Sergei Grechkin, Chief Risk Officer at UFG Capital writes that in an era where gold and oil have long reigned as commodities royalty, a new contender is surfacing.
Blue gold, otherwise known as water, is fast emerging as the most sought-after resource on the planet. The 2020 forecast indicates that the demand for global freshwater is expected to exceed available supply by 56 per cent by 2030.
As clean freshwater becomes increasingly scarce, with China and India the most at risk, savvy investors are turning their attention to the “blue economy” and this vital commodity, effectively turning water the new gold.
The World Wildlife Fund (WWF) predicts that nearly two-thirds of the world’s population may face water shortages by 2025. Moreover, the UN warns that water scarcity could displace an estimated 700 million people in Africa by 2030.
Yet assuming water scarcity exclusively is a third-world problem would be incorrect. Developed nations like the US and Australia have felt the sting of severe droughts, particularly in states like California and regions like New South Wales. Over the past few decades, the data show that climate change has intensified the water cycle globally, bringing more extreme bouts of wet weather and droughts.
Besides the obvious implications, the looming water crisis has significant ramifications for the global economy and financial markets. The World Bank estimates that climate change and water scarcity could cost up to 10 per cent of some countries’ GDP by 2050, a figure that is driving investors to explore the water sector, looking for promising solutions and the potential for profit.
According to a report by Bank of America, in 2020, companies reported maximum financial impacts of water risks at USD301 billion, which is astonishingly five times higher than the cost of addressing them (USD55 billion). Beyond risk management, there are also business opportunities when investing in water security and water sanitation.
Investment funds are not just dipping their toes but diving head-first into the “blue” market. The Invesco Water Resources ETF has seen a surge in interest and now manages assets worth USD1.85 billion. Another compelling case comes from the Asian Infrastructure Investment Bank. Since 2016, it has approved 15 water projects in eight countries, totalling an investment of USD3.9 billion in areas such as flood management, modernisation of irrigation systems and improvement of water supply and sanitation systems.
As for the particular types of innovation that grab investors’ attention, water-related technology, such as desalination and water recycling, as well as greywater recycling, are also expected to rise, presenting potentially high returns for early investors. Increased investment in water infrastructure, technology, and utilities presents enormous growth opportunities for investors and could reshape the financial markets. Based on potential demand for water supply, the infrastructure sector will become a trillion-dollar industry by 2030.
Overall, financing water is driven by a combination of significant financial opportunity, environmental consciousness, and the recognition of water as a fundamental resource crucial for global development. The escalating water crisis highlights not only the importance of water for life but also its increasing importance for markets and investors.
The demand-supply gap for water is likely to widen, highlighting the importance of water as a critical resource for both markets and people. We offer three predictions regarding water shortages and investment implications in the near future:
Increasing investment opportunities: As water scarcity becomes more pronounced, the financial markets will face a surge in investment opportunities related to water infrastructure, water treatment technologies, and sustainable water management practices.
Regulatory landscape shifts: Governments and regulatory bodies will shape the water market’s trajectory, with stricter regulations regarding water usage and conservation driving technology adoption and creating investment prospects.
Social and environmental impact investing (ESG): Investors will seek water-related investments that align with their social and environmental values. Impact investing, which integrates financial returns with positive social and environmental outcomes, will gain traction, offering opportunities to support sustainable water practices.
Water scarcity poses challenges to the global economy and financial markets, but it also opens avenues for investment in innovative, sustainable solutions. Recognising water as the new gold allows investors to contribute to responsible water management, address environmental concerns, and tap into the water sector’s growth potential. Just as the pursuit of gold once shaped economies, the quest for water is poised to do the same in the coming years.
