Investing in Water Technology and Desalination Stocks & Companies

What Is the Global Water Crisis and Why Is It Relevant?

Water is one of the key building blocks of life. While the Earth has lots of water, only about 2.5% is fresh water that we can use for drinking, cooking, and hygiene. Around 70% of that fresh water is contained in glaciers, ice, and snow, so this leaves less than 1% of Earth’s water accessible for human consumption. Making the problem even more complex is the fact that this precious resource isn’t evenly distributed across inhabited regions. According to the UN’s Food and Agriculture Organization, 33 countries depend on other countries for over 50% of their renewable water resources.

According to the United Nations, water scarcity already affects every continent, and the problem is getting worse. On the demand side, water use has been growing at more than twice the rate of population increase in the last century, and an increasing number of regions are reaching the limit at which water services can be sustainably delivered.

785 million people – one in nine people globally – lack ready access to clean water. And it’s not only about the ability to cook with or drink fresh water. Promoting good hygiene is one of the most cost-effective health interventions there is. According to Wateraid.org, a newborn dies every minute due to some infection caused by polluted water. Diarrhea caused by dirty water and poor toilets kills a child under five every two minutes. In 2012, the World Health Organization calculated that every dollar invested in water and toilets returns an average of four dollars in increased productivity – unsurprising, considering that people, mainly women and girls, spend an estimated 200 million hours hauling potable water every day.

Water crises are not limited to underdeveloped areas. Political crises between less-than-friendly states can affect water access as is the case between Israel and Palestine, something that is now controlled through an international treaty. Cape Town in South Africa had a brush with disaster in 2017-2018, and almost became the first major city in the world to potentially run out of water. That disaster was averted, thanks to halving water usage and heavy rains that arrived in June 2018. If Cape Town is having such issues with its population of 434,000, what will happen to metropolises of millions like Chennai?

Water is clearly a scarce resource. Besides the feel-good aspects of trying to solve the problem through international bodies, nonprofit organizations, and charities, there is money to be made by investing in water technology.

How to Invest in Water?

Investing in Water Infrastructure

As always, startups are driving much of the innovation in water technology. In a previous piece, we looked at seven water technology startups working on next-generation water infrastructure. Whether it’s detecting contaminants, managing infrastructure assets, or reducing water waste, venture capital is helping us use water more efficiently. (On average, utilities worldwide lose more than 30 percent of the water they distribute in their networks – a mind-boggling number.)

Agricultural uses for water also seems to be low hanging fruit for efficiency gains as about 70% of the world’s fresh water supply goes toward irrigating crops. At least eight water tech startups are developing IoT sensors and imaging solutions to optimize water usage for crops.

Startups might be leading the way in innovation, but you shouldn’t underestimate the opportunity presented by the modernization of water infrastructure. There are more than 1 million miles of underground pipe in the US, much of which is almost a century old and in dire need of replacement. A listed US water utility stock called Essential Utilities (WTRG) (previously known as Aqua America) is tackling the modernization problem by acquiring customers from municipalities, then making the much-needed infrastructure investments. These investments are paid for by the consumers in the form of infrastructure surcharges regulated by each state. In the end, it’s a win-win as developments in infrastructure decrease the cost of water in the long run.

The added benefit of investing in WTR is its status as a dividend champion. Not only did it pay dividends for 27 years in a row, but it also increased those dividends every single year. Over the past ten years, that increase has averaged around 7.3% which is some remarkably good growth when compared to traditional utility companies.

Are There Any Water ETFs Available to Invest In?

We love Exchange Traded Funds (ETFs) because they offer rules-based exposure to investment themes using a diversified portfolio. Since 80% of active fund managers can’t consistently beat their benchmarks, ETFs offer a good alternative for diversification with liquidity and lower fees than mutual funds. There are now more indices than stocks available on the market, so we looked around and found some water ETFs to invest in.

The Invesco Water Resources ETF (PHO) is the oldest and largest water ETF on the US market, investing in U.S. water companies only. Launched in 2005, it tracks the Nasdaq OMX US Water Index with net assets just above $1 billion (as of June 2020). The ETF allocates almost half of its assets to the industrials sector and only around 20% to utilities which might seem strange at first glance. The investment thesis here – according to Bloomberg – is that utilities are regulated and could be subject to price controls and usage limits. On the other hand, industrial companies that conserve, purify, and treat water as well as their equipment manufacturers are pure-play investments on water scarcity.

There are at least four other water ETFs listed on the US market, and of course, global ETF leader iShares also created its own global water fund which is listed in Europe.

Investing in Water Desalination Stocks and Companies

Since 97% of the world’s water exists as saltwater, that’s one place we might look for a solution to the water crisis. Water is neither created nor destroyed through natural processes, which means the global water crisis would simply go away if there was an economic way to turn saltwater into fresh water. The process of turning salt water into fresh water is called desalination.

There are many different ways to go about water desalination, but the predominant technology in terms of growth and installed capacity is called reverse osmosis. During the reverse osmosis process, water is pumped through a semi-permeable membrane which acts as a filter, letting water through but rejecting salts. Costs vary considerably depending on the water’s salt content, the type of the reverse osmosis process, and the size of the desalination plant.

At the moment, the cost of seawater desalination is higher than traditional water sources (about double the cost of natural freshwater in the case of a plant near San Diego), but it is expected that costs will continue to decrease with technology improvements, lower cost of energy, and economies of scale. In many cases, the population doesn’t have a choice, and only has access to desalinated water. At the moment, 4% of the global population get their drinking water from desalination plants so it’s still a relatively small contributor, but this means lots of room for growth.

We’ve previously looked at the top-10 and top-20 engineering, procurement, and construction contractors for desalination plants to see if any of them provide pure-play exposure to desalination technology. We concluded that most of these companies were major global corporates with many other divisions, so none of them qualified as pure-play investments. AquaVenture Holdings, a small-cap company that IPO’ed on the NYSE in 2016, met the same fate when it was acquired by Culligan Water in March 2020. WaterFX and its planned Californian desalination plant seems to have disappeared from the face of the earth leaving two empty websites and puzzled journalists in its wake. The one pure-play reverse osmosis desalination stock still going strong is Caribbean company Consolidated Water (CWCO). That might be because all of its desalination plants are in areas of significant water shortage where the population has no alternative.

Other companies are developing forward osmosis, a technology that promises better efficiency than its predecessor. Oasys Water, with its award-winning proprietary technology, would be a great investment opportunity, assuming the company does a long-overdue IPO. Another player that’s listed on the London Stock Exchange, Modern Water, is working on portable forward osmosis desalination plants, but its share price has been beaten to death over the past years.

Water technology investments are a small niche at the moment. Water stress is a problem that needs to be solved, and we expect investment opportunities to grow over the coming years. At the moment, the handful of opportunities are only enough to act as a satellite investment around a larger green technology portfolio or a renewable energy portfolio.