Watering your portfolio

With water scarcity on the rise, see how your investment can help.

05 Mar 2019

Key takeaways

  • Over 1 billion people today lack access to safe drinking water.
  • With threats to water supplies ever present, it is important to consider how water and related industries can fit into a sustainable portfolio.
  • Find out more in the UBS Chief Investment Office report Longer Term Investments – Water Scarcity (PDF, 1 MB).

Access to clean water is far from guaranteed around the world, and growing pressures from climate change and population trends make water a resource of increasing importance to sustainability advocates.

The recent water crisis in Cape Town, South Africa—where the city neared "zero day" when taps would go dry—is just one example of the growing challenges in providing clean water to the planet's 7.5 billion humans. Indeed, the World Economic Forum has identified water scarcity as one of the biggest risks facing humankind. With threats to water supplies ever present, it is important to consider how water and related industries can fit into a sustainable portfolio.

Growing pressure on the world's water resources

While areas around the U.S. and the world are seeing new strain on water resources, many areas have had long-standing issues with water accessibility. Laura Kane, UBS Thematic Investment Strategist for UBS, points out that "over 1 billion people today lack access to safe drinking water."

While problems of water scarcity are felt most acutely in emerging economies, you don't have to look far in the U.S. to see the increasing strain being placed on water supplies and related resources. For example, droughts in California and infrastructure problems in Flint, Michigan, both highlight opportunities for domestic water investment.

Globally, "we estimate the water market is worth about $600 billion annually," says Kane. By allocating capital to various sectors of the water market, ranging from wastewater treatment to water distribution, investors can potentially earn an attractive return while aligning their portfolios with their desire to help address a major societal issue. And, according to the UBS whitepaper Longer Term Investments—Water scarcity (PDF, 1 MB), such investment opportunities should remain valid for decades.

Opportunities and risks with water-focused investments

What makes water a potentially attractive investment? For one, while many industries follow economic trends, the demand for water is consistent. Unlike cyclical resources like heating fuel, for example, water has strong demand year-round; and unlike the energy sector, there are no substitutes for water.

Water sustainability also offers a high likelihood of private-public partnerships. As municipalities struggle with water demand and limited budgets, private companies can enter the picture to provide capital and other resources, and take a cut of the revenue. While such partnerships are common in toll highway projects in the U.S., they have taken less of a hold in the water sector. However, projects in places like China, Jordan, Panama and Tunisia show that challenges in public-private water partnerships can be overcome.1

In the U.S., many municipalities and states regularly invest in water resources. "California put billions toward improving the state's water resources," says Kane. "Similar proposals are coming out of Texas and New York." This is evidence of the upside potential in water infrastructure projects. Public policy changes offer a negative risk, however, as laws can change at any time.

Areas of potential investment

Kane explains that opportunities in sustainable water investment are focused in three broad areas: industrial, utilities and ballast water.

  • Industrial investments focus on the supply side of water, such as exploration, distribution and treatment companies.
  • Utilities are on the demand side. These are major infrastructure users and spenders.
  • Ballast water is a byproduct of shipping. While it is more niche, regulations are growing in this area. As a less established industry, it offers opportunities for higher growth rates.

Diversifying across these three areas helps negate the risks.

Water is here to stay

While a long-term sustainable portfolio should be well-diversified across industries and geographies, one thing remains certain: Humans will always need a source of clean water. This hard fact may make water investments an attractive addition to your portfolio.

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