As global demand for fresh water rises exponentially, how can the world meet the growing need? It’s a question the Ontario Teachers’ Pension Plan has been asking recently – not only have they done a lot of research on the topic of water stress, they’ve begun to identify opportunities to invest in technologies and innovations that will help bridge the supply-demand gap. To find out what Teachers’ is doing, we invited Terence Yuen, portfolio manager and senior economist, asset mix and risk at Ontario Teachers’ Pension Plan, to lead a session on water stress and its long-term implications for investors at the 2014 Global Investment Conference. In this Q&A he shares his research on the topic and where he sees the hunt for new sources of fresh water going in the coming years.
Why look at water stress?
Over the past couple of years, we have been exploring long-term socio-economic themes that affect the investment landscape, such as the rising middle class and urbanization in emerging economies, and the aging population in developed countries. More recently, we looked at some emerging climate change related themes that we believe will have a substantial investment impact going forward. Water stress is one such emerging issue.
Water stress is very much in the news, what with droughts in California.
At this point we definitely see that the demand for freshwater is going to increase over the next 10 to 20 years and the big question now is whether the supply can catch up and to what extent technology will fill the gap. We are already starting to see water stress in places like California. Some emerging countries including certain parts of China and northern India also recognize this problem. Based on some current estimates, the gap between global supply and demand by 2030 could be as high as 40%.
What causes water stress?
From the demand side, it’s mainly because of the growing population and rising wealth in emerging markets. We expect the emerging economies to continue to develop. As they urbanize and become wealthier, their habits change and this has important implications for the consumption of food, water and energy. For example, higher protein consumption will substantially increase the demand for water. To produce one kilogram of beef, it requires 15,000 litres of water, mostly to grow the crops, usually soybeans or corn, to feed the cattle. This is equivalent to the amount of water that a typical American household would use in 10 days.
This is just one example of water footprint. There are many other supply chain interactions that a lot of people may not be fully aware of. When people talk about water scarcity, they tend to think about agriculture. Often they say if we don’t have enough water, if we have drought, then food prices will shoot up and maybe we won’t have enough food to feed the people. But water scarcity has far more impact than what people would think because people don’t really think through the supply chain from agriculture and power generation to the rest of the economy.
How does this present investment opportunities?
From the opportunity side, going forward we expect to see a supply and demand imbalance. We believe that, from a longer-term perspective, human beings will be smart enough to balance the gap. This creates investment opportunities arising from improving water efficiency or changing business models in high intensity industries, as well as developing new technologies that increase water supply or reduce water usage