Water Rights: An Investment Guide

Water is an essential resource, but it's becoming increasingly scarce. This makes it a valuable commodity with investment potential. There are several ways to invest in water, including buying water rights from a river, stream, or groundwater source. However, water rights are difficult to invest in directly due to a lack of intrinsic value, standardisation, and a dedicated trading market. Instead, investors can gain exposure to water-related securities through multiple indexes, mutual funds, and exchange-traded funds (ETFs). These options provide opportunities to invest in water-related companies, such as beverage providers, utilities, water treatment firms, and equipment manufacturers.

Water scarcity and the impact of climate change

Water scarcity is a growing global issue, with around 2 billion people currently lacking access to safe drinking water. This number is only expected to increase due to climate change and population growth. Climate change is a primary driver of water scarcity, as it affects the world's water in complex ways.

Firstly, climate change is causing more unpredictable and extreme weather events, such as floods and droughts, which directly impact water availability. Rising global temperatures lead to increased evaporation, resulting in higher levels of atmospheric water vapour and more frequent heavy rainfall. This, in turn, leads to more floods, as the excess water drains into larger bodies of water, polluting the water supply and limiting access for humans and ecosystems. At the same time, higher temperatures and more frequent droughts cause water sources to dry up, further reducing water availability.

Secondly, climate change is causing terrestrial water storage, including soil moisture, snow and ice, to decline. This has significant implications for water security, especially in regions supplied by meltwater from major mountain ranges, where a significant portion of the world's population lives. The disappearance of glaciers, ice caps and snow fields also affects the regulation of freshwater resources for people in lowland areas.

Thirdly, rising sea levels due to melting glaciers are leading to the salinization of groundwater, reducing freshwater availability for human and ecosystem consumption in coastal areas. This is particularly problematic in regions that rely on desalination processes to produce freshwater, such as the Middle East, North Africa and the Caribbean.

Finally, climate change impacts water quality. Higher water temperatures and more frequent floods and droughts exacerbate water pollution from various sources, including sediments, pathogens and pesticides. Climate change also increases the risk of harmful algal blooms, which can contaminate water supplies, kill aquatic life, and make people sick or even kill them.

The impact of water scarcity is felt across various sectors, with agriculture being a major concern. Most of the freshwater used globally is dedicated to agriculture, and water scarcity will put pressure on food supplies. Additionally, growing demand for water increases the need for energy-intensive water pumping, transportation and treatment, further contributing to environmental degradation.

Water scarcity and climate change are inextricably linked, and addressing water scarcity through sustainable water management is crucial for building societal and ecological resilience and mitigating the effects of climate change.

Water rights and the challenges of local, state and federal governance

Water Rights and the Challenges of Local, State, and Federal Governance

Water rights in the United States are a complex interplay of local, state, and federal governance, with each level of government playing a critical role in managing this precious resource. While water is essential for life and a ubiquitous natural resource, its value and ownership often come into question during times of scarcity or when it is polluted. This dynamic has led to a variety of water rights frameworks across the country, with each state adopting its own approach to water law and water rights.

Local Governance

At the local level, water rights are often highly political and contentious, with communities and interest groups vying for access to this vital resource. The issue of water rights can be especially challenging in areas with limited water supplies or where demand exceeds available resources. In these cases, users may have to pay more for water or even have their water access rationed, underscoring the critical nature of water as a commodity.

State Governance

State governments play a pivotal role in allocating water rights and managing water resources within their borders. Each state has adopted one of two main water rights frameworks or a combination of both: the riparian doctrine and the doctrine of prior appropriation. Under the riparian doctrine, water rights belong to landowners whose land physically touches a river, pond, or lake. This approach is common in eastern states with plentiful water resources. On the other hand, the doctrine of prior appropriation, often seen in western states with scarcer water resources, allocates water rights based on the principle of "first in time, first in right." This means that the first person permitted to divert water has priority over subsequent users.

