Water is the most important commodity of all. The human race cannot survive without it. Anthropologist and nature science writer Loren Eiseley has said that “if there is magic on this planet, it is contained in water”. Yet in the UK we take for granted a constant and reliable supply of water whenever we turn on the tap. In some ways, that’s no surprise. Seventy-one per cent of the world’s surface is covered by water, according to the US Geological Survey (USGS), with a total volume of a staggering 333 million cubic miles. Yet nearly 97% of the Earth’s aggregate water supply is contained in oceans and seas, meaning it is far too salty for human consumption, crop growing or most industrial uses except cooling.
Furthermore, more than 25% of the remaining 3% still has saline elements. The upshot is that only about 2.5% of the planet’s overall water stock is freshwater (defined as having low concentrations of dissolved salts and solids). And more than two-thirds of this 2.5% is contained in glaciers and polar ice caps, notes the USGS, and 30% of it is groundwater (under the Earth’s surface in soil and rock pores and fractures as well as in gravel, sand and silt). In other words, only 1% of global freshwater is actually surface water. Almost 70% of the latter is locked in ground ice and permafrost, with merely the remaining 30% – just 0.0075% of the world’s total water supply – to be found in rivers, lakes, swamps, soil and the atmosphere. In short, fresh, accessible and potable (drinkable) water isn’t as plentiful as it might at first seem.
Pollution and lack of rainfall have squeezed supplies even more. Conditions in the American West, for example, have been “so dry for more than 20 years that we’re no longer speaking of a drought”, says Lis Mullin Bernhardt, an ecosystems expert at the UN Environment Programme. The conditions such as those we see around the Colorado River basin represent more “aridification” and a “new very dry normal”.
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We need more fresh water
With both the quantity and quality of the planet’s surface water under increasing threat, then, groundwater is pivotal. Yet some of this is also highly polluted or is too deep underground to be economically extractable. What’s more, some of the planet’s largest groundwater systems are already under pressure from increasing irrigation requirements, leaving no extra water for storage. Several of the world’s main aquifers (underground layers of water-bearing material) too are now depleting. “Rapid groundwater-level declines (of more than 0.5 metres per year) are widespread in the 21st century, especially in dry regions with extensive croplands,” say researchers in Nature, the international science and technology journal. “Critically… groundwater-level declines have accelerated over the past four decades in 30% of the world’s regional aquifers.”
The survival of the human race depends on improving water collection, storage, purification and distribution. Yet the United Nations Educational, Scientific and Cultural Organisation (Unesco) spotlights some serious shortfalls. Globally, built reservoir capacity per person is decreasing as reservoir expansion has not been able to keep pace with population growth, but also because the storage capacity of existing reservoirs is decreasing, chiefly due to sedimentation. Distribution infrastructure is creaking: America’s Environmental Protection Agency has estimated that 2.1 trillion gallons of treated drinking water leak from US water main and pipe networks every year. And while supply is progressively imperilled, demand is surging. Global freshwater usage has risen six times over the past 100 years and has grown about 1% a year since the 1980s, says Unesco. Worldwide, agriculture accounts for roughly 70% of freshwater withdrawals, followed by industry (slightly under 20%) and domestic (or municipal) uses (about 12%). The global population – more than eight billion and rising – needs more fresh water.
In particular, there is extra demand from growing urbanisation (more water per person is consumed in cities versus rural areas). “Today, some 56% of the world’s population – 4.4 billion inhabitants – live in cities,” says the World Bank. “This trend is expected to continue, with the urban population more than doubling its current size by 2050, at which point nearly seven out of every ten people will live in cities.” That is set to create more problems. “Roughly half of the world’s population currently experiences severe water scarcity for at least part of the year,” says the UN World Water Development Report 2024. Cape Town, for instance, very nearly ran out of water in 2018. It all boils down to this: “The planet is facing an unprecedented water crisis, with global demand for freshwater predicted to exceed supply by 40% by 2030,” according to Csaba Korosi, president of the 77th United Nations General Assembly.
How, then, does the human race ensure future adequate and consistent supplies of this most important commodity? Better wastewater processing is one possibility. Eighty per cent of the world’s wastewater is currently left untreated back into nature, says Unesco, yet “safely managed wastewater is an affordable and sustainable source of water, energy, nutrients and other recoverable materials”. Later in this article, we examine three companies involved in wastewater. Yet the real key to boosting global water supply is plumbing into all that salty water in the world’s oceans – in particular as sea levels rise – via desalination.
