It’s Time for Serious Capital to Flow to Water
By Tom Ferguson, Burnt Island Ventures
This is part six of a six-part series, Breakthrough Strategies with Emerging Managers, in partnership with Confluence Philanthropy to lift up the voices of emerging fund managers, sharing their perspectives and experiences, as they shine a light into the challenges and the opportunities in this unique ecosystem.
It’s always odd to hear the water sector referred to as “niche.” This is a substance that underpins all economic activity and all life on earth, and accounts for well over $1 trillion in annual capital and operating expenditure. Unfortunately, in climate financing, it is a niche. Since 2021, almost $100 billion has been invested in climate tech, of which less than 2% has gone to water. Investors have focused their attention elsewhere—storage, generation, hydrogen, mobility, fusion, CDR—because water isn’t in their circle of competence. It would be sensible for that to change, particularly for impact investors.
Here are four (of many) reasons why water should not be overlooked by this community. First, there is a basic mismatch of supply and demand, affecting billions of people. Second, urban water demand is expected to increase as populations move to cities. Third, sea level rise will increase the salinity of coastal aquifers upon which many cities rely. Fourth, addressing these issues and others presents a massive economic opportunity.
We are approaching a future in which everyone on earth will need to do more with less water, including growing food. Infrastructure is not keeping pace with needs. In the Global North, water and wastewater infrastructure has aged out. U.S. upgrades are a $744 billion job by 2032. In much of the Global South, it needs installing for the first time. This is a global effort for everything from pipes, pumps, and sensors, to an entire universe of software to monitor quality, ensure security, and more.
The dynamics are even more pronounced in the context of climate change. Globally, a 40% shortfall of water is projected by 2030, with 5 billion people affected by drought by 2050. Climate change is water change. From floods to rising sea levels, to droughts, to groundwater abstraction—everything points to tailwinds for improved solutions for everything from stormwater management to agricultural irrigation to enabling the energy transition. Urban water demand is expected to increase 80% by 2050, when about 70% of the population will live in cities. 60% of these cities are coastal and will be affected by sea level rise, which will increase the salinity of coastal aquifers.
This mismatch of supply and demand when it comes to solutions around a global water shortage speaks to the enormous potential that values-based investing can have in this industry. Water has impact built in. Even the most voracious capitalist can see the benefit of being able to profit while increasing global society’s resilience. This includes opening up new markets of people who can aim their efforts at more productive things now they don’t have to take care of their water needs each and every morning—or are no longer sick, dying, or dead as a result of inadequate water and sanitation. Unless you’re going all Quantum of Solace and looking to corner water rights, water investment is impact investment.
For us, as water specialists, it’s quite useful to be overlooked. We are insulated from the effects of the VC market whipsaw, and we don’t participate in exuberance, which drives asset prices higher than those assets' fundamentals justify, because there isn’t any exuberance (yet). But this is both a huge opportunity and a fundamental requirement in the context of climate resilience. If we don’t get water right, nothing else matters. However, we are currently not running enough experiments in water to get it right.
Addressing these issues and others presents a massive economic opportunity. It is a $1 trillion market that is going to get relentlessly bigger. The number of smart people starting companies greatly exceeds informed capital to fund them. Investing in this sector will ensure that you are insulated from competition in more crowded sectors and from market cycles. You get to feel good while investing in it, because it’s the one commodity literally every human on earth can’t do without. What’s not to like?
LEGAL AND PROGRAM DISCLAIMER: LEGAL AND PROGRAM DISCLAIMER: This is not a solicitation to buy or sell securities, nor a private placement offering. Nor is this an endorsement of any of the featured impact fund managers. It is intended for informational, educational and discussion purposes only.