water Asset Management notes that they benefit from “sticky” customers and long-term contracts, and have high visibility cash flows. When utilities spend on infrastructure (CAPEX) this translates into rates and therefore revenues. As pricing tends to exceed inflation, they can be a good hedge.14 The flip side is that water is getting more expensive for end users, which includes many communities already facing economic difficulties.
Zooming out beyond utilities, there are numerous public companies with water-related products and services. The value of water divisions within public companies is undergoing a shift. Having previously been seen through a purely cost center lens, they are now recognized for strategic potential. Some companies have deployed commensurate capital and are experiencing profitability.15
In private markets, innovative water technologies provide many opportunities. Historically, only a small amount of early-stage climate tech funding has been dedicated to water, partly owing to a lack of awareness. Just $455 million of $53 billion (<1%) of European climate tech funding went to water startups in 2021. While the market is presently small, it is an exciting opportunity for those keen to engage and come up the learning curve.16
Water innovations encompass sensors that support more precise irrigation systems, filtration and treatment technology that can remove Per- and Polyfluoroalkyl Substances (PFAS), a.k.a. “forever chemicals,” as well as decentralized systems that can localize treatment and re-use. As you can imagine, the use cases and potential positive impacts are abundant.
How to Invest in Water
At Gitterman Wealth Management, water is a key investment theme. We offer the Water Asset Management Global Water Equity strategy in our Unified Managed Account (UMA) and as a standalone investment. The strategy invests in water utilities and other public companies, providing exposure to climate adaptation while delivering solid returns. The strategy also includes public companies leading innovations such as Xylem, Veralto, and Valmont. For investors unable to participate in venture capital, this is a great way to be at the forefront of technological development.
Water Asset Management was one of the first managers to exclusively invest in the water theme, doing so since 2005. The firm also has a partnership with WaterAid, a U.S.-based nonprofit seeking to “transform lives through sustainable and safe water, sanitation, and hygiene.”17
Other public markets investments exist, including mutual funds and ETFs that track the S&P Global Water Index. Its holdings comprise water utilities as well as companies providing infrastructure and equipment etc.18
There are also various private markets and alternative investment options. These range from dedicated venture capital, private equity, and infrastructure funds, to vehicles that invest in water rights, to green bonds focused on water, to derivatives. While less common than carbon markets, water trading programs exist and may become more widespread over time, requiring broader financial markets participation for liquidity and longevity.
While a thematic investment is necessarily concentrated, the local nature of water markets and their associated regional regulatory regimes reduce the concentration risk. Per Water Asset Management, this means no single local event can derail the entire investment opportunity.
Conclusion
This is an acutely important investment theme. We expect to see increasing focus from financial markets and policymakers over the coming years, regardless of which party is in control of Washington D.C.19 We therefore anticipate the expansion of viable public and private markets investment opportunities.
Utilities are expected to increase CAPEX spending while also investing in technologies that can support conservation, recycling, and re-use. Economic sectors that rely heavily on water will face greater scrutiny over water use, especially if they are operating in water-stressed locations where competition is high, especially from residential and agricultural uses. This means expanding opportunities for innovations that can manage usage more efficiently and effectively.
This heightened focus will raise the profile of water as an impact investment and a philanthropic theme. Many technologies that can solve commercial and industrial challenges also have a role to play in communities across the world.
The words of Matt Diserio, President of Water Asset Management say it best. “In the end, it all comes down to water. Without water, everything is not only worth less, it’s worthless.”20
As always, if you would like to explore the themes raised above and learn more about our thematic investment offerings, please click here to schedule a call.
“How Much Water is There on Earth?”, Water Science School, USGS, November 13, 2019 – https://www.usgs.gov/special-topics/water-science-school/science/how-much-water-there-earth ↩︎
The WWF estimated that “the total quantifiable economic use value of water in 2021 at approximately US $58 trillion, equivalent to 60 per cent of global GDP in 2021.” – High Cost of Cheap Water: The True Value of Water and Freshwater Ecosystems to People and Planet, (2023, October), World Wide Fund for Nature (WWF) ↩︎
United Nations, International Decade for Action ‘Water for Life’ 2005-2015 – https://www.un.org/waterforlifedecade/human_right_to_water.shtml ↩︎
“Global Listed Water Equities 2024 Investor Meeting”, Matt Diserio, Water Asset Management, October 2024 ↩︎
Bridging the Gap: The Power of Investment in Water, (2024), Value of Water Campaign/American Society of Civil Engineers (ASCE) ↩︎
Closing the $7 Trillion Gap: Three Lessons on Financing Water Investments from World Water Week, World Bank, September 16, 2024 – https://blogs.worldbank.org/en/water/closing-the–7-trillion-gap–three-lessons-on-financing-water-in ↩︎
“How Mexico City Averted All-Out Drought”, Averbuch, Maria, Bloomberg, October 14, 2024 – https://www.bloomberg.com/news/features/2024-10-14/mexico-city-day-zero-never-came-how-the-city-avoided-running-out-of-water? ↩︎
“Catalonia’s farmers demand more help over drought”, Hedgecoe, Guy, BBC, February 27, 2024 – https://www.bbc.com/news/business-68401814 ↩︎
“Data Centers draining resources in water-stressed communities”, University of Tulsa, July 19, 2024 – https://utulsa.edu/news/data-centers-draining-resources-in-water-stressed-communities/ ↩︎
The Water-Energy Nexus: Challenges and Opportunities, U.S. Department of Energy (DOE), June 2014 ↩︎
The Future of Water Resilience, J.P.Morgan/ERM Sustainability Institute, October 2024↩︎
“Technical Report: Water Pricing, Costs, and Markets,” Global Commission on the Economics of Water, February 2023 ↩︎
“Global Listed Water Equities 2024 Investor Meeting”, Matt Diserio, Water Asset Management, October 2024 ↩︎
“Why Everyone’s Betting BIG on Water in 2024”, November 8, 2024, Antoine Walter – https://www.youtube.com/watch?v=4x8ArbmIgCY ↩︎
“Investing in Water: A Practical Guide”, Uplink/World Economic Forum, June 2024 ↩︎
“Our Global Strategy: 2022-2032”, WaterAid, (n.d.) ↩︎
S&P Global Water Index, S&P Global, (n.d.)- https://www.spglobal.com/spdji/en/indices/sustainability/sp-global-water-index/#overview ↩︎
“How to Build a Climate-Friendly Portfolio”, Morningstar, November 8, 2024, https://www.morningstar.com/sustainable-investing/how-build-climate-friendly-portfolio ↩︎
“The Great Asset Repricing: It All Flows Back to Water”, The Great Repricing Report, Gitterman Asset Management, 2021 ↩︎