View from Vox: why investors could protect profits by protecting water

Michael Burry, the man who called the great financial crisis, is worried. This time it’s not about financial weapons of mass destruction – as Warren Buffett famously described the complex derivatives instruments that caused the GFC – but something much more mundane: water.

It’s easy to understand why Burry is concerned and has focused much of his attention on buying up stocks that stand to benefit from water scarcity, which is becoming a significant concern in many regions due to various factors such as population growth, climate change, overexploitation, and inefficient water management. 

Indeed, while the world is awash with water, it’s not always in the right places, which has often caused localized water shortages and challenges in meeting water demands for human consumption, agriculture, and industry. 

Arid regions like North Africa, the Middle East, and parts of Australia experience low precipitation, limiting water resources. Overexploitation, as seen in India's extensive irrigation, depletes groundwater reserves. Rapid population growth strains resources, evident in Beijing, Mexico City, and São Paulo. Climate change intensifies droughts and alters rainfall patterns, impacting places like California. Pollution from industry, agriculture, and inadequate sanitation contaminates water sources, as seen in the Ganges and Yangtze rivers. Inefficient water management, such as outdated irrigation methods in sub-Saharan Africa, compounds scarcity for agriculture and communities.

Closer to home, and most of us will have experienced hose pipe bans or, largely thanks to Feargal Sharkey, heard stories about polluted rivers - the results of leaky pipes and reservoirs, sewage discharge and agricultural run-off into rivers (not wading bird poo as Environment Secretary Therese Coffey pathetically attempted to claim). Such is the anger at the UK’s water industry for underinvesting in infrastructure whilst paying shareholders huge dividends (£1.4bn in 2022) and management fat salaries (a combined £25m in 2022), that some water bosses are foregoing bonuses this year.

That seems the least they can do as the fines mount up: last month Southwest Water was find £2.1m for pollution offences in Devon and Cornwall, while today the regulator, Ofwat, said that it had begun an enforcement investigation into Pennon (PNN) over its leakage performance. "We are committed to holding companies to account for performance and for sharing timely, accurate, and complete data with us and their customers," said the regulator’s CEO David Black.

Given the increased public scrutiny is now likely to be backed up with regulatory and political bite, it follows that water companies will need to up their infrastructure game. That’s good news for the public, who may now be able to enjoy a wild swim or water their geraniums. But it’s also good news for investors, who like Michael Burry might do well to consider investing in companies that can help.

Take Eneraqua (ETP), for example, which specialises in energy and water efficiency. Although its energy efficiency business has been in the spotlight this year for obvious reasons, the more nascent water division perhaps offers a more reliable source of long-term growth. Alongside delivering agritech solutions in India and Spain to help provide water efficient irrigation systems, it’s working with two UK local authorities to pilot net water neutrality projects, and believes there are 74 local authorities concerned about nitrite levels in water. 

Elsewhere, the likes of Ondo InsurTech (ONDO) and Water Intelligence are making progress in helping companies tackle the huge problem of leaking pipes, which costs a combined $17bn of insurance claims in the US and UK each year.

This week, Ondo said that it’s planning to share the results of a pilot of its LeakBot technology with Portsmouth Water, aimed at determining whether it can be used by a water company to reduce water demand through the prevention of plumbing-side leakage in homes. Hopes are high, given the success of leak-detection peer Water Intelligence (WATR) in the US, where it dominates the market as we discussed in our latest stock screening podcast.  

Water Intelligence also uses its state-of-the-art survey technology to support UK water utilities in managing their infrastructure, where it should benefit from significant regulatory support. As part of its PR-24 regulatory regime, Ofwat wants water companies to drive down household water consumption by 35 litres a day and is introducing a fund of up to £100m to help stimulate transformative, sustained, and measurable reductions in water demand nationally using a range of water efficiency approaches. 

That's potentially good news for investors looking for fresh ideas, as well as fresh water.