YES!

Yes, we believe Water is more valuable than Gold.

We will share why with you in this article.

First, we came up with the idea to blog on the topic of water after 27 games of tennis at the Prospect Park courts in Brooklyn leaving us sweaty and thirsty.

Afterwards, we would head to a local Park Slope diner for breakfast, typically starting off by drinking several huge glasses of water. Then we would discuss a wide range of topics that seemingly always revolved around a theme and data, such as a movie (theme) and its box office revenues (data). For instance, Guardians of the Galaxy; theme – Marvel movies; data – over $600+ Million ticket sales globally.

Also, we shared stories of what is was like to work and travel in China, Korea, Hong Kong, Hungary, London, New York and Silicon Valley. After all, our career experiences helped to shape our respective perspectives on water – one of us as an investment banker and impact investor and the other as a strategist in the telecom industry used to evaluating technology, infrastructure and consumer and regulatory impacts and trends.

Although we come from two very different backgrounds, with many oceans of water between us originally, funny enough our backgrounds are literally products of world trade flows with both of us ending up on different coasts of America. One of us from the surfing shores of southern California while the other spent summers sailing and swimming the waters of Cape Cod.

So it is not too surprising when you think about it that we would end up focusing more and more on water, especially now that the topic of water appears to be everywhere, including being embedded into pop and pulp culture (e.g., movies like James Bond’s Quantum of Solace and The Book of Eli with Daniel Craig and Denzel Washington, pulp like Herbert Allen’s the Dune series, and Samuel T. Coleridge’s The Rime of the Ancient Mariner and the famous quote “Water, water everywhere, not any drop to drink” and more).

Water is literally our future. Our livelihood and quality of life increasingly depends upon it.

Through the course of these “post-smashing-bright-yellow-tennis-ball conversations” we began talking more deeply about water (pun intended)! The impact of water. The value of water. And eventually the possible implications of water issues on investment opportunities. For instance, we’ve read that 21 billion bottles of water were sold in 2012, but that is only a small piece of the half trillion dollar ($500,000,000) ‘direct’ water market today.

So back to water (symbol H20) and gold (symbol Au) and which is worth more…!?

So Why Water Now?
It seems that suddenly, distressing stories about water are almost everywhere, from drought in California to flooding in Washington State to algae blooms (when algae multiplies rapidly in water degrading its quality) shutting down water supplies to cities in Ohio and West Virginia.

These stories represent a growing awareness of water issues and how they are impacting the US economy and society, but there has been very little focus on how the drivers of these changes can also lead to future investment opportunities. This article kicks off what we hope to be a series of stories looking to link the emerging trends that are effecting the state of water resources and management in the US with potential impacts on future economic development and the related investment opportunities that could arise from the crucial relationship between water (as an “enabling resource”) and almost all areas of the economy – from agriculture, to aquaculture, to energy, to manufacturing to real estate development and valuation.

Do We Have Enough Water in America?
The US has enjoyed a golden age in terms of water resources and availability for almost 50 years, but this period is quickly drying up. By most standards, water supplies should not be a constraining issue in the US. Overall, the US is characterized as a water rich country in terms of available freshwater resources, particularly because of the Great Lakes, which is the largest source of freshwater in the world (represents 21% of global water resource). Access to these resources is also critical, but here the US is also privileged, enjoying almost ubiquitous access to indoor plumbing since the 1970’s (93% of households; over 99% today). As can frequently happen, richness can lead to waste and indeed US per capita consumption is several times larger than most other developed countries.

Even here though the US has made great strides – according to the latest US Geological Survey data, since peaking in 1975, consumption per person dropped over 30% by 2005 (from ~2,000 to ~1,400 gallons per day).

All of these indicators would suggest that water is not a high level issue in the US. This could almost be justified by the invisible or hidden status that water has held for many decades within the US economy, let alone, in people’s minds. Multiple trends are emerging, however, that are rapidly changing this perception and there is sea-change (fun pun) happening now as it relates to water.

And What Water Issues are Impacting America’s Relationship with Water Today?
Multiple drivers and trends, some new and some accelerating in importance, are impacting US water supplies and availability, deriving from a range of sectors from environmental to social to legal, including (just to highlight a few);

 pic1 Climate Change is Shifting Water Patterns – modified weather patterns are changing the water cycle (how much, where and when), driving multiple water issues (e.g., droughts, floods, stranded water infrastructure).
pic2 Water infrastructure is Decaying – the majority of US drinking water and sewage systems were developed 50-100 years ago and are now decaying due to a lack of sufficient maintenance / investment – utilities (and the populations they serve) are living on borrowed time!
pic3 Pollution Spreading – both in urban (i.e., storm water run-off) and rural (agriculture run-off of pesticides and fertilizers) areas, impacting essentially all water bodies – according to recent USGS report, all US streams & rivers contained at least 1 pesticide for 90% of the year.
pic4 US Demographic Shifts to Water Stressed Areas – population is moving away from water rich areas (Great Lakes, NE-region) and towards water stressed areas (South, West and SW-region), which is accelerating the scope and pace of needed change.
pic5 Groundwater ‘Bank’ is Going Bankrupt – groundwater (GW) resources have been used as an invisible water bank, but the bank is literally drying up and will take decades to recover (if ever). Agriculture being most effected – legal definition of GW rights needs clarification and unification across US.
pic6 Environmental Safety Blanket is Tearing – ecosystems have declined to the point where they are no longer providing ‘hidden’ ecological services, with increasingly visible impacts (i.e., decaying wetlands in Louisiana contributing to Hurricane Katrina damage). Legal efforts to reserve more water for the environment is also effecting water availability and increasing competition for resources.