Technological advances in semi-permeable membranes that filter out salt and impurities have made seawater desalination a success. The seawater reverse osmosis (SWRO) procedure is relatively energy-efficient and cost-effective. It also needs less maintenance than other desalination methods. Indeed, some Middle Eastern countries already use it for as much as 90% of their drinking water needs. While SWRO works well enough with very saline water, it has been expensive and energy-intensive. However, further progress is in the pipeline as membrane technology improves and the cost of building desalination plants declines.
The size of the necessary investment in the global water sector is vast. “An estimated $6.7trn for water-related infrastructure will be needed by 2030, reaching $22.6trn by 2050,” says the 2030 Water Resources Group. In addition, “an estimated $150bn is needed each year to deliver universal safe water and sanitation”. Within this, the global water desalination market is projected to be worth €17.5bn this year and to expand at a compound annual growth rate of 8.7% to 2031, by when it is expected to be worth $31.3bn, according to a report by market research group Coherent Market Insights. In other words, opportunities for investors in this particular sector could be huge.
Three water stocks to buy
1. Consolidated Water (Nasdaq: CWCO) designs, builds, operates and finances SWRO desalination plants and water-distribution systems in several Caribbean countries where drinking water is scarce and the use of such plants is economically feasible. It also develops and operates water treatment and reuse plants, in addition to water distribution systems, in the US and the Caribbean. The company also provides design, engineering, management, equipment manufacturing and operating services for commercial and municipal water production, supply and treatment, as well as for industrial water and wastewater treatment. Second quarter revenues dipped as a couple of major projects were completed. But “looking ahead to the remainder of the year and beyond, we remain very excited about our prospects”, says CEO Frederick McTaggart.
“Many positive factors – including consistent strong water sales growth in Grand Cayman, the long-term recurring revenues from our Caribbean-based bulk water and US-based operations and maintenance businesses…and the anticipated revenue and earnings from our $147m design-build-operate project in Hawaii – all together provide a very solid base for the company in the coming years,” he says. “The market for design-build projects is also showing no sign of slowing. We recently signed master design-build service agreements with two major national clients for a number of projects they are contemplating. We anticipate this will positively impact revenue and earnings in future periods.”
Down 30% from its November 2023 peak, the shares trade on a prospective 2025 price/earnings ratio (p/e) of 15.7, according to average analyst estimates compiled by MarketWatch. With its super-strong balance sheet (holding $96m of net cash compared with a £416m market cap), Consolidated Water is a long-term buy.
2. Energy Recovery (Nasdaq: ERII) doesn’t actually build desalination plants, but most of its sales come from producing equipment that makes SWRO and other water-purification processes more cost-effective. The company is expanding into water treatment solutions and refrigeration and has a market capitalisation of $1bn. Commenting on the firm’s latest financial results, president and CEO David Moon says that second-quarter revenue of $27m “exceeded the top-end of our guidance of $20m-$25m”. He “reaffirmed” full-year revenue guidance of $140m-$150m.
Again, the balance sheet is strong. There is no debt, the company is flush with cash and cash equivalents of $138m. Having dipped some 45% from their July 2023 peak on fears of a slowdown in capital expenditure, the stock price is set to benefit from doubled earnings per share over the next two years, say average analyst estimates compiled by MarketWatch. That would put the shares on a prospective 2026 p/e of just over 20, quite reasonable considering the firm’s long-term earnings growth potential. It’s worth tucking away.
3. Veolia Environnement (Paris: VIE), the French water, waste and energy business, designs, installs, operates and maintains water networks. Last year the group served 113 million people with drinking water while managing 3,809 drinking-water production plants. It also supplied 103 million with wastewater services and 35% of sales are derived from wastewater. Although Veolia isn’t a pure desalination play (40% of sales come from the group’s water activities), it is the leading global player in the sector. It has world-leading subsidiaries in both SWRO and thermal desalination ranging from design and construction to operation and maintenance. Veolia also offers portable desalination units as well as mobile water solutions.
The firm’s market capitalisation is €24.5bn and its shares trade on a 2025 p/e of 14.4, says MarketWatch, with a multiple of 13.2 forecast for the following year. One caveat is that net debt was €20bn at the end of July 2024. The historic yield is 4.2%, though, which should improve as the firm says dividends will move in line with earnings growth. It’s another long-term buy.
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