Just add water


01 / 02 / 22 - 3 minute read

Water scarcity is one of those local problems found right across the globe. It affects the lives of millions and dominates newspaper headlines and political discourse. 

Around 1.2 billion people worldwide live in areas of water scarcity, a figure forecast to grow to 1.8 billion by 2025. UNESCO predicts that water scarcity in some arid and semi-arid places will displace between 24 million and 700 million people by 2030. While water scarcity is a significant policy area for governments and supranational organisations, what does it mean for investors? Should investors look to capitalise on this by targeting water assets?

An investment analysis from PATRIZIA considers the ‘investability’ of water, including how investors can potentially gain exposure to water. It also examines whether the long-term risk-adjusted returns make it an allocation worth considering within a broader diversified portfolio. 

A finite resource with no substitute

The investment analysis considers water from a supply-side perspective and how water scarcity and a changing global climate will fuel a new wave of water infrastructure opportunities worldwide, aimed at improving water efficiency and equity.

It also examines water from the demand side, looking at market mechanisms implemented to enhance the efficiency of water allocation and measures to increase water conservation. As part of this, the analysis takes a deep dive into water markets, specifically a case study on one of the most developed water markets in the world – the southern Murray Darling Basin in Australia.

“There will be enough water for the world’s population out to 2050, but an increasing number of regions will face growing water scarcity, and this will impact rural and urban livelihoods, food security and economic activities.”

Global cities considered most likely to run out of water

Source: BBC, PATRIZIA

“While water is a precious commodity, there are no deep global markets for water investments like there is for oil and gold.”

The ethics of investing in water

The analysis is underpinned by the ‘specialness’ of water that makes it different from other commodities and, indeed, any other investment: water is essential to human life, and access to water is a basic human right. These unassailable facts mean water investment has a complex moral aspect that investors should not underestimate.

The analysis concludes that water is homogeneous as a commodity but heterogeneous as an investment. There are many ways to access water exposure, such as ETF’s, investing directly in water infrastructure and buying water rights. All these investments may provide access to the rewards of governments, supranational organisations, companies and people acting strategically in reaction to increasing water scarcity and the changing climate.

However, for example, water ETFs, are highly correlated to equities and may not offer adequate diversity to investors’ portfolios. Such investments may be more suitable for a thematic investor or work as a short-term parking bay for patient investors waiting for the right direct water infrastructure opportunity. And on that note, water scarcity and a changing climate present a significant opportunity for long‑term infrastructure investors. 

Technology will be essential to climate adaptation. Investors can expect to see increasing opportunities to invest in more traditional water infrastructure assets, albeit charged with new technologies to make them more sustainable and resilient.