Columbia Threadneedle: Water in crisis – searching for solutions

The world is facing a water crisis. Around the globe we either have too little (drought), too much (flooding) or too toxic water.

Climate change, alongside other factors, are placing our access to clean, safe water under threat. And it’s a crisis that looks set to worsen. Per a 2023 water risk report, 25% of the world’s population currently face extremely high water stress each year, regularly using up almost their entire available water supply. And at least 50% of the world’s population, around 4 billion people, are currently living under highly water-stressed conditions for at least one month of the year¹.

These are worrying figures, but sometimes it’s hard to grasp the seriousness of the problem until you’re physically presented with it. That’s exactly what happened on a holiday to Spain’s Andalusia region in February this year. On a hike inland we encountered Malaga’s El Chorro Reservoir, which was more of a muddy puddle. Standing at less than 17% full – the lowest level on record – it was way below the 60% level you’d expect at that time of year. Southern Spain is in a multi-year drought with increasing restrictions on water use and growing fears of what that could mean for the summer tourism season.

But Spain is not alone with record global temperatures in 2023² exacerbating multi-year droughts across South America, Africa and elsewhere in the Mediterranean. Flooding has also become more prevalent as rising ocean temperatures bring more intensive storms.

The impact of climate change is compounded by growing populations and rapid rates of urbanisation which place further strain on our water infrastructure. This also follows decades of insufficient government investment into water networks. It is estimated that about 30% of water in global water systems is lost through ageing infrastructure and wasteful water practices, enough to provide water to an additional 2 billion people!³

And the economic costs of depleted access to quality water are immediate with water a critical input for many industries. Agriculture accounts for around 70% of global water use whilst water helps to power 15% of the world’s electricity generation through hydropower⁴. But water also plays a key role in the construction of buildings, the mining and refining of resources and in technology sectors from the manufacturing of the semiconductors used in our electronics to the cooling of the datacentres used to power the internet. With clean water increasingly scarce, it’s clear that both public and private enterprises need to invest in solutions that promote greater water circularity. Recycling and reuse need to become the norm and at Columbia Threadneedle Investments we actively engage with companies on this topic given its importance from environmental and financial perspectives.

But water scarcity is not the only problem – there are also real issues around the quality of water, for example in 2023, only 14% of UK rivers were deemed to be of ‘good’ ecological status⁵. Per – and polyflourinated alkyl substances (PFAS) are used in a multitude of manufacturing processes and products including plastic packaging. When released into water these ‘forever chemicals’ won’t break down for thousands of years and have been linked with a host of negative biodiversity and health impacts. Dubbed the ‘new asbestos’, governments around the world are starting to introduce stricter regulation around the cleaning up of PFAS in our drinking water with the scope for related litigation and cleanup costs huge for those companies not adhering.

Governments and enterprises are now waking up to the increased economic risks from water stress, at a time where political pressure is growing for them to address the water crisis. Many countries are now accelerating water investment as a result. For example, as part of President Biden’s 2021 $1 trillion infrastructure spending bill, $55 billion was earmarked to upgrade America’s ageing water infrastructure, at a time when droughts and flooding are becoming more frequent and severe across the country⁶.

We believe companies providing innovative solutions to promote better water management are not only delivering positive sustainable outcomes but are also well positioned to enjoy tailwinds to their growth from increased public and private investment into water infrastructure and solutions. We see sustainable water management as a key theme and we are invested in several companies positively exposed to this theme, including:

• Xylem, the world’s largest water flow and treatment company. In 2022, they bought Evoqua, thereby enhancing their treatment capabilities – including the ability to decontaminate water from PFAS chemicals.
• Advanced Drainage Systems, a leading provider of stormwater and wastewater management systems in the US. With the frequency and severity of storms increasing across the US because of climate change, states are having to upgrade their stormwater infrastructure to lower the risk of flooding.
• Tetra Tech, a water consulting company that supports clients in all aspects of water management including water resilience and access to clean, safe water. Increased regulations around PFAS are expected to double sales for their PFAS consulting business this year. They recently announced a $464 million contract with the US Department of Defence that includes tackling PFAS chemicals as well as a £100milliion project from a UK water utility company to help improve river health across the North-West of England.
• Ecolab, a business services company delivering water solutions which enable its customers, across multiple sectors, to both recycle water and increase water- efficiency. In 2023, we visited Barclays’ cooling tower in London’s Canary Wharf where Ecolab’s “Nalco” water solutions are used to keep the air-cooling systems free of water borne pathogens (making the building healthy for its occupants) and promote better water efficiency.

Mention of specific stocks is not a recommendation to deal.

Water is arguably the most underappreciated resource in the world today – we pay very little for it but the impact to both our lives and our environment when we lack access to clean, safe water are immeasurable. Fortunately, it appears the world is starting to realise this and invest to preserve this treasured resource.

¹https://www.wri.org/insights/highest-water-stressed-countries#:~:text=And%20at%20least%2050%25%20of,one%20month%20of%20the%20year

²World Meteorological Organization, January 2023

³Global Water intelligence report, May 2021

⁴Our World in Data, February 2024

⁵UK government ‘State of the water environment indicator’, May 2023

⁶The White House, November 2021