“If you see me, cry,” were the words etched into an exposed rock as the water receded on the Elbe River in the Czech Republic this summer. It is one of many so-called anti-hunger stones carved over the years in memory of the historic drought. Recently, these markers – and others like them – have appeared much more frequently. When Lake Mead dried up this summer, there were discoveries as macabre as corpses. Then, in the fall, the barge ran aground along the Mississippi River as it hit a 30-year low. Drought headlines have been persistent reminders of how limited this resource is. The other side of the coin is equally troublesome. Climate change leads to more severe storms that can be accompanied by flooding, which can contaminate water supplies. Residents of Jackson, Mississippi discovered this. It took more than two months for the Environmental Protection Agency to consider the city’s water safe to drink after its local utilities were flooded by successive storms. Even more dramatic was the flooding that engulfed nearly a third of Pakistan in August, killing more than 1,700 people and displacing 33 million. Water is essential to life, and as these facts show, it is necessary to keep supplies safe and available. More and more companies are working on solutions. This trend could present an opportunity for investors as stresses on water systems around the world worsen in the coming years and drive demand for these services. Investing in the space requires a bit of care, according to Deane Dray, an analyst at RBC Capital Markets, who emphasizes that not all water supplies are created equal. “There’s an element of frustration,” says Dray. “There are not many ways to invest in the water sector. The reality is that there is a scarcity of investable assets. And they tend to be very expensive because there is such demand for them.” According to Dray, investors looking to support this supertrend are providing some demand. This includes dedicated water funds or broader ESG funds that support companies that fit environmental, social and governance criteria, he said. Dray’s preference is to pick stocks in the sector that offer specialized technology, which means faster growth and higher margins. Many activities in areas such as filtration and desalination, testing and analysis or smart water networks can make water more efficient. Huge Demand for Fresh Water The United Nations Framework Convention on Climate Change estimates that around 2.3 billion people are living in water-stressed conditions. According to the report, at least once a month, about 4 billion people experience a shortage of water supply and this number is expected to increase to 5 billion by 2050. While more than 70% of the planet is covered covered by water, mostly in the ocean, which means that only about 1% is suitable for human use. The urgent need for water in arid regions like the Middle East or countries like the Bahamas, Maldives and Malta, has fueled reliance on extremely energy-intensive desalination processes. Saudi Arabia gets about half of its drinking water this way. In terms of cost, this process can be harmful to the environment. HSBC Global Research analysts said: “For every liter of drinking water generated through desalination, about 1.5 liters of the liquid is contaminated with chlorine and copper, which is twice as salty as seawater and very harmful to marine life”. in September. While governments and companies will consider alternatives, desalination is likely to continue to be an option as large populations are concentrated on the coasts, with access to abundant saline water. . Some of the companies that are pushing to make desalination work are private, Dray said. However, he cites Energy Recovery as an example of a public company in the field. It makes pump system and booster used in seawater reverse osmosis. As the name implies, Energy Recovery attempts to recover hydraulic energy from the high-pressure pumps used in the desalination process to reduce its costs. Better membranes will also be key. These semi-permeable barriers are used to separate molecules in water. The idea is to sort out salts, minerals, and other impurities. DuPont is one of the companies working on this. In addition to the desalination process is the reuse of wastewater. The United Nations estimates that 380 billion cubic meters of water can be recovered annually from wastewater and it predicts that number could increase to 574 billion cubic meters by 2050. Treated wastewater can be used drinking water or used for industrial or agricultural purposes. “In America, people immediately say, ‘Oh, from the toilet to the faucet? It’s disgusting. Never even think about it.” But the people in Singapore, of course, have already started,” said Dray. A pure advantage to make a change, people will need “more trust and confidence” in water testing and treatment, He cites Danaher as an example of a company well positioned in the sector, he said, but the company expects to complete the division, known as EAS, by the fourth quarter of 2023. The application and environment solutions business generated about $4.7 billion in revenue last year and about 55% of that is recurring.Sales are expected to grow at an average rate a long-term number “As an independent company, EAS should have the scale and ability to make more meaningful organic and inorganic investments, supported by its strong M&A system.” them,” wrote Stifel analyst Daniel Arias in a research note, published after the spinoff was announced in mid-September. Once the device is detached, it will be almost a source of water. pure to play, this can do making it more attractive to water-focused funds. However, some of the country-focused funds have found ways to diversify their holdings. Get the Calvert Global Water fund. It concentrates its shares among companies operating in the water industry or providing water-related services and technologies. However, it can diversify by investing in large water users, such as semiconductor or apparel companies, as long as these companies are working to become large water users. water more efficiently. It also invests in water solutions companies like Danaher even if their share of revenue comes from water-related businesses below the 30% threshold normally required by the fund. “If you’re going to tackle global water challenges, you can’t ignore areas that really use a lot of water,” said Jade Huang, managing director of responsible investment solutions at Calvert Research and Management. this country. “Invest in things that really drive the industry to improve them.” Calvert’s Class A fund is down about 23% this year, according to FactSet. Water metering is also vital to conservation efforts, and companies in the field include Xylem, Badger Meter and Roper. Xylem stock is trading above its average stock price target on Wall Street, according to FactSet. Dray considers this one of his top picks. As a pure drinking water company, he hopes it will capitalize on some industry trends. One advantage for Xylem is that half of its business is tied to steady demand from the city’s utility services. This can be a real boon in uncertain economic times. In recent quarters, semiconductor shortages have weighed on the company’s ability to supply products, but it hasn’t suffered cancellations. “In our view, the setup for Xylem over the next few quarters is very good given its large backlog, low risk, relatively defensive market, and normalization,” said Stifel analyst Nathan Jones. price/cost, has gone from headwind to headwind for profit.” Last week, he reiterated his buy rating on the stock. Jones expects these conditions to continue for at least a few quarters. The improvement in chip supply could then refuel its outlook for the period 2023 to 2024, he said. Stifel has a $113 price target for Xylem, which closed Friday at $107.21. In the field of water quality, Evoqua Water Technologies is the name that RBC prefers. The company has moved from selling capital equipment to providing outsourced services. Under this agreement, Evoqua provides water treatment services to its customers for a flat fee. Dray said this business has been highly profitable for Evoqua. The company also attracts attention for its ability to clean PFAS, a so-called forever chemical. While the service is a small part of the company’s overall business, Dray expects fixing PFAS will become a long-term driver of the company’s earnings over the next five years, and it doesn’t currently count. into the company’s long-term 3% to 5. % sales growth target. Huang said water quality will continue to be a driving force in the industry as the ability to use technology to purify water will help alleviate the problem of scarcity. “It has a lot to do with water scarcity,” she said. “…You can have a ton of water, if the quality isn’t good enough to use, it’s not useful.” — Michael Bloom of CNBC contributed to this report.