Investment potential flows from water scarcity

The UN outlines private investment as a crucial pillar to meeting its goals in water supply and sanitation, alongside public money.

A united nations pledge to "ensure access to water and sanitation for all" by 2030 will create investment opportunities as governments liberalise the heavily regulated, state-controlled utilities industry and seek private sector partners to build infrastructure.
But the goal is also in danger of becoming merely an aspiration rather than an achievable target because, in its current form, it is too loosely defined to provide a credible framework for action by both private companies and the public sector.
The UN outlines private investment as a crucial pillar to meeting its goals in water supply and sanitation, alongside public money. Achieving universal coverage in safe drinking water and sanitation will require investing the equivalent of 0.1 per cent of global gross domestic product (GDP), or around $53 billion over five years.
The private sector plays a pivotal role in working alongside governments and international organisations. It opens up new opportunities for investors by fostering greater political will to liberalise the water sector, removing for example, regulations that have previously kept out many investors, such as price caps on water tariffs.
Pictet's investment instruments strategy allows investors to gain exposure to the investment opportunities available across the water industry. Our strategy is related to diverse range of water services stocks, companies which are well-placed to benefit from rising investment in global water infrastructure.
Risk-return profile
By combining investments in conservatively managed utilities with positions in companies that exhibit strong long-term growth potential, our strategy endeavours to achieve a risk-return profile that compares favourably with that of global equities.
The UN goal is part of 17 Sustainable Development Goals (SDG) outlined for member states to incorporate into policies, which highlight that inadequate infrastructure and dysfunctional economics cause the deaths of millions of people every year from diseases associated with inadequate water supply and sanitation. The SDGs form an ambitious successor to the Millennium Development Goals (MDG), launched in 2000. Most of the MDGs, which focused on cutting extreme poverty and boosting public health and education, have since been met, largely thanks to economic progress in China and India. But while the MDGs were limited to eight clearly defined targets, the new SDGs are more loosely formulated.
As well as the 17 goals, there are more than 100 sub-targets covering diverse areas such as gender equality and the environment.
Water industry experts believe this amounts to a weakness. The goals for water and sanitation are not focused enough, are too far-reaching and the sub goals give "a tick-box nature" to the overall target. A tactical plan is needed to move ahead and fund the changes needed.
Nevertheless, the UN goal pledges to "achieve universal and equitable access to safe and affordable drinking water for all" as well as "access to adequate and equitable sanitation and hygiene for all."
The challenges are considerable. The UN says 2.5 billion people - more than one third of the global population - live without basic sanitation facilities and 748 million lack access to an improved source of drinking water.
A principal obstacle to effective worldwide adoption of the goal is government inertia, particularly in the developing world. Real and effective action on the part of policymakers is unlikely until the issue of access to clean water and proper sanitation becomes a public health emergency. Industry experts believe it may need a major catastrophe in India or China to see change.
That's not to say governments and other agencies have not made considerable progress in recent years. Between 1990 and 2012, 2.3 billion people gained access to an improved drinking water source.
In a 2014 report, the UN highlights the example of Ethiopia where access to improved drinking water rose from 13 per cent of the population in 1990 to 52 per cent in 2012. Access to sanitation jumped from two per cent to 24 per cent. It attributed this achievement largely to strong political will, a robust education system which helped implement programmes aimed at ending practices such as open defecation and robust financial management.
Constraints
But to achieve universal access as outlined in its development goals, the UN recognises there are institutional and financial constraints to alleviating the problem and is calling for "behavioural change" that can mobilise investment.
According to water industry experts, the number of people without access to safe water is between 1.5 and three billion, which shows the scale of the challenge. Therefore, the important thing from an investor viewpoint is to acknowledge a real problem rather than a hypothetical problem.
The writer is senior investment manager in thematic equities for Pictet Asset Management. Views expressed are his own and do not reflect the newspaper's policy.