There’s plenty of water in the universe without life, but nowhere is there life without water.
— Sylvia A. Earle
- Industrial uses of water are global, large-scale and impactful, making efficient management of water resources critical to the bottom line of public equities.
- Owning and engaging with companies that consume water, and those that make water treatment and efficiency their strategy, offers ClearBridge meaningful opportunities to track shareowner and societal impact.
- Valuing the economics of water may be the biggest driver to conserving water.
Water Efficiency Is Good Business
Recently at World Water Week, a gathering of key stakeholders in Stockholm to discuss global water-related challenges , participants sized up the world’s water challenges: water stress (occurring when demand exceeds supply or when poor quality restricts use) increased between 1996 and 2016 for most countries in the world, and has more than doubled in 26 countries; only 59% of domestic wastewater is collected and safely treated; over 2 billion people lack access to safe drinking water; only one out of five countries is on track to achieve Sustainable Development Goal (SDG) 6 — clean water and sanitation — by 2030 for drinking water, and only one out of 10 for sanitation. Much of the world will be under high water stress in the next two decades (Exhibit 1).
Exhibit 1: Water Stress by Country: 2040
Water usage is ubiquitous. The average American has a water footprint of roughly 2,000 gallons of water per day — not just flowing through the tap, but hidden behind the food we eat and products we buy. A single avocado needs 60 gallons to grow; a hamburger requires 660 gallons to be made; a cotton T-shirt 713 gallons. Statistics like these highlight the importance of water across industries. Industrial uses of water are numerous and impactful, making efficient management of water resources critical to the bottom line and reputation of public equities.
Just as water usage is varied, there are many ways companies can improve water resources. Efforts to improve water resources illustrate how public companies are supporting the UN Sustainable Development Goals (SDGs), a set of milestones established in 2015 to solve some of the world’s most significant social and environmental changes and which ClearBridge can reference to help frame our ESG research and guide our engagement efforts with companies — in this case clean water and sanitation (goal 6) and life below water (goal 14). The mandate of SDG 6 is to ensure the availability and sustainable management of water and sanitation for everyone. All targets under this broad goal are relevant to companies, but two stand out:
- By 2030 to improve water quality by reducing pollution, eliminating dumping and minimizing the release of hazardous chemicals and materials, halving the proportion of untreated wastewater and substantially increasing recycling and safe reuse globally.
- By 2030 to substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity.
Water Efficiency Can Make Waves
Owning and engaging with companies that consume water offers ClearBridge meaningful opportunities to have an impact. In March 2018 ClearBridge analysts participated in a panel on water risks hosted by ClearBridge and Principles for Responsible Investment. There we discussed approaches to water conservation and challenges to beverage manufacturers’ water supply chains. The event followed closely upon ClearBridge’s hosting of a water day for Coca-Cola and other investors to discuss water stewardship in December 2017. As a major consumer of water as an ingredient in its beverages — ClearBridge’s consumer staples analyst notes that this makes water a material business risk for the industry — Coca-Cola prioritizes water quality and availability through efforts to improve water-use efficiency in its bottling plants, manage wastewater and water resources in the agricultural supply chain. It also replenishes over 100% of the water it uses in its finished beverages through nearly 300 water projects covering water sanitation, infrastructure and restoration of watersheds. In 2017 and 2018, Coca-Cola replenished almost 250 billion liters of water.
Exhibit 2: Clean Water and Sanitation
Within technology, water is also a key input in the semiconductor manufacturing process, which uses water to rinse the semiconductor wafer between hundreds of manufacturing steps. Intel, the world’s leading chip maker, offers an illustrative case of steps that can be made toward improved water use in semiconductor manufacturing. ClearBridge regularly engages with Intel and has hosted Intel’s annual sustainability day for over 10 years. Our hardware sector analyst notes that such sustainability-focused business practices around the IT footprint have affirmed our view that Intel is investing for the long-term. During our investor engagements, we have discussed how, to reduce water use, Intel has pursued internal recycling and efficiency initiatives, such as facility-based reuse of grey water, that recently conserved 3.5 billion gallons in a year. Using highly efficient reverse osmosis to purify water for wafer production, for instance, has also helped the company become over 90% more efficient in many operations. As described in an academic study on Intel, the company’s focus on innovation, environment and efficiency have been a competitive advantage in terms of cost savings and environmental regulations.1
We also have an impact by owning companies that make water treatment and efficiency their strategy, i.e., companies in the business of water. Xylem, for example, is the world’s largest provider of water technology, and it demonstrates how addressing water-related challenges can also be an attractive business proposition. Similarly, Ecolab, a provider of water, hygiene and energy technologies and services to the food, energy, health care, industrial and hospitality markets, shows how water is not only a social problem, but one with real economic costs.
Xylem and the Water Industry
A core element of Xylem’s business proposition is improving resource efficiency in the water industry, as well as improving water quality and the resilience of water infrastructure. Many people don’t think of energy use as an issue for the water utilities, but water is a heavy product to move. The wastewater industry is very energy-intensive — energy is the second-largest operating expense for water utilities (behind labor). Xylem pumps and other products are helping reduce operating costs, energy use and associated GHG emissions for its customers.
In 2017 ClearBridge attended Xylem’s Investor Day, to discuss one-on-one with CEO Patrick Decker the company’s sustainability efforts and to understand use-cases for Xylem products. Xylem’s own sustainability program prioritizes safety, employee engagement and better tracking of retention stats and engagement scores.
We discussed with Decker the focus of Xylem’s products on improving water efficiency and quality and reducing energy costs. Xylem’s new Flygt Concertor, for example, is the world’s first “smart” wastewater pump; it includes sensors that monitor operating conditions and automatically adapts the pump speed for optimal efficiency and cost savings. This can lead to energy savings of up to 70% versus conventional pumping systems. As Decker explained, Xylem is also having success in China with its ultra-violet (UV) treatment products, which offer more environmentally sustainable treatment solutions than chemical treatments. Xylem is looking to do the same in India, where water quality is a big focus. The country is pushing to clean up the Ganges River (the river passes through 50 cities in India), and Prime Minister Narendra Modi’s Smart Cities Mission aims to improve infrastructure and provide connected technology to increase resilience to extreme weather and reduce resource consumption.
Ecolab and Water Cost Reductions
Ecolab sees water as the ultimate renewable resource and an area in which it can create value, either by helping reduce consumption, encouraging reuse or recycling water. In terms of water management, Ecolab has an incredible reach. Every year the company manages 1.1 trillion gallons of water, helping with water safety for 27% of the world’s processed food and 42% of all processed milk supply. It supports 22% of the world’s electricity production and 40% of all nuclear power production. Ecolab solutions are used in production of 45% of all petroleum products globally.
"Energy is the second-largest operating expense for water utilities, behind labor."
For many years, Ecolab has reached out to ClearBridge for feedback on its environmental and governance practices. On a recent call with Ecolab’s investor relations, legal and sustainability teams, we discussed new sustainability initiatives and trends in 2018. Ecolab estimates that in 2016, within the 20 largest countries by GDP, 75% of water was under either moderate or high water stress. This number is set to grow to 90% by 2030. The issue, according to Ecolab, is that water is underpriced, and they forecast water costs will have to go up as scarcity increases. The costs of Cape Town’s water crisis, for example, are both social and economic. Recently, the crisis there required beverage companies to ship water in at $1,000 a truckload.
Companies often lack the data on how much water they use and how much they can save, and this may explain why some are not prioritizing water more. Ecolab continues to build out technology that helps customers monitor and quantify their water usage. The Water Risk Monetizer is an app that helps companies calculate the returns that would come from water-related investments, making it much easier for companies to justify a water decision. Ecolab then sells other tools that monitor water use in water sensitive applications like chemical plants.
Companies are also not focusing on the regions with the highest risk for water scarcity. Ecolab helps customers identify severe-risk hotspots in places like Cape Town and Sao Paolo, which helps develop more context-based solutions and avoid blanket prescriptions. This is key because global statistics don’t tell the complete story, as water is most often a local issue that needs to be addressed at the water basin level.
Water Needs Within and Across Industries
While different industries require different approaches to water’s challenges in different locations, the need for better water infrastructure is universal. In the U.S., neglected infrastructure and underinvestment have led to a record number of main breaks, prompting a U.S. wastewater infrastructure grade of D+ from the American Society of Civil Engineers’ Report Card for America’s Infrastructure. U.S. drinking water infrastructure earns a D. Companies like Xylem and Ecolab are helping to turn things around by reducing strain on existing infrastructure and building new, more efficient facilities.
The U.S. is certainly a key player, but a little over two-thirds of the world’s new water infrastructure over the next few decades is expected to be built in the emerging markets. In China, India and the Middle East in particular, the focus is on water quality and scarcity. In some cases, water and the environment are top policy mandates, as in China and India.
The potential monetization of water creates both challenges and opportunities. On one hand, clean water is a universal human right, and there are risks to monetizing it. At the same time, because there is no pricing around water, much of the developed world takes the value of water for granted; it might not be pressured into conservation unless it becomes more economically necessary. Making the business of water sustainable therefore leads us to ask: where can we as investors capitalize on “making access to water possible”? We ask similar questions about access to medicine and financial inclusion. We don’t want those without the means to have to pay for water, but we do want everyone to value water and thus invest for the access to clean water. Such an approach could ensure that clean water will be available during droughts, and for future generations. While this conversation proceeds, as ESG investors and long-term shareholders, we can encourage better water management by both encouraging better corporate behavior toward water broadly and by owning water companies whose business is to make this better behavior possible.