Water scarcity is set to become the most critical global resource problem by 2025. A growing world population, rising relative affluence in emerging markets and increased industrialisation and urbanisation is placing ever increasing demand on the finite supply of water. This is stimulating the rapid growth of companies offering sustainable solutions to water treatment, distribution and increased efficiency of supply, and providing highly attractive investment opportunities.
Whilst the world's population tripled in the 20th Century, the use of renewable water resources grew six-fold and is expected to increase by a further 50% by 2060 (World Water Council, 2010). This population growth, coupled with industrialization and urbanization, means that demand for clean water is set to far exceed supply. The Intergovernmental Panel on Climate Change (IPCC) estimates the number of people at risk from increasing water stress could rise from 1.7 billion in 2020 to 3.2 billion by 2080. In addition, two million tonnes of sewage, industrial and agricultural waste are discharged annually into the world's waterways, causing one child under five to die from water related disease every 20 seconds (UNEP, 2010). The pressure to provide clean sanitation and manage existing water resources more efficiently
is set to intensify. Whilst emerging market countries must strive to develop basic water infrastructure, developed economies have the challenge of replacing ageing water infrastructure for the potential impacts of 21st Century climate change.
The Market Opportunity
The World Bank estimates that US$180 billion of water infrastructure investment is needed each year until 2030 to meet freshwater demand. This urgent need for vast amounts of capital investment is quickly gaining recognition and creating a wealth of opportunities for water utilities, infrastructure companies and those offering technologies for demand reduction (such as smart metering), desalination and pipe monitoring.
The overwhelming majority of the population growth and increased demand for water services is expected to occur in Asia-Pacific and Africa. The Chinese water market has been of particular interest of late with the announcement of the 12th Five Year Plan. More than 40% of China's land area is categorised as water stressed and over 400 Chinese cities suffer from water shortages and pollution (Nomura, October 2010). China Everbright is one company already profiting from the Chinese water scarcity concerns as it works to develop waste water treatment plants, such as the Qingdao Waste Water Treatment Project, which provided facilities for the 2008 Olympic Games. China Everbright's business model is buoyed by good visibility of revenues, earnings and cash flow and credit availability from Chinese banks. Future prospects for the Company are indeed bright; the 12th Five Year Plan is expected to double the investment in waste-water treatment to RMB700bn over the next five years (Arden and Partners, 2010). Prospects are equally rosy for companies providing superior irrigation systems in countries such as India, where despite huge rates of urbanisation the majority of the population are still dependent on agriculture. In 2004, the Indian government began to subsidise Micro Irrigation Systems (MIS), which are ideal for allowing farming to continue in resource stricken areas. Now part of the Indian 5 year plan, the MIS market is growing at 40% per annum, allowing companies such as Jain Irrigation, which supplies MIS and helps farmers to develop efficient water source management, to thrive.
A Global Opportunity
Investment opportunities in the water sector are by no means confined to emerging economies, with companies across the value chain in Europe and North America also poised to outperform. For example, Pall Corporation, a US based supplier of filtration, separation and purification technologies for the removal of solid, liquid and gaseous contaminants is set to benefit from global market growth rates of up to 13% to 2025 (UBS).
Strong global market growth is reaping dividends for environmental markets investors. Indeed, over the first three quarters of 2010 the FTSE EO Water Technology Index and the FTSE EO Waste and Pollution Control Technology Index outperformed the MSCI World Index by 2.5% and 4% respectively*.
In sum, companies operating across the water sector stand to derive sustainable profits from strong long term visibility and rising levels of demand. Solving a critical global resource problem is proving to be an excellent investment opportunity.

*Return in Euros from 31 December 2009 to 30 September 2010. FTSE indices are total return, MSCI indices are net return. Source: WM Reuters and FactSet.

By Simon Gottelier, investment manager at Impax