Managers at the RobecoSAM Sustainable Water Fund are, unsurprisingly, keen to bang the drum about what they say is a major water shortage challenge.

Managers at the RobecoSAM Sustainable Water Fund are, unsurprisingly, keen to bang the drum about what they say is a major water shortage challenge. This piece is by Dieter Küffer, who is senior portfolio manager, and Junwei Hafner-Cai, senior equity analyst, RobecoSAM Sustainable Water Fund. This publication is grateful for the opportunity to exclusively carry these views; the opinions here, however, are not necessarily shared by this news service’s editors.

Adequate supplies of drinking water are one of the most pressing challenges of our time. Over the last 100 years, the global population has tripled and water consumption has increased six-fold. But our total water supply has remained unchanged. Several other megatrends are compounding the challenge: rapid growth of the global population, fast economic growth and industrialisation in emerging markets such as China and India have led to increased water consumption, highlighting the need for huge investments in the water sector.

The economic and social transformation of the past few decades has been particularly prevalent in emerging markets. In many cases, entire regions have been urbanised. By the end of last year, 52.6 per cent of the Chinese population lived in cities – up from 37.7 per cent 10 years earlier. Growing cities in emerging markets are putting enormous pressure on the water sector; past experience shows that urban dwellers consume significantly more water than rural residents.

As it is, China already faces acute water shortages, particularly in the northern parts of the country where a high concentration of coal and steel producers and petrochemical companies is adding to the pressure on limited water resources.  Today, most of the province’s wells are contaminated and can no longer cover residents’ daily water needs.

The 12th Five Year Plan in China reflects the government’s commitment to the resolution of the water problem. In it, the government has earmarked $330 billion for investments in clean drinking water over the next few years and as much as $740 billion for environmental protection. The main beneficiaries of this growing demand for water treatment will be regional and international water utilities as well as providers of water purification technologies which can help to ease the problem of water contamination.

Additionally, waste water is beginning to be turned into a resource. Faced with limited global phosphorus reserves, European companies, in particular, have initiated projects to reuse phosphorus from waste water – examples can be found in the Netherlands and Switzerland.

Social advancement of entire classes of the population in emerging and developing countries is reflected in changing lifestyles and consumption patterns which ultimately add to the pressures on water management. A good example of this is the wealthy oil-producing Arab countries, which are investing heavily in new water technologies. No other country in the world matches Saudi Arabia when it comes to investments in desalination equipment. The government of this oil-rich nation plans to pump billions into improved water supply infrastructure over the next few years.

The market for desalination plants has seriously taken off: RobecoSAM expects desalination capacity to increase from the current 93 million cubic meters a day to 126 million cubic meters by 2016. As a result, annual investments in desalination plants should grow from $8.3 billion to $16.6 billion by 2016. Essentially, the desalination boom is due to the sharp drop in production costs: 40 years ago, one cubic meter of desalinated water cost about $10. Today’s plants cap this cost at about $0.50.

Southern California had the driest year ever recorded in 2013. Additionally the winter 2013/2014 was very dry and brought only 20 per cent of the average precipitation in the Sierra Nevada. As a result, less water was available after the snow melt and the state of California declared drought emergency in 2014.  All affected parties will have to contribute to a more efficient use of scarce water resources. As agriculture accounts for about 70 per cent of global water consumption, it can also help to save substantial amounts of water. For example, depending on the type of crop, micro or drip irrigation systems can reduce consumption by 30 per cent to 70 per cent.

Over-exploitation of existing resources is not the only pressing challenge of our time. In many places, aging infrastructure also leads to inefficient water usage: in Spain and France, about 30 per cent of water is lost through leaks in old water pipes. All of this is creating a growing market for innovative companies. For example, specialised providers will benefit from sales of state-of-the-art water meters that can help to identify leaks.

Careful handling of water resources is a global challenge that will fuel major investments across the globe over the next few decades – more so than in almost any other sector of the economy.

The rapidly changing environment calls for new technologies to guarantee clean water supplies over the long term. This is creating substantial business opportunities for innovative companies. In this environment, we are focused on investing in companies that develop future-oriented, resource-friendly solutions.