From the November 2008 issue of Investment Advisor • Subscribe!

Water, Water, Everywhere

There's plenty of H2O available, but little of it can do us much good

Finding a clean and renewable energy source to replace petroleum is undoubtedly one of the most pressing, and well-publicized, problems facing civilization today. Oil, however, is not the only liquid natural resource whose availability, or lack thereof, threatens our future. Running out of fossil fuels would certainly change life as we know it, but it wouldn't be the death of us all. A lack of water, however, could do just that. There are alternative sources for energy, but there's no alternative to water.

In a land where our supermarket shelves are filled with bottled water, some of which is shipped to us from an island in the South Pacific, where we use vast amounts of fresh water to keep golf courses verdant in the desserts of Arizona, Nevada, and California all year long, and the average American household consumes about 127,400 gallons of water for small fractions of a penny per gallon by opening a tap, the idea that we could run out of water is inconceivable for most people. Then again, it wasn't too long ago that no one could conceive of paying $4 a gallon for gasoline, either. Scientists believe that the amount of water on the planet has remained constant for the last billion years. According to the Web site howstuffworks.com, the amount is around 326 million trillion gallons. Obviously that's a lot of water.

The problem we face is not the overall volume of water, but the amount of it that is fresh water--about 2%. Okay, you say, that leaves us about 6.5 million trillion gallons, but most of that is inaccessible as it's frozen into the polar ice caps and glaciers. In reality, only about 0.36% of the world's water supply is found in underground aquifers and wells and another 0.036% in lakes and rivers. Twenty percent of all the planet's fresh water is stored in the Great Lakes and the same amount is in Lake Baikal in Russia's Siberia region. The remaining fractional percentage of earth's water is either floating in the air as clouds and water vapor or locked up in plants and animals. (Of every 100 pounds of bodyweight, the average person is carrying around 65 pounds of water.)

Letting the Tap Run

While we have a limited amount of fresh water available to us, we're using more of it than ever. According to Rose George, author of The Big Necessity: The Unmentionable World of Human Waste and Why It Matters (Metropolitan Books, 2008), in 2000 twice as much water was used around the world as in 1960. Right now two billion of the world's six billion people live in water-stressed areas and I've seen estimates that by 2050 as much as 75% of the world's population (predicted to have reached nine billion people by then) could face problems of fresh water scarcity.

Already, according to UNICEF, a billion of the world's poorest people drink unsafe water and in many cases pay a lot of money for it. In most developed countries we don't think of water as expensive because it's subsidized by the government, and whatever water bills we pay as homeowners are really only a fraction of the actual expense of finding it and getting it into our homes. According to the Earth Policy Institute (www.earthpolicy.org), however, poor urban residents in developing countries have no access to municipal water supplies and instead purchase water from private purveyors who bring it in by truck. If you think that too much of our disposable income in this country goes to purchase gasoline, consider that the poorest households in Uganda spend about 22% of their income on water. In El Salvador and Jamaica it's around 10%.

A Water Fund Is Launched

Finding solutions to the planet's water problems is bound to be a growth industry in the coming decades. With that in mind, Calvert recently launched the Calvert Global Water Fund (CFWAX). It follows last year's alternative energy fund launched as part of the firm's Calvert Solution Strategies, a new series of investment portfolios which Lily Donge, an analyst for Calvert Funds whose official title is manager, environment and climate change, describes as "a portfolio strategy that invests in companies that produce products and services geared toward some of the world's most pressing environmental and social challenges." She says that the idea behind the strategy was for Calvert to channel investments in a way that was proactive and looked for more solutions and opportunities, rather than taking the traditional SRI approach of screening companies out because of negative behavior.

"We think that there is a water crisis and it really is about the imbalance between supply and demand," she says of the thinking behind the Global Water Fund's creation. "Often people will ask me the question, 'Are we running out of water, like we're running out of oil?' The answer is that we are not necessarily running out of the resource, we are just managing it poorly. There is a lot of value to manage it right, or manage it sustainably. That is what the fund aims to do--to look for the services that enable water to be cleaner, higher quality, and accessible."

It's Not Bottled Water

The first thing that many investors are likely to think of in terms of investing in water is bottled water, but for the Calvert fund, that's not a consideration.

"As far as the investments, there are three buckets," Donge explains. "The first one is water and wastewater utilities. The second bucket is a big group--it's infrastructure, including engineering and consulting, but even pumps and valves--anything to distribute the water. The third bucket, which is my favorite, is water technologies. These are really what I call the science of water--defining value in purification, separation, desalination, for example."

A big area is undoubtedly going to be the development of water technologies, but Donge has high hopes for the entire sector. "I think we're going to find growth in all three buckets, which is surprising given the fundamentals," she says. "We're very positive that even utilities have a huge role to play in terms of growth potential. A good example is Manila Water, which serves the Philippines but has branched out to other parts of Southeast Asia. There's a huge growth potential in those utilities. There are utilities that are very crucial to cleaning up China's pollution. That's the utilities bucket and we see growth there."

Donge argues that "In infrastructure we see growth in engineering and infrastructure because of the basic needs of Europe and the U.S. to redo our pipes and valves. It's a really old infrastructure. According to our sources, it's going to take 900 years at the current pace to replace our U.S. infrastructure."

Since we obviously don't have 900 years to wait, the revitalization of that infrastructure is going to have to be a high priority in the coming years, as becomes evident every time there's a water main break in one of our older cities, such as New York or Washington, D.C. According to a recent Scientific American article ("Facing the Freshwater Crisis") there will need to be an investment of as much as $1 trillion annually through 2030 in water infrastructure and sanitation systems.

In addition to our energy and freshwater crises, there's also the crisis of our economy. The idealistic optimist within me, as opposed to the unabashed cynic, sees investment in the solutions to the first two problems as going a long way toward fixing the third. New technologies developed during World War II, the space race, and the computer revolution helped fuel prosperity in the following years. It could happen again.

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