Federal Governance

The federal government also has a significant role in water rights and management, especially on public lands and in interstate water disputes. While Congress has generally deferred to states on water rights allocation, federal courts have upheld the federal government's authority to reserve and manage certain waters. This has led to conflicts between state water rights holders and federal agencies, particularly when it comes to managing public lands or regulating activities that impact water resources.

Challenges and Opportunities

The challenges of governing water rights are further compounded by increasing water scarcity due to climate change, pollution, and rising demand. As water becomes scarcer, the need for innovative solutions and effective governance at all levels of government becomes more critical. At the same time, water scarcity also creates investment opportunities, as companies develop new technologies to address the water crisis.

In conclusion, governing water rights in the United States involves a complex interplay between local, state, and federal authorities. Each level of government faces challenges in balancing the needs of diverse stakeholders while ensuring the sustainable use of this precious resource. Effective water governance is essential to safeguard water resources for current and future generations.

Water treatment and purification technologies

Filtration

Filtration is a fundamental process in water treatment, which involves passing water through a porous medium to remove suspended solids, particles, and impurities. Different types of filters are used, such as sand, gravel, charcoal, and membrane filters. Membrane filters, including reverse osmosis and ultrafiltration, are highly effective in removing bacteria, parasites, and even smaller particles like giardia and cryptosporidium. Reverse osmosis involves forcing water through a semi-permeable membrane, leaving contaminants behind.

Sedimentation

Sedimentation is a physical process where water is allowed to sit, causing heavier particles and solids to settle at the bottom. This process is often used in conjunction with coagulation and flocculation, where chemicals are added to neutralize the charge of particles, causing them to clump together and settle more easily.

Disinfection

Disinfection is a critical step in water treatment to kill any remaining bacteria, viruses, and parasites. Chlorination, using chlorine or its compounds, is a common method, but other options include chloramine, chlorine dioxide, ozone, and ultraviolet (UV) light. These methods ensure that water remains safe as it travels through pipes to homes and businesses.

Nanotechnology

Nanotechnology-based purification processes are gaining traction due to their efficiency and cost-effectiveness. Nanoparticles, such as silver, copper, and zero-valent iron, are used to adsorb and remove contaminants. Carbon nanotubes (CNTs) are particularly effective in removing organic, inorganic, and biological compounds from water.

Advanced Oxidation Processes

Advanced oxidation processes, such as ultraviolet photolysis and advanced oxidation processes (UVAOP), use UV light in combination with chemicals like hydrogen peroxide or chlorine to oxidize and degrade organic contaminants. This technology is useful for reducing organic micropollutants that may be challenging to address with other methods.

Biological Treatment

Biological treatment uses indigenous bacteria in a bioreactor to remove contaminants. As water passes through a media bed containing bacteria, the bacteria react with contaminants, producing biomass and non-toxic by-products. This process is effective for removing contaminants like nitrate and perchlorate.

These technologies, along with others like electrodeionization and packed tower aeration, are essential in providing safe and clean water for various applications, including drinking water, medical, industrial, and chemical purposes. Each technology has its advantages and disadvantages, and the choice of method depends on factors such as water quality, treatment cost, and expected water standards.

Water infrastructure and the need for innovation

Water infrastructure refers to large-scale engineered systems such as water treatment facilities, dams, reservoirs, aqueducts, and pipelines. These systems are typically designed with long lifespans of 50-100 years. However, the water industry lags behind other sectors in adopting innovative techniques due to several factors, including the long lifetimes and costs of previous water infrastructure and risk aversion due to public health concerns.

Barriers to Innovation in Water Infrastructure

• Long lifetimes and costs of previous water infrastructure: Water infrastructure systems are designed for the long term, with lifespans of up to 100 years. This long-term commitment to existing infrastructure makes it challenging to adapt and implement new technologies.
• Risk aversion due to public health concerns: Access to clean water is critical for public health, so water system operators are inherently risk-averse when it comes to adopting new technologies.
• Low financing for innovation: Water utilities often have limited resources and prioritize public health and water service provision over innovation.
• Monopolistic nature of water services: The monopolistic structure of the water industry can hinder the drive for innovation and the adoption of new technologies.
• Lack of in-house research and development: Water utilities often rely on external research institutions or supply chain companies for R&D, which can hinder the development and implementation of innovative solutions.
• Low water pricing: In many countries, water is underpriced, which can lead to a lack of revenue for suppliers to invest in innovation and infrastructure upgrades.

The Role of Regulations and Policies

Regulations and policies can play a crucial role in supporting or hindering innovation in the water sector:

• Supportive regulations: Governments can encourage the recycling of wastewater, the treatment and disposal of desalination brine, and the implementation of energy-efficient technologies.
• Restrictive regulations: On the other hand, regulations regarding environmental concerns, such as the use of nanomaterials in membrane development, may restrict the adoption of certain innovative technologies.
• Innovation-enabling policies: Policies such as the Water Infrastructure Finance and Innovation Act (WIFIA) in the US provide funding for eligible water infrastructure projects, including wastewater projects, drinking water projects, and projects to enhance energy efficiency in public water systems.

Enablers of Innovation in the Water Industry

To foster innovation in the water industry, several factors need to be addressed:

• Supportive culture for innovation: Water utilities and stakeholders need to recognize the importance of innovation and create a culture that embraces new technologies and ideas.
• Regulations that foster innovation: Regulations should be designed to support and encourage the development and adoption of innovative solutions in the water sector.
• Financial resources for research and improvements: Adequate funding is crucial for research, development, and the implementation of innovative technologies in the water industry.
• Public support: Public acceptance and engagement are vital for the successful implementation of innovative solutions in the water sector.

The water industry faces several challenges in adopting innovative techniques due to the long lifespans of existing infrastructure, risk aversion, and limited resources. However, the growing awareness of water scarcity and the need for sustainable water management are driving the development and implementation of new technologies. To accelerate innovation in the water industry, it is essential to address the barriers and enable innovation through supportive cultures, regulations, financial resources, and public engagement.

Water-related stocks, funds and ETFs

Water-related stocks, funds, and ETFs are a great way to invest in water without buying water rights, which can be difficult. Water ETFs invest in companies involved in the treatment, purification, and distribution of water. Here are some of the top water-related stocks, funds, and ETFs:

Water-Related Stocks

• American Water Works Co. Inc. (AWK): The largest listed water and wastewater utility in the US, serving over 14 million people. It has stable, long-term military contracts and a market capitalization of about $23 billion.
• Roper Technologies Inc. (ROP): The parent company of Neptune Technology Group, which provides innovative data and software solutions for water utilities. Roper has impressive organic revenue growth and significant margin expansion.
• Danaher: Produces professional, medical, industrial, and commercial products, including advanced water purification technology. The company has strong fundamentals and is well-positioned for growth.
• Ecolab: Provides water, hygiene, and energy technologies and services for a wide range of customers, including the food service, healthcare, and energy markets. Ecolab is undervalued and has the potential to regain pre-pandemic profit margins.
• Tetra Tech Inc. (TTEK): A global consulting and engineering company that provides One Water solutions to address complex water issues such as climate change impacts and contamination. Tetra Tech is well-positioned in high-growth markets related to water infrastructure and resilience.

Water-Related Funds and ETFs

• Invesco Water Resources ETF (PHO): The largest water-focused ETF with over $2.1 billion in assets under management. It invests in companies that create products for purifying and conserving water for homes, businesses, and industries. The fund has an expense ratio of 0.6%.
• First Trust Water ETF (FIW): The second-largest water ETF with over $1.6 billion in assets under management. It tracks an index of companies deriving substantial revenue from the potable and wastewater industry. FIW includes a healthy mix of utilities and industrial stocks.
• Invesco S&P Global Water Index ETF (CGW): This ETF offers exposure to water-related companies outside the US, including in the UK, Switzerland, Saudi Arabia, and Brazil. It has around $980 million in assets under management and an expense ratio of 0.56%.
• Invesco Global Water ETF (PIO): Provides exposure to emerging markets and has a higher expense ratio.
• Ecofin Global Water ETF (EBLU): A smaller ETF with a focus on sustainability and ESG, with low expenses.

Frequently asked questions