December 15, 2022 | 7 Minute Read
Global Head of Fundamental Equity Client Portfolio Management
Water’s importance to human survival and society’s most critical industries from agriculture to energy cannot be overstated. Yet the world’s water security—our capacity to have enough water of sufficient quality for survival and economic activities—is facing multiple threats. Pollution and natural disasters driven by climate change are exacerbating pressure on water systems, straining societies and economies. Global water use is expected to grow by roughly 1% per year over the next 30 years,1 driven by industrial and energy sectors as well as population growth, economic development and shifting consumption patterns. With households making up only 12% of all water consumption worldwide and business (both agricultural and industrial) responsible for 88%, companies are realizing their water use can’t operate as it once did as this vital resource becomes scarcer and/or less suitable to use. As such, demand for advanced technologies to conserve water and manage the complex water needs of businesses has been growing. This has been creating compelling opportunities for investors to help secure a sustainable water future in key industries benefiting from structural tailwinds, from agriculture and energy to healthcare and technology.
Source: International Energy Agency, 2016. United Nations 2020. Water withdrawal: The volume of water removed from a source; by definition withdrawals are always greater than or equal to consumption. The economic and market forecasts presented herein are for informational purposes as of the date of this material. There can be no assurance that the forecasts will be achieved.
Agriculture represents 70% of global water consumption and both contributes to and faces water risks. The sector therefore plays a vital role in addressing the world’s water challenges. Modern farming techniques and progress in food production have made it possible to provide better quality food to more people than ever before, but too often this is achieved at the expense of water resources and the health of ecosystems. For instance, agricultural fertilizer run-off and pesticide use contribute to the pollution of waterways and groundwater. At the same time, farmers themselves increasingly face water usage limitations, rising fertilizer costs, and changing weather patterns, which can make irrigating a challenge. Encouragingly, we see continued innovation in this space. Smart renewable energy-powered irrigation systems are increasingly helping farmers achieve sustainable high-yield production, reduce energy and water consumption, or simply provide reliable drinking water for livestock. Technologies include precision-engineered spray nozzles for crops, apps monitoring wind, humidity, and soil temperature, as well as solar-powered pumps allowing farms and vineyards to provide maximum water flow.
The food and beverage industry closely monitors water risk at sourcing locations for key commodities including cereals, coffee, dairy and sugar. Companies are also focused on their own water use, particularly at factories located in regions of high baseline water stress. Beverage manufacturers have already set some of the most stringent sustainability goals to ensure proper water management, so they need the tools to achieve them. We see companies now providing technologies across the entire water cycle for food and beverage operations, including water intake, cleaning, disinfection, and wastewater treatment. Examples of innovation designed to conserve water include automated bottle washers with smaller holes in the spray nozzles, and air rinsers that clean bottles without any water at all. Technology is also emerging to recover water used in food manufacturing by condensing and purifying the steam evaporated from fryers.
Water is critical for electricity generation and fossil fuels; for instance, it is used to spin turbines connected to electricity generators or to extract and transport coal. In the oil and gas sector, reducing water usage is emerging as a key environmental consideration alongside efforts to reduce flaring levels and mitigate carbon emissions. In the renewables space, low carbon doesn’t always mean low water. Technologies such as wind and solar require little water, but others like nuclear power, biofuels and carbon capture techniques are water intensive.2 Examples of water-related needs in the energy sector include wastewater management systems for offshore rigs, as well as water quality monitoring technology and wireless software to track pipe leaks. We also expect to see more demand for solutions enabling the energy sector to use more recycled water and conserve fresh water, improving the sustainability of their own operations and easing water stress on local communities, habitats, and wildlife. Third-party specialists providing efficient, full-cycle water management systems—from groundwater supply to water gathering, recycling, and disposal infrastructure—stand to be among the potential beneficiaries.
Source: IEA, as of October 26, 2022. The economic and market forecasts presented herein are for informational purposes as of the date of this material. There can be no assurance that the forecasts will be achieved.
Alongside efforts to conserve water use, solutions are needed to address industries’ complex water needs and complicated treatment processes. For example, injectable drugs and eye medications require different water treatment methods, while high-purity water is required to make the microchips for our phones, laptops, solar panels and electric vehicles. Papermakers, power plants and car manufacturers all need their own treatment technologies, plumbing systems and maintenance services. There is a limited pool of water engineering companies able to deliver such sophisticated products and services to specific markets, so they can have a highly competitive edge and unique business models. This potentially enables them to generate high margins and stable earnings via services—characteristics that can be attractive in an uncertain macro environment, where it can be difficult to gauge capex demand or earnings prospects. Below, we highlight three sectors with these types of complex water needs: semiconductors, healthcare and mining.
Semiconductor manufacturing facilities require large quantities of high-purity water. There are multiple stages of cleaning, rinsing and surface conditioning, and even the smallest contaminants in the production process can jeopardize the quality of the end-product. High-performance ultraviolet (UV) disinfection technology is widely used in industrial water treatment applications to eliminate bacteria and other microorganisms. In addition to initial treatment, the management of wastewater is also complex due to toxic solvents and chemicals, and chip makers can face heavy fines or even closures if they’re not compliant with wastewater discharge regulations. Overall, we believe the sector’s specific manufacturing, treatment and purification requirements present opportunities for solutions that will help the manufacturers produce next-generation chips more efficiently and cheaply.
Source: Goldman Sachs Global Investment Research. September 16, 2022. For illustrative purposes only.
In the healthcare industry, water quality critically underpins patient safety and the management of medical technology, with different grades of water quality required depending on different pharmaceutical uses. Sterile water is required to treat wounds, prevent infection, and clean reusable surgical instruments. In the clinical diagnostics space, pure water is required at every stage of operation and, as diagnostics tests become more sophisticated and sensitive, consistent water quality is more important than ever. The pharmaceutical industry also devotes considerable resources to the development and maintenance of water purification systems to ensure that water for the manufacture of medicinal products is at the highest quality. We expect to see continued demand for solutions—including water quality sensors and reverse osmosis, nanofiltration and UV techniques—designed to handle the water needs of pharmaceutical labs, supporting the development of critical medicines and improving patient care.
Mining critical raw materials is a water-intensive process. Around 70 cubic meters of fresh water is required to produce one ton of copper, for example, with surface and groundwater as the main sources.3 However, while it might be easily accessible and the cheapest to use, the availability of water from rivers and lakes can depend on weather conditions and permits to access it. As a result, many of the world’s largest mining companies are studying ways to recycle water and eliminate, where possible, fresh water from mining processes. Some are looking into water-free ways to process raw materials, such as dry separation during ore crushing and grinding. Others are seeking to diversify water sources and invest in seawater desalination facilities. However, fossil fuel-based thermal desalination results in high greenhouse gas emissions, and the toxic brine and other chemicals produced from the process can pollute coastal ecosystems. As mining companies look to improve the sustainability of their projects, we expect more demand for technologies minimizing brine volumes and enabling energy efficient desalination.
Source: Goldman Sachs Global Investment Research, Company data. October 5, 2022. For illustrative purposes only.
Delivering a secure water future is a monumental challenge, both domestically and industrially, but achieving it is vital for human health, global economies, and our planet’s ecosystems. As attention on the world’s water crisis—and the ambition to solve it—grows, we expect corporates across key sectors of the economy to expand their water conservation efforts and seek solutions to manage their own complex water needs. By allocating capital to innovative businesses solving real-life liquidity challenges across critical sectors of the economy, investors can also help play a role in securing a sustainable water future.
Green Capex is emerging as a powerful secular growth theme for investors as greater capital is required to meet net zero, clean water and infrastructure mandates. Within the theme, a mosaic of key technologies and impacted sectors exist, including ‘Greenablers’ - companies operating in what we describe as building block sectors where increased reinvestment will be needed.Read More
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1 United Nations, Groundwater: Making the Invisible Visible. March 2022.
2 International Energy Agency (IEA). Introduction to the Water-Energy Nexus, 23 March, 2022.
3 Goldman Sachs Global Investment Research, 1 September 2022.
Capex refers to capital expenditures.
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Date of First Use: December 15, 2022 299363-OTU-1707682