Turning off the water shortage tap

Supply will not be able to meet this growing demand indefinitely, but are global leaders doing enough to address this looming crisis? We investigate the growing challenges of the water supply chain, what is needed to improve current systems and consider how investment can align with technology to offer the innovative solutions of the future.

Planet earth is covered in water. In fact, around 70% of the planet’s surface is water, yet only a mere 0.025% is fresh water accessible at the surface¹. This figure has remained static since the time of the dinosaurs and has so far served our needs. Yet these needs are growing exponentially.

The rising global population is the main driver behind this increased demand, but our use of water – reflecting increased urbanisation and an advancement in living standards – is adding further pressure. This mismatch between supply and demand cannot last – by 2030 demand for fresh water is expected to exceed supply by 40%². Unless action is urgently undertaken, nearly half the human population could find themselves at risk of ‘water stress’.

It is easy to assume that water scarcity will just be a developing world issue – for example, China’s water demand is expected to outstrip current supply by around a third over the next 10 years³. These nations are likely to face the brunt of the shortfall, but they are not facing this crisis alone. Developed nations are already experiencing supply concerns of their own. France and Germany are enduring their third consecutive summer of drought, which is having significant consequences on agricultural production and, as happened in 2018, plunging levels on the river Rhine could massively disrupt shipping. This means there is not just a human cost to water shortage, but a significant economic cost too.

Encouragingly, the future water gap is solvable⁴. The problem is less about running out of natural supply, than the current poor management of water resources. With the right innovation, productivity and investment, this mis-management is fixable.

Domestic consumption is the most recognisable use of water, but it is not the most dominant and accounts for only around 14% of total use⁵. Even so, aging or poor infrastructure means that the loss of treated water is a significant problem. In Asia alone this is estimated at 29 billion cubic metres annually⁶.

Industrial usage accounts for 16% of demand⁷, with activities such as mining and power generation being core consumers. But by far the biggest user of water is the agricultural industry – accounting for an astonishing 69%⁸ of global water withdrawals. Improvements in water efficiency across these key areas would have a massive impact in closing the supply-demand gap.

There has been a legacy of chronic underinvestment in the water supply chain, but the looming supply shortfall and support from prominent, international agencies, such as the United Nations (which has made the provision of clean water and sanitation one of its Sustainable Development Goals) are driving change. It is estimated that USD7.5 trillion will be spent on water infrastructure globally over the next 15 years⁹, creating exciting opportunities for investors. Water is known as ‘blue gold’ for a good reason.

Investment opportunities span all sectors and geographies as the industry benefits from technological advances to create a more sustainable water supply chain.

At the top of this list is super-consumer agriculture. Here the aim is to improve the ‘crop per drop’ usage through innovation. An improvement in water application technologies – such as a wider adoption of drip and sprinkler irrigation – are pivotal to increasing efficiency. Such methods have also been proven to reduce costs, by limiting the amount of fertiliser required and increasing yields.

Industry is another crucial area. Advances in the recycling of water are gaining traction, such as the wider use of ‘grey water’ (relatively clean waste water from households or commercial buildings). Where higher-quality water is required, low pressure membrane filtration technology is coming to the forefront.

Having an efficient water infrastructure is the responsibility of all nations. Initiatives to upgrade systems to ensure longer-pipe life and lower operating costs are being adopted, as are improvements in leak detection. Additionally, smart applications are helping domestic users have a better and more responsible understanding of their water usage.

Water needs to be everyone’s business if real change is to be achieved. The looming water shortage is aggravated by a lack of awareness and action is needed to compel governments, farmers and industries to adopt water-saving techniques.

Thankfully, a greater focus on the issues such as resource scarcity, inadequate infrastructure and environmental constraints will drive this awareness and help accelerate the transition towards a more sustainable global economy.

At BNP Paribas, we believe such a movement will provide valuable investment opportunities over the long-term. Companies at the forefront of these transformative initiatives should benefit from the enormous capital being spent on improvements to the water supply chain. To achieve long-term sustainable returns, our Aqua strategy invests in a deep and wide-range of defensive and cyclical water-related stocks across the global water value chain. These stocks not only have the potential to achieve strong growth but also provide a positive environmental impact.

To learn more, visit our investment themes page.