 

Taken all together, these trends and others are creating multiple stressors to the US economy that will require increasing focus by politicians, communities and Wall Street and Silicon Valley in order to maintain both economic growth and social welfare.

How Do Water Issues Impact the US Economy?
As Benjamin Franklin is quoted as saying “when the well is dry, we know the worth of water”. For us, this worth is magnified as water has vast dependencies throughout the US economy, mainly through its relationship as a key raw input to two important industries, agriculture and energy. This relationship, frequently referred to as a ‘nexus’, is the so called triangle relationship between Energy, Agriculture & Water, and it has a strong influence on US economic activity and Gross Domestic Product (GDP) through a range of factors, effecting both consumers (e.g., food prices, utility bills) and industry (e.g., raw materials costs, growth options and limitations, regulatory compliance costs). While the link between agriculture and water is fairly obvious, most people fail to realize the magnitude of this relationship – according to the Environmental Protection Agency (EPA), agriculture only accounts for about 33% of all water withdrawals, but almost 70% of water “consumed” (defined as water not returned to the water body it was withdrawn from for re-use) in the US. The link between water and energy is less apparent, but includes both water needed to cool most thermoelectric plants and energy needed to distribute water to end users. For instance, the average American’s water footprint comes 1/3 from direct water use (drinking, cooking, bathing) and 2/3 from the embedded water in their energy use (TVs, computers, smart devices)!

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Through these linkages, water issues then indirectly impact all sectors of the economy, but there are also many industries that are directly dependent on water resources, including semiconductors, textiles, beverages, mining, energy, drug development and pharmaceuticals. For these industries, water issues not only impact potential cost structures, but also impact real growth opportunities, going forward.

For instance, where Pepsi locates a new bottling plant or the Koch Brothers develop a new fracking operation (each fracking operation is estimated to need 3-10 million gallons of water to develop) depends increasingly upon local supplies and an ability to access water.

What Investment Opportunities Can Water Drive in the Future?
Water is already a significant industry in itself generating revenues of over $500 billion globally in 2010 (Source: Jefferies, 2012) and covering everything from bottled water to pumps and pipes to filtration and purification systems.

All of these companies provide opportunities to invest directly in water through the full gambit of financial instruments, including Equities (individual stocks, water-focused ETFs/exchange traded funds and indices), Bonds (particularly municipal bonds), and Alternatives (venture capital & private equity investments in new technology companies).

Beyond these opportunities, we feel that the indirect linkages between water and the US economy that we described above can create additional possibilities that may not traditionally have been considered to date. One such opportunity includes buying water rights – there is a reason savvy investors like T. Boone Pickens (buying up water rights in North Texas) and Warren Buffett (buying water companies) are already active in this space. Investing in emerging water markets (like the water bank in California) and in real estate opportunities linked to future water impacts (buying up farm land in water rich areas to anticipate agricultural production shifts) are also potential areas of focus.

In addition, including potential water impact on analysis of traditional sectors like insurance and construction (i.e., cement is a very water intensive product) can also expose potential new risks and opportunities to leverage for future investment consideration.

The more we discussed all of these aspects of water, we saw that it will create investment opportunities that provide market-rate or better than market level returns and significant impact benefits such as human returns, creative returns, emotional returns in addition to the financial returns — a true attractive sector focus in the fast growing Impact Investing space and the sustainability race.

So YES, water is more valuable than gold – both under scarcity situations (i.e., mining companies are paying exorbitant prices for water to develop mines in water stressed areas), and also increasingly as an input contributing to the success and growth of the whole US economy.
So YES, water should be characterized as the ultimate “enabling resource”, providing strong direct benefits and a multitude of indirect benefits that cascade throughout a society. This is true for a developed country like the US and is magnified tremendously on a global scale (think China, India, Africa).

Remember, while reading this article today, an average bottle of water from the corner market costs around $1 dollar and on ounce of gold costs over $1,200. That translates into gold being about 1000Xs more valuable when making a simple comparison of an average sized water bottle to one ounce of gold. But what lies beneath is that water represents a massive hidden opportunity to create and capture wealth in all its forms, and we believe these numbers will be reversed faster than you think!

Stay tuned for future articles in our series on water, which we will explore, develop and share with you.

Christopher Meissner was formerly a vice president with France Telecom building wireline and wireless products across multiple international markets, and currently is now at Columbia studying to complete his Masters in Sustainability Management.

Gregory Mark Hill was formerly in M&A and tech investment banking in New York and Silicon Valley, venture capital in China, and now serves as adviser to both impact start-ups and social entrepreneurial organizations such as Ashoka.