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The environmental ugly duckling: water

09 August 2010 #Environment

An often dismissed subject, which also ties into the theme of climate change, is water. Water is essential to every aspect of life, from growing food to industrial production and basic human survival. Yet the dire state and outlook of the world`s current freshwater resources seems to be overlooked in favour of carbon emissions. The problem is akin both in developing as well as developed countries, though the drivers behind the problems are slightly different. Either way, the nature of the problem suggests that there are investment opportunities to be had in the water sector globally.

According to UNESCO, global population is growing by 80m annually and is expected to increase by 3b by 2050 - 90% of this increase is expected to come from developing countries, where current populations have inadequate access to drinking water and sanitation, which means massive demands on water. Trade liberalisation and the increase in international trade is also putting pressure on freshwater reserves, especially as a result of agricultural commodities. As large proportions of populations are lifted out of poverty - the middle class is the fastest growing population in India and China - rising living standards change perceptions of needs and wants, resulting in unintended consequences on water resources, not to mention the wider impacts on climate change. Investment in new infrastructure in developing countries will therefore be of utmost importance in the next few decades.

Similarly, developed countries will require investment to replace old infrastructure whilst simultaneously having to cope with increasing demand. According to the Independent on Sunday, an estimated 3.3b litres of treated water, which amounts to 20% of the country`s supply, is wasted due to leaky pipes every day. Despite £7.5b of investment over the past decade, England and Wales` water infrastructure leaks more now than it did at the beginning of the period. At commercial rates, this amounts to almost £2 billion worth of lost water each year.

The essence of the investment thesis in the water sector - increasing demand and dwindling supply - in addition to rapidly changing socioeconomic and environmental landscapes, not to mention climate change and the global nature of the problem, provides a variety of options for investment exposure to the sector with the ability to aggressively manage risk. Investing in listed or private businesses, both in the supply chain and utilities will face this risk. These companies may not actively manage the risk due to the target of increasing profits rather than investing in improved infrastructure and technologies. The Independent on Sunday report states that UK water companies made a total profit of £4.5b in the last financial year, corresponding to more than double their profits a decade ago. There is also the possibility of venture-style investment opportunities arising from new technologies and products entering the supply chain and competing with existing products by making efficiency improvements, be it via collection, treatment and delivery of water, or via analysis and disposal of wastewater or more efficient transportation of water (eg. Pump/valve manufacturers).

A 10% decrease in leaks would save 30 million litres of water a day in the UK, and applying the enabling technologies to developing countries would be a huge market opportunity as infrastructure investments increase.

Written by The EIC Environmental Investment Network.

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