Sustainable water management: an exciting investment case?

Water is essential for life – and yet simultaneously a severely underestimated economic resource, as water is, after all, necessary for the production of virtually every product. And at the same time, population growth, rising prosperity, and climate change are increasing the pressure on global water systems. In many places, the water infrastructure is outdated, which results in significant wastage of this precious resource. Added to this is artificial intelligence, which acts as an additional, dynamic driver of demand: data centres require not only electricity but also cooling, and therefore water.

In this interview, fund manager Clemens Klein explains why water is also a relevant issue for investors, how drought and water scarcity affect the economy, and how innovative technologies can help us manage this precious resource more sustainably and efficiently.

In your view, what makes water management and water consumption such an interesting investment case at this point in time?

Clemens Klein: From an investment perspective, water is an exciting theme because it is where several long-term megatrends converge, making investment in functioning infrastructure and efficient water management essential. These include population growth, urbanisation, and a growing global middle class. As living standards rise in many countries, so too does water consumption – driven, for example, by household appliances, improved sanitation, and changing consumption patterns.

At the same time, we see an enormous need for investment in existing infrastructure in developed markets. In the United States, more than 22 billion litres of drinking water are lost every day due to outdated and faulty water pipes. This is 19 times the amount consumed by all Austrian households in a single day and illustrates very clearly that it is not just a question of finding new water sources, but also of using existing water more efficiently and preventing wastage.

When it comes to the topic of water consumption, one’s mind quickly turns to the increasingly frequent reports of extreme drought and water shortages in this country. How are these developments affecting the economy?

Water scarcity is no longer just an issue affecting individual arid regions. In Europe, too, we are noticing more frequent extreme droughts, falling groundwater levels, and conflicts over water use between agriculture, industry, and private households. For the economy, water is a key factor of production – even if it is often not recognised as such. To illustrate this a little more strikingly: for example, around 7,000–10,000 litres of water are needed to produce a pair of jeans. The vast majority of this – 80–90% – is used to irrigate the cotton.

As you can see, agriculture in particular has very high water requirements. It is the world’s largest consumer of water, and inefficient irrigation systems lead to enormous losses in many regions. When water becomes scarce, risks to crop yields, food prices, and supply chains increase. But industry, energy production, and infrastructure are also affected. Many production processes require water – either directly in manufacturing or indirectly via energy generation and cooling.

Climate change is further exacerbating this situation. It is altering the water cycle, leading to more unstable rainfall patterns, and increasing the likelihood of droughts, heavy rainfall, and flooding. For businesses, this means greater uncertainty, higher costs, and a growing need to invest in resilience, efficiency, and security of supply. Water is thus increasingly becoming a location factor. Businesses and regions that have reliable access to water and use it efficiently may have a long-term advantage.

On the subject of cooling: what role do the massive AI data centres play in rising water consumption?

Artificial intelligence is a new and highly dynamic driver of water demand. This is primarily due to the infrastructure behind it: data centres generate enormous amounts of heat and must be continuously cooled. Water-based cooling systems are often used for this purpose.

A single AI prompt, taken on its own, consumes very little water. However, it is the scale that is crucial: billions of queries, ever-larger models, and the expansion of data centres are leading to a sharp increase in water consumption by digital infrastructure. Large data centres can require up to 19 million litres of water per day. According to estimates, the global water consumption of data centres already stands at around 560 billion litres per year and could more than double by 2030.

Indirect water consumption is also important. A large proportion of data centres’ water footprint is not caused directly by on-site cooling, but by the electricity generation required to power them. As a result, the actual water consumption of digital infrastructure is often underestimated. However, this also opens up new areas of growth for the water sector. There is a demand for more efficient cooling systems, alternative water sources, water treatment and digital measurement and control technologies. Water is thus not only becoming a sustainability issue, but also a critical factor for the further scaling of AI technology.

How can you invest in these themes?

The water market is very broad and comprises several sub-segments. Investors cannot simply invest “in water”, as it were, but rather in companies that offer solutions across the value chain. These include water utilities, which generate stable and regulated cash flows, as well as industrial and technology companies. Examples include suppliers of pumps, valves, filtration solutions, water analysis, treatment technologies, digital monitoring, and efficient irrigation. Companies in the fields of sanitation, infrastructure, and recycling also play a role.

To what extent does the ERSTE WWF STOCK ENVIRONMENT fund focus on the issue of water?

In the ERSTE WWF STOCK ENVIRONMENT fund, water is one of the environmental themes alongside areas such as energy, energy efficiency, sustainable mobility, waste, and recycling. The fund invests in companies that offer solutions to environmental challenges. In the water sector, the focus is primarily on supply, distribution, treatment, efficiency, irrigation, hygiene, and digital control systems.

One figure in particular illustrates why the issue of water is likely to become even more significant in the future: the US Environmental Protection Agency (EPA) and the American Society of Civil Engineers (ASCE) estimate that the total funding requirement for US water infrastructure over the next 20 years will amount to more than USD 1.25 trillion.

This is another reason why we regard water as a structural, long-term theme – although it should be noted that the sector currently accounts for only about 10% of the fund’s allocation, as we currently see greater potential in other areas, particularly renewable energy. The portfolio is not about focusing solely on traditional water utilities. Rather, we are interested in companies that make a concrete contribution to solving water problems – for example, through modern infrastructure, smart metering systems, water treatment, filtration, or more efficient use in agriculture and industry. One specific example is Xylem. The company offers technologies relating to pumps, water infrastructure, monitoring, and efficient water management, and is a prime example of a solutions provider across the water value chain.

 

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