Investing for a Water-Safe Future: Align Impact’s Perspective
By: Tamar Honig
The water sector is a wide-ranging space, spanning from wastewater treatment technology to water entitlements to public utility infrastructure and beyond. Investments can occur at any stage in water's lifecycle – from raindrop to river, faucet to farm – where the quantity, quality, accessibility, or efficiency of water use stands to be improved. This broadness of the investable universe – a function of the ubiquity of water itself – ensures suitable opportunities for diverse investor impact preferences and risk appetites.
Though the water sector is large and growing, it remains underinvested. Water financing has historically been driven by government entities, public water services providers, donors, grants, and concessionary debt. But leakage rates, contamination, and dramatic decreases in U.S. government spending on water infrastructure since the 1970s point to the severe shortcomings of public funding. In private investment, on the other hand, water has too often been an afterthought or absent altogether, despite the risks its scarcity poses to every business, whether through raw materials, supply chains, operations, product use, or a combination thereof.
Even among climate-focused fund managers, water has remained an unpopular cousin. But climate change is water change, as evidenced by droughts, floods, groundwater overdraft, extreme temperatures, erosion, and other impacts that have exposed weaknesses in global water infrastructure. Thus, adapting to climate change requires improving our ability to manage both the quality and the quantity of the world’s water, from Flint, Michigan to Cape Town, South Africa and everywhere in between.
The business case for investing in water revolves around the need to innovate to meet parallel increases in water scarcity and global water demand. Today’s rising prices for water will motivate high-volume water users such as farms, cities, and industries to invest in water efficiency. Similarly, wherever there is an enforced cost to environmental degradation, there is money to be made in conservation through such mechanisms as wetland mitigation banking and pay-for-success financing.
Investment trends of note within the water sector include the following:
Obsolete water infrastructure requires widespread replacement and/or upgrading. To maximize the life of existing large capital assets and minimize the cost of inputs, utilities and industrial players seek to deploy novel technologies and services. Many utilities are risk averse, with slow adoption curves for new technologies, but their need to invest in innovation is becoming increasingly apparent.
Public health crises caused by contaminated water have gained visibility, resulting in accelerated investment in management, remediation, and prevention of contamination.
Climate change has caused droughts and floods to increase in both severity and frequency. Growing pressures result in heightened demand for stormwater management systems, more efficient fixtures, and nature-based solutions.
The past years have witnessed a steep increase in public sustainability commitments from major companies and brands like Amazon, Google, Microsoft, Unilever, Walmart, PepsiCo, Coca-Cola, and others. These commitments include better management of water and water systems.
Research in the sector is gaining momentum. For example, in 2019, the National Alliance for Water Innovation (NAWI) received a $110m grant from the U.S. Department of Energy to galvanize research into desalination. The U.K. government recently established a £200m innovation fund for water utilities.
Impact investors can think about their expected impact outcomes along both social and environmental lines. To achieve the highest social impact, investors may prioritize the water and sanitation access subsector. Globally, 2.2 billion people - one out of every four people on the planet - lack access to safely managed drinking water, and by 2025, half of the world’s population is projected to live in a water-stressed area. Improved access to safe and affordable water and water-related services are needed to bridge that gap, with solutions ranging from next generation toilets to affordable reuse solutions and filtration/treatment technologies. Improved access means less arduous and time-consuming water collection practices, which disproportionately impact women and girls in emerging economies.
Those investors focused on environmental protection and natural capital can lend their resources to a real assets strategy that acquires timberland, grassland, and/or ranchland, where implementing sustainable water management practices can restore and preserve the natural state of the land for long-term use. Another option is to finance conservation through ecosystem service markets, which are designed to internalize the economic costs of environmental degradation by requiring individual actors to pay a financial price for the damage they cause. One other conservation finance tool is pay-for-success programs, also known as impact bonds, by which the government repays investors using the cost savings that resulted from a successful intervention. If the program fails, the government does not pay investors back.
Other critical impact themes within the water sector include ensuring that cities and towns have sufficient clean water, improving the efficiency of agricultural water use and handling, and improving industrial processes to use less water and reduce wastewater. For investors keen to tackle these challenges through a private equity/venture capital approach, diversified water technology funds are compelling options, as they offer investors exposure to technologies with a wide variety of applications. Examples of such technologies include digital water solutions, including IoT devices and data analytics tools; industrial wastewater treatment and reuse technologies; and network management and leak detection technologies.
Whichever the preferred asset class or impact subcategory, investing in water can help alleviate myriad challenges of water supply and quality. Water is foundational to all life, playing a key role in sustaining the environmental, social, and financial ecosystems upon which we all rely. High net wealth individuals, family offices, and foundations are well positioned to provide the solutions-oriented capital that is critical in keeping that foundation healthy and intact.