The Future of Water: Identifying the backbone of a critical investment theme
There is no disputing that we face a global water crisis that intensifies each year. Heavily populated areas withstand periods of alternating droughts and floods, putting undue strain on infrastructure, industry, and, of course, the people who rely on this most precious resource.
Water is essential not only for health and hygiene but also for industrial processes, agriculture, and energy production. It underpins almost every aspect of modern life, and the global impact of water scarcity is escalating. According to the World Resources Institute, the world is expected to face a 56% freshwater deficit by 2030,[1] and we already live in a reality that sees approximately 10% of the global population