World Water Day: the importance of water management

Water is as essential to the existence of companies as it is to human life. The food we eat, the clothes we wear, the electricity in our homes, and the chips that power our phones and computers, all depend on the availability of quality water supplies.

World Water Day: Water for Peace

This year the theme of World Water Day is "Water for Peace". This slogan underscores the importance of promoting collaboration between the public and private sectors to establish policies, drive innovation, and ensure the necessary funding to build a future where access to water is safe and sustainable.

Investing to Protect Groundwater

Christian Zilien, CFA, Equity Product Specialist, and Nezhla Mehmed, Portfolio Manager, from Allianz GI

Groundwater constitutes 30% of all freshwater reserves and approximately 99% of all liquid freshwater supply on Earth, making it the main source of nearly half of the world's drinking water.

Currently, 70% of groundwater is used in agriculture for the production of food, textiles, livestock, and industrial crops, with arid and semi-arid regions experiencing the highest extraction levels.

Large aquifers represent more than half of the global groundwater reserves and from them comes approximately 40% of the amount of groundwater that is extracted worldwide. According to a recent scientific study, 36% of the total of 1,693 aquifers examined worldwide significantly decreased between 2000 and 2022.

Depending on their hydrogeological characteristics, some aquifers may take only a decade or even less to recharge, while others may need thousands of years.

Given the importance of groundwater and aquifers as essential components of our planet's hydrological cycle, it is crucial to direct investments towards more sustainable water treatment and management solutions, as well as infrastructure and supply. This will help to address the challenges related to the rapid deterioration of groundwater worldwide and can also play an important role in ensuring food supply to an increasingly large population, with an equally increasing need for water and ever-increasing energy needs.

Groundwater and aquifers: two essential resources in danger

As climate change intensifies and droughts become more frequent and prolonged, overexploited aquifers and groundwater reserves can no longer fulfill their role as safe reserves to mitigate agricultural losses during drought periods. This, in turn, decreases the agricultural recovery capacity in the face of future droughts, threatening food security and global food supply chains.

In addition, anthropogenic pollution of groundwater, originated from spills, wastewater and waste from households, industries, mining and agriculture, puts additional pressure on this vital resource.

A worrying fact is that 42% of US crop exports, mainly corn, come from groundwater that is being overexploited. As these sources are depleted and crop production and export are reduced, the risk to importing countries and their food security increases.

Improving storage and access to fresh water resources through sustainable investment

The conservation, management, and global and sustainable rehabilitation of natural freshwater storage capacities is emerging as a growing market, especially in segments that will see almost double-digit growth in the coming years. This is partly due to the increase in spending on digital solutions that allow for cost-effective control and measurement of groundwater levels and quality.

It is predicted that the global water and wastewater sector's spending on digital solutions will increase by 8.8% annually, reaching a market value of $55.2 billion by 2030, more than double the $25.9 billion invested in 2021.

The development of this market also involves the identification and investment in innovative leaders, key catalysts, and main beneficiaries throughout the entire water value chain.

For example, a prominent global company specializing in advanced technologies, services, and products for water and wastewater treatment has developed a hydroacoustic current meter (Acoustic Doppler Current Profilers, ADCP) to measure water speed and the complexities of water flow conditions, allowing for professional water surveillance in the environment.

In addition, a Swedish leader in the field of heat exchangers offers self-produced heating and cooling systems from groundwater, significantly reducing emissions, optimizing energy consumption, and maintaining groundwater temperature.

For these and other leading companies to continue developing quality and adaptable products that improve the sustainability of natural water resources, it is crucial to further direct investment flows towards solutions that address the current and future challenges of water scarcity and quality.

Cooperation and innovation for the water sector

Deepshikha Singh, Deputy Head of Sustainable Investment Research at La Française and Head of Stewardship, La Française AM

At the United Nations Conference on Water, held in 1977, the first Action Plan was created to address the water crisis, in which it was recognized that "all peoples, regardless of their stage of development and their social and economic conditions, have the right to have drinking water in sufficient quantity and quality to meet their basic needs".

Nearly five decades later, we are nowhere near guaranteeing this basic human right. According to the United Nations University Institute for Water, Environment and Health (the water think tank), approximately 72% of the world's population lives in countries with water insecurity, about 2 billion people do not have access to clean and safe drinking water and about 3.6 billion people (46% of the world's population) lack adequate sanitation services. Many of these problems are attributed to unprecedented population growth in many countries, but there are other reasons. The most important is that virtually all our consumption habits require a large amount of water, from clothing production, through food harvesting, to the manufacture of electronic devices.

Water on Earth is scarce

Despite the fact that 70% of the planet's surface is covered with water, only 1% is drinkable. Moreover, water is not an easily renewable resource: replenishing groundwater can take decades, if not centuries. The availability of water is further compromised by extreme weather events, pollution, and aging infrastructure. Water pollution from chemicals, pharmaceuticals, agricultural runoff, microplastics, and "forever chemicals" exacerbates water insecurity worldwide. This affects not only people and society, but also our investee companies. The delay in the Panama Canal, created by historic droughts and low water levels, raised the costs of countless companies in 2023. Drought is the third highest risk identified in India, and 59% of Indian companies declared themselves affected. Companies are exposed to physical climate risks related to water in one way or another, through their own operations or their supply chains.

The water sector provides public and private benefits. However, many of these benefits cannot be easily monetized, which limits the revenue streams from investments. The water sector requires a considerable amount of funding, with estimates ranging between 182,000 and 664,000 million dollars annually (2019). This deficit includes various areas such as water supply and sanitation (between 116,000 and 229,000 million dollars annually), flood protection (between 23,000 and 335,000 million dollars annually) and irrigation (between 43,000 and 100,000 million dollars annually), as well as funding for the implementation of water resource management. Our current water infrastructures are not well adapted, as the necessary investments have been neglected for decades. Public utility companies report that one in six gallons of water is lost between the treatment plant and the end customer, which is called "non-billed water". Without investments and proper water governance, competition for water between the public and private sectors is likely to increase and a variety of water crises are likely to escalate, triggering emergencies across a range of water-dependent sectors. Regulatory barriers can also limit innovation and prevent the adoption of new technologies or approaches.

There is still hope

Cooperation and innovation are fundamental: among companies, investors, communities, and countries. The development of sustainable financing models can be facilitated with the support of the public sector. For the sustainable management of water resources, in addition to building new infrastructures, it is necessary to invest in the maintenance, operation, and improvement of the resilience of current facilities (especially older infrastructures). In addition, effective incentives and regulation can redirect financing towards climate-smart, resilient, and nature-positive investments. We need public and private financing to work hand in hand. In Ghana, various actors, including the private sector, non-governmental organizations, charities, and development partners, financed the increase in coverage of safely managed drinking water services by 28 percentage points between 2000 and 2020, reaching 41% of the population in 2020. Globally, it is also necessary to increase data exchange and improve the interoperability of all global databases of the Sustainable Development Goals. At the industrial level, the CEO Water Mandate brings together more than 240 companies to share best practices and forge alliances to address the urgent water challenges related to scarcity, quality, governance, and access to water and sanitation.

The water sector comfortably sits at the intersection of climate, natural, and social issues, creating investment opportunities for all sustainability-focused investors. However, most investments in the water sector have so far focused on public utility companies that cater to the public's water demand and need. But there are many well-established companies, as well as new start-ups, that are now working to solve water security issues using innovative technology and solutions. According to some analysts, the global water and wastewater market could be worth between $700,000 and $800,000 million. Original equipment manufacturers (OEMs) and engineering, procurement, and construction (EPC) services cover more than half of the market, while the rest corresponds to facilitators, which include general equipment, such as pumps, valves, and meters, outsourced operations and maintenance services, water treatment, and various parts and consumables. Earth observation technologies, including satellites and drones, present a transformative opportunity for both the public and private sectors to improve water resource management. Governments can also use innovative methods, such as offering tax reductions for nature-based solutions and conservation spaces or payments for ecosystem services to preserve the green infrastructures critical for water, making private financing lucrative.