Author Michael McCullough is a graduate of the University of Pennsylvania’s Department of Earth and Environmental Sciences. This is the introduction to his paper in the IGEL Student Research Briefs series. Click here to read the whole paper>> Opinions are those of the authors and not of Penn, Wharton or IGEL.
Water is an increasingly scarce resource due to booming population growth, increased demand and climate change. Many investors see global water scarcity as an investment opportunity. This ever widening gap between supply and mounting global demand is an obvious selling point for some investment funds eager to acquire an under-valued commodity. Unlike oil, gold or copper commodities, however, the basic supply-demand calculus will not necessarily yield predictable returns on water because of political risks inherent in charging increasing prices for a life-sustaining service. A successful strategy will seek to provide cost-effective technology enabling consumers to receive and enjoy the same level of water service while consuming significantly less water.1 Additionally, water-inefficient production processes, primarily in the agricultural sector account for the vast majority of water consumption, meaning gains in efficiency can do much to close the supply shortfall if increasing prices incentivize efficiency (Ghosh 2009; 2030 Water Resources Group 2009).
The water sector has tremendous growth potential for investors, but a strategy must assume provision of a minimum level of domestic and subsistence water services with a hard ceiling on prices for those services. More importantly, a rational investment strategy should consider that agricultural production accounts for the vast majority of water consumption.2 Technology-enabled efficiency gains allowing agricultural producers to grow more with less water should represent a primary short-term focus. The winners in the water sector will be innovators of cost-effective solutions that enable consumers and producers to do more with less water.
This paper identifies the opportunities and risks in the growing water sector. The study draws from several leading investment funds with holdings in the water sector, which have misjudged the potential risks and opportunities. It considers recent grass-roots activism and political events surrounding the provision and pricing of water. Finally the paper proposes an investment strategy that limits risky exposure to political backlash over rate hikes for water services by focusing on short-term efficiency gains, primarily in agriculture.