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Investing in water: Using scarce resources sustainably

November 8, 2022

reading time: 6 Minuten

by Tobias Aellig, LGT Equity Analyst

Invest in water

Global demand for fresh water is rising sharply, while at the same time it is becoming increasingly scarce. Investors can help to avoid water crises with the right investments.

Although 70% of the earth’s surface is covered with water, only 0.5% thereof is accessible freshwater. What’s more, freshwater is very unevenly distributed geographically, with water-rich countries such as Switzerland at one end of the spectrum, and countries like Ethiopia and regions like California at the other. And because water has a closed cycle, its supply is limited. But demand for water is continuously growing.  

Water scarcity invest
Like desert soil: The bottom of a fish pond in Reckahn in Brandenburg. © Jochen Eckel/SZ Photo/laif

Numerous factors are exacerbating the problem of water scarcity, including rapid population growth, urbanization, increasing demand for water in the agricultural, manufacturing and energy sectors, and pollution. Then there’s climate change.

The summer of 2022 will likely go down in history as Europe’s worst drought in more than 500 years. Extreme weather events such as these are the result of global warming – and are expected to occur more frequently in the future, therefore posing ever-greater challenges for humankind.

The World Resources Institute (WRI) forecasts that by 2030, demand for freshwater will exceed supply by 56% unless measures are taken to counteract this trend. The United Nations has recognized the need for action and made clean water and sanitation one of its 17 Sustainable Development Goals

Sustainable thematic investing
There is a strong need for investments in water infrastructure around the world. © GettyImages/Seamind Panadda/EyeEm

Benjamin Franklin’s statement “When the well is dry, we know the worth of water.” is a rather accurate description of how this vital resource is currently treated. Many governments, companies and other stakeholders neglect water risks until a crisis occurs.

To prevent water crises and ensure long-term access to clean water, water management must become more sustainable along the entire water value chain. Massive investments are needed to this end. Investments that both companies and investors can benefit from.

Eliminating inefficiencies: Water infrastructure and wastewater treatment

In its simplest form, the water value chain consists of four steps:

  1. Water procurement
  2. Transport
  3. Use
  4. Water and wastewater treatment

To improve water supply, inefficiencies along the value chain must be eliminated.

Water stress
Regions like California will experience more and more water stress. © istock/Peter Schaefer

There is a strong need for investments in water infrastructure around the world. While developing countries are focusing on building infrastructures, developed countries are looking to upgrade and expand their infrastructures. In the United States, for example, 14-18% of treated drinking water is lost every day due to leaks and burst pipes. In cities like Delhi, this figure is over 50%. These water losses also result in significant revenue losses for utilities (so-called non-revenue water). The amount of water that is “lost” each year could fill Lake Zurich over 32 times.

Companies that help make water distribution more efficient are likely to benefit from necessary infrastructure investments. These include providers of reliable piping systems and companies that offer possibilities to better monitor supply systems.

Invest water
Limited freshwater asks for better water use: A water treatment and purification station in Le Grau du Roi. © Matthieu Colin/hemis/laif

Wastewater management is another area where better use can be made of the limited freshwater supply. An enormous amount of wastewater is produced globally – and this trend is growing. By way of comparison, the global volume of wastewater is roughly equivalent to five times the volume that flows through Niagara Falls each year. And astonishingly, around 80% of this water returns to the ecosystem without being treated or reused. This is very concerning from an environmental perspective, but it means there is a lot of potential for relieving the pressure on scarce water supplies. How? By treating wastewater and reusing it as often as possible.

The companies that are likely to benefit from this necessity to recycle water include developers and operators of water purification plants, as well as suppliers who provide the corresponding equipment, such as filtration systems.

Investing in water: Long-term trends

Invest in water
According to forecasts by Global Water Intelligence, the global water market is expected to grow to USD 915 billion in 2023. © GettyImages/Mystockimages

Although the global water market comprises companies from many different areas, the majority are active in the utilities and manufacturing sectors. Utilities treat the water, supply households and businesses, and then take care of the disposal and treatment of wastewater. In contrast, the majority of the manufacturing companies are suppliers to the utilities, and sell filtration, piping and pumping systems, and water meters, for example.

The water industry is driven by a number of long-term trends, including population growth. In the coming decades, the following developments are expected to result in greater money flows into the water industry:

  • The implementation of stricter environmental requirements
  • Increasing water stress
  • A large pent-up demand for infrastructure investments

The infrastructure package adopted under President Biden, for example, provides for an additional USD 55 billion for water-related investments.

According to forecasts by Global Water Intelligence, the global water market is expected to grow to USD 915 billion in 2023, which represents a 50% increase compared to 2014. 

Sustainable use of water

LGT sustainable thematic framework: Focusing on positive contributions

Long-term investors looking to add investments in the water industry to their portfolio have a number of different options. One is to invest in the shares of companies whose products and services address water risks. These range from smaller companies that focus on water to larger groups whose water exposure only accounts for a part of their overall business, despite the strong influence they have in this area. In addition to avoiding concentration risks, it is important to keep in mind that manufacturing stocks tend to be somewhat more cyclical than utilities stocks. Another, more diversified solution would be to opt for actively managed funds or ETFs that invest in different companies and segments in the water industry.

Interested in learning more?

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Title image: © GettyImages/Bertrand Godfroid

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