An ocean of opportunity
The world’s growing thirst for water is opening up a string of attractive investment opportunities. By choosing the right partners, investors can capitalize on this strongly performing commodity.
Water has long been known as blue gold due to how precious the resource is in terms of sustaining life on Earth. But recently this moniker has also become an accurate description of the financial value of water, in emerging markets in particular. Global players in investment and trade are certainly enthusiastic about the sector’s prospects. Allianz Global Investors calls water “a key 21st century growth opportunity”, while the OECD goes so far as to quantify potential returns: “benefit-cost ratios for investments in water and sanitation services have been reported to be as high as 7 to 1 in developing countries.”
Too good to be true? Not in the slightest. In fact, the water sector offers a wellspring of opportunities for the sustainable investor looking for projects that are both profitable and impactful.
It’s worth remembering that only a tiny fraction of the world’s total water supplies – half a percent, in fact – is exploitable for human use, be it residential, agricultural or industrial. But this figure dwarfs the amount of drinking water available. Indeed, only 0.007% of the planet’s water is considered potable. And while the global supply of water remains constant, the world’s thirst continues to grow.
In November of last year, we reached the milestone of eight billion people. And the global population is expected to grow by a further two and a half billion by 2080. This, combined with years of underinvestment in water infrastructure and the worsening effects of climate change, has grave implications for achieving Sustainable Development Goal 6 (Ensuring availability and sustainable management of water and sanitation for all), despite some encouraging gains having been made in recent years. The UN estimates that 2.2 billion people still didn’t have access to drinking water in 2022, while 3.5 billion people were forced to go without basic sanitation systems.
Due to the capital-intensive nature of investments in water sector, there is a growing recognition by governments and development agencies in emerging markets of the need to attract private capital by putting in place the requisite financial and non-financial incentives. Even the previously prickly political dimension of private investment in emerging countries’ water distribution and wastewater networks has largely taken a backseat to the overriding necessity to provide clean water to their populations. Other benefits include “accelerated economic growth, sustainable development, improved health and reduced poverty”, according to the Stockholm International Water Institute.
Impact investing in the water sector covers a wide range of potential projects, ranging from precision irrigation, pumping stations, desalination plants, sanitary appliances, wastewater treatment plants and many more. Interestingly, water and wastewater treatment suppliers represent the biggest single segment in the USD500-600 billion global water market, accounting for around 35% of the market, studies by UBS show. It’s also worth pointing out that research indicates that strategic investments in the water, when included as part of a broader portfolio, can contribute to higher returns, due to the sector’s positive alignment with established equity segments.
In short, all this goes to show that the sector is primed to grow significantly in the medium- and long-term due to the sheer scale of the investments required to sustainably exploit this scarce yet essential resource, the commodity’s historically strong performance against wider equity markets and its attractive reward/risk profile. This is important news: private investors are going to play a fundamental role in helping the world achieve SDG 6, especially in emerging markets where these investments are most needed but where the barriers to financing can be especially daunting.
There is no shortage of choice when it comes to identifying a partner through which to invest in the water sector in frontier markets. After years of timidity, traditional lenders are now vying to position themselves as the go-to solution for raising capital for water infrastructure projects – the commodity’s inexorable scarcity makes it an impossible opportunity to ignore. And given the current investment shortfall, their involvement is to be welcomed. But for the impact investor, there exists a more innovative, less cumbersome option.
With its four decades of experience in transaction advisory and capital raising in emerging markets, Delphos is uniquely positioned to capitalise on the blue gold rush. To date, the Washington DC-based firm has raised over USD20 billion in emerging markets project finance and its global network of professionals constitutes an unrivalled resource when it comes to understanding these markets and unlocking their potential. Its track record in large infrastructure projects on five continents where it has worked closely with a wide range of governments, multilaterals and multinational corporations are testament to its tireless commitment to the economic development of emerging markets.
An oft-cited bit of trivia reminds us that those who benefited the most from the original gold rush were the sellers of shovels and other equipment. The same logic applies to the current boom in water finance; infrastructure is where the real action lies. And Delphos knows how to get the investment tap running.
