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Why Water Is Becoming Everyone's Business
By Ana Olaya-Rotonti

For years the U.S. has enjoyed an abundance of water for households, business, and agriculture. However, within the last decade, the western U.S. has begun to experience its share of water stress and droughts showing the need for more awareness and for the need to implement solutions focused on mitigation and adaptation.

Peter Culp, an expert on water law and policy, believes that water scarcity is an issue whose time has come. As discussed during the 2016 SRI Conference panel, Investing in Water: Issues and Innovative Solutions, Culp remarked: "When I began working in this field the discussion around water was for the most part a conversation around how we were going to allocate the water we had, it was around allocation of surplus, that conversation has changed over the last ten years to a conversation on how we manage scarcity." Culp emphasized that "Water is the ultimate legacy" of America and while water and its issues are "intrinsic to the cultural identity of the West," investment opportunities exist nationwide and globally.

Water scarcity is becoming a true global problem. Around the world there is a growing need for better management of our water resources and a serious disruption of models that have been in place in the past.  Addressing water issues will require both effort and capital. Impact investors may soon enjoy a wide range of opportunities to get involved and help solve one of the most critical problems of our time.

Availability, water rights, and rising demand

Quantifying and allocating available water resources is a critical step to ensure that these can continue to exist in the future and can meet the demand of a growing population. However, some states are encountering an imbalance between supply and demand of this resource. For example, according to a study by the Bureau of Reclamation, demand for the Colorado River exceeds the amount of water that actually exists. Similarly, a study from the University of California, also found that in 16 of 27 major rivers in this state, water rights exceed the available supplies.

There is no easy solution. The allocation of water rights in many states involves a complex and well-established legal framework that is very difficult to modify. Furthermore, long-term solutions to these problems must go beyond remediating the current imbalance and avert the challenges posed by population growth and climate change in the years to come.

Providing water for human consumption is not the only challenge

Alongside households, businesses, and agriculture, nature is also fighting for its fair share of water. Unfortunately, with not enough water to go around and many rivers being consumed and diverted upstream, nature is often deprived of this critical resource.

This has significant implications for ecosystems and the environmental services that they provide. For example, half of the world's wetlands have disappeared since 1990, and wetlands in the U.S. continue to disappear at alarming rates. Wetlands play an important role in improving water quality, floodwater storage, fish and wildlife habitat, aesthetics, and biological productivity. Hydrologic alteration, including the diversion of flow to or from wetlands, is one of the human activities that has a significant adverse effect on wetlands. A holistic solution to water scarcity should take these issues into consideration as well.

The Impact Investment Solution

Market based approaches are currently being studied as a way to solve these problems and achieve a better balance of supply and demand of water resources. According to Mark Tercek, CEO of The Nature Conservancy, establishing a water rights trading system is an impact investment-driven solution to water shortages that generates environmental, financial and social benefits at a greater scale than philanthropy-funded efforts can. A water rights trading system will also support farmers and communities who rely on freshwater. Brian Richter, Chief Scientist of the Nature Conservancy's Water Program, also points out that a specific market-based model known as a Water Sharing Investment Partnership, would also allow the organization to use a portion of water to restore natural ecosystems.

Numerous other creative options are being explored as a solution. A white paper on investing in water illustrates that there may be various tools to manage scarcity within the Colorado River Basin and in other areas, while providing attractive opportunities to investors.

Water Resources: Innovation and Investment

Water resources and associated scarcity and treatment technologies are becoming increasingly important in the investment world. The Investing in Water: Issues panel, highlighted three key investment trends that deserve to be watched:

  1. Water scarcity technology
  2. Hydro-electric power
  3. Decentralized treatment systems

Water scarcity

It's no surprise that challenges for appropriate water allocation methodology have increased in recent decades.  For example, Culp noted Lake Mead's recent drought was in fact not the result of water scarcity, but rather the over allocation of water rights in Colorado.   High consumption users, such as the agricultural industry, create the opportunity for new developments in efficient water use technologies.  New innovations such as water efficient crops can help diminish the possibility of large scale resource scarcity while maintaining profitability in agricultural sectors.  Coupled with increasing impacts of climate change, water allocation and use create the necessity for ingenuity.  As Culp concluded, successful technologies and their investments will be those that solve the problem.

Hydroelectric power

Hydroelectric dams create long-term value in their high-capacity power generation with little on-going operational and maintenance costs. Hydroelectric power, even with limited storage, can meet peak demands even when solar and wind energy struggle.  Hydroelectric dams require longer lead times in permitting and construction and an approximate $2 million initial budget requiring diligence on the on-set of the investment but a 50-year lifespan with high-capacity design quickly outweighs any initial barriers.  Gregory Morris of GLM Engineering COOP did note that most of America's dam development has been "tapped" out. However, developing countries still offer opportunity for feasible investment opportunities.

Decentralized treatment systems

Moderator Azita Yazdani of Exergy Systems, Inc noted that most in-ground infrastructure within the United States is over thirty years old, with growing inefficiencies in transport of water.  She estimates up to 30% of in-ground water transfer is lost to the surrounding soil due to failing infrastructure in what is called a "non-revenue loss." A shift must be made towards decentralizing our water treatment and transport infrastructure. An EPA study noted the need of $271 billion in order to maintain our current wastewater treatment infrastructure. Yazdani suggests shifting that expense towards advanced treatment technologies that enable efficient and localized recovery and reuse.  Decentralized technologies can help achieve drinking water standards without the non-revenue loss of centralized distribution.  However as these innovations develop, it should be noted that regulatory agencies continue to consider promulgation of rules for pending new technologies.

The conference panel emphasized the existence of ample opportunity for capital investment in innovative water resource technologies – both now and in the future. You can listen to the whole panel here.

The promise of conservation finance is that innovation and impact investors will come together to find solutions to our most pressing environmental needs. Our hope should be that the conceptual work being done today, may soon become practical and will write the history about how this generation managed to solve our water problems.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: April 5, 2017