Water – a sector brimming with opportunity
"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognise the opportunity." - John F. Kennedy.
The irony of the water crisis is that we are battling predictions of too little and too much water at the same time. As global population grows, or should I say, exponentially grows, water scarcity is expected to grow with it. The industrialisation to support the population growth is also expected to drive temperatures up through greenhouse gas emissions. This will lead to melting of ice caps and glaciers with sea levels rising to a point which threaten devastation in several urban coastal areas.
But let’s take John F. Kennedy’s advice and see what this could mean in terms of the opportunities that come from this crisis…
What if I told you, returns on investment in addressing this crisis are ~800%? The Water Project found that every $1 invested in water and sanitation generates, on average, a $8 return in saved time, increased productivity, and reduced health costs.
If that 800% return doesn’t seem tempting enough, what if I told you that the world could save $32bn each year with such investments? These are the economic benefits from reductions in health costs and increased productivity due to sustained access to clean water. This incentivises what should be the moral obligation we have towards the bottom billion of the world who suffer the most from water scarcity.
And if you aren’t convinced by a $32bn savings, how do investment opportunities of $3.9trn a year sound? The UN estimates these costs in developing countries alone, to achieve the Sustainable Development Goals, which are directly or indirectly dependent on water. The private sector and capital markets need to step in to provide a substantial portion of this funding. As an example, China, faced with a nationwide shortage of water, has increased its water investment budget by 7% this year, and plans to start construction on 172 major water projects by 2020.
If you’re looking for one more reason to see the opportunity that comes in this sector, then consider the 438% expected increase in investment in the adaptation finance sector. That’s the growth the World Resources Institute estimates taking the most recent commitments for adaptation in 2013 and the lowest estimated needs by 2050. Considering the $140-300bn per year that the developing world alone will require to invest in adaptation by 2050, such growth seems likely.
One of the most important steps after recognising opportunity is to convert them into business. These numbers might remain theoretical unless both the public and private sector work together on their implementation. Co-operation and alignment of interests therefore becomes key in realising these opportunities. For the private sector to fully immerse itself, there needs to be clear and stable regulation. Improving guidelines, legislation, licensing agreements and contracts supports sustainable financing for water-related infrastructure and services. A lifecycle planning approach to water projects improves understanding of the costs, leads to transparent and accessible investment plans, and promotes accountability and stakeholder participation.
Another aspect of financing these opportunities in the developing world is the country risk, where several entities might be hesitant in taking up. Insurance and guarantees from Export Credit Agencies and governments have proved to provide the comfort that developed world entities might need to consider such riskier investments.
Several burning topics in the sustainability world are also providing products and frameworks which can be used to better tap into opportunities in the water sector. Green Bonds are becoming bluer directing the funds raised towards projects in the water sector. The Circular Economy’s reuse of waste model is best applied to waste water -the largest untapped waste category, as big as all solid categories taken together.
The corporate world is recognizing these developments and is increasingly placing water prominently in their sustainability agendas, thereby increasing opportunities for financiers and water solutions providers. In a 2014 CDP survey of 174 companies in the Global 500 index deemed to have high vulnerability to challenges posed by water insecurity, 75% stated that water offers operational, strategic, or market opportunities. An example of this is companies like Coca Cola, which has invested up to $2bn to reduce water use and improve water quality.
In summary, within the urgency and danger of the water crisis, there is enough reason to look at the flowing (pun intended) opportunities that arise in attempts to mitigate this crisis. So let’s pull a Kennedy on this crisis, and tap into this pool (pun intended again) of opportunities by being open to the reforms it brings to business, policy and mostly the mindsets of people.
Ambika Jindal, associate, sustainable finance, ING