Water

In 2017 we highlighted Water as one of our core thematic holdings across client portfolio. Considering that the challenges and opportunities relating to the provision and consumption of water remain the source of much debate, and given the far-reaching implications of global water scarcity, we thought it would be timely to provide you with an update on recent developments.

Thesis for Investing in Water

The global annual temperature has increased 0.06°C per decade since 1850 (the early days of the industrial revolution) and by 0.2°C since 1982, leading to a total rise in the global average temperature of about 1.3°C. The increase in temperature is having a massive impact on water; the total amount of it, the quality of it and access to it.

Although over 70% of planet Earth is covered in water, little of it can be used for drinking. Only 2.5% of all water on our planet is freshwater, and only 1% of all freshwater is easily accessible.  Over the past 40 years, the world’s population has doubled, whilst water consumption has quadrupled. Worldwide, 800m people (about 10%) have no access to clean drinking water, and about 4bn people experience severe water scarcity for at least one month every year.

Agriculture accounts for approximately 70% of global freshwater consumption, a figure that continues to rise. Meat production, in particular, is extremely water-intensive. For example, producing a kilogram of beef in the UK requires an estimated 15,000 litres of water—five times the amount needed to produce a kilogram of wheat. The growing middle class in densely populated regions of the developing world, like India, has resulted in a tripling of global meat production over the past 50 years and is expected to drive a 15–20% increase in global meat production by 2030, according to the Food and Agriculture Organization. This surge will significantly escalate agriculture’s demand for freshwater.

The world is facing high levels of water stress, and maintaining current energy usage and power systems could lead to the world potentially facing critical water scarcity by 2040. The problem is exacerbated when you consider the growing population.

Datacentre Cooling Systems

In today’s tech driven world, Artificial Intelligence (AI) and Cryptocurrency are starting to transform how we live and work. The demand for both technologies has uncovered serious environmental concerns stemming from their excessive water and energy consumption. The main reason for the intense water usage is the extraordinary amount of heat being generated by the servers supporting the new technologies, which has created a need for more cooling.

Datacentre cooling consists of the utilisation a mix of techniques, processes and equipment which reduce the heat generated by the hardware (mostly servers) in those datacentres. Cooling down the hardware is required to ensure continuous, efficient and smooth functioning. Although water-based cooling is only one of several cooling techniques in use, a disproportional amount of water is used every day. The water used by datacentres to cool down their servers and other critical hardware must be free of bacteria and impurities, otherwise the effectiveness of the hardware could be jeopardized. Datacentres are competing with humans for the same water we drink, cook, and wash with every day, and so careful consideration regarding effective use of the resource is of the utmost importance.

Data centres using cooling towers and air mechanisms to dissipate heat use roughly 9 litres of water per kWh of energy. Google’s collection of datacentres consumed 24.2 billion litres of freshwater for cooling in 2023, up 17% from the year before. Microsoft’s consumption of freshwater increased by 34% over the same period. In total, datacentres consume about the same amount of water as the entire country of Japan every year.

We have already seen real life implications of the introduction of these datacentres in communities. Google’s data centre in Oregon’s water usage tripled from 2016 to 2021, reaching over 355 million gallons per annum. In 2022, the city’s government filed a lawsuit, attempting to keep Google’s water use a secret from farmers, environmentalists and Native American tribes who were concerned about its effects on agriculture and on the region’s biodiversity.

Given the projected growth of datacentres, consumption of water is set to increase dramatically. As climate change is having a massive impact on the availability of water suitable for human consumption, solutions must be found.

How Quartet Invests On Behalf Of Clients

A large percentage of water related companies within stock market indices are utilities who are not actively trying to solve the problem of scarcity. We prefer exposure to businesses who help mitigate water scarcity and contribute to a clean, safe and sustainable water supply. This will include the manufacturers of pipes, pumps and valves to sophisticated analytical testing and filtration systems. These companies provide the equipment and technologies needed to efficiently collect, purify, and redistribute water to residential, industrial and commercial customers or to the natural environment. Also in focus are the environmental service firms that provide the specialized engineering needed to ensure public water infrastructure is properly maintained and upgraded.

Water, once a free and abundant resource, is now becoming a precious commodity. As demand for water increases we believe the price of the commodity should continue to rise. Investors must accurately price this essential element to ensure sustainable management and equitable distribution. As such, we remain committed to the theme.

Risk Warning

This document has been issued by Quartet Capital Partners LLP (“Quartet”), which is authorised and regulated by the Financial Conduct Authority. The information in this document does not constitute, or form part of, any offer to sell or issue, or any offer to purchase or subscribe for shares, nor shall this document or any part of it or the fact of its distribution form the basis of or be relied on in connection with any contract. Quartet has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and no assurance can be given that the stated investment objectives will be achieved. Quartet may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which it is based, before the material is published. Past performance is not a guide to future performance.

The law may restrict distribution of this document in certain jurisdictions; therefore, persons into whose possession this document comes should inform themselves about and observe any such restrictions. This letter, the information contained herein, and any oral or other written information disclosed or provided is strictly confidential and may not be reproduced or redistributed, in whole or in part, nor may its contents be disclosed to any other person under any circumstances.

Quartet Capital Partners LLP is a Limited Liability Partnership registered in England and Wales, Company No: OC345770.

Registered Office: 16 Water Lane, Richmond, Surrey, TW9 1TJ.

Authorised and regulated by the Financial Conduct Authority of the United Kingdom (“FCA”).

A list of members is available for inspection at the registered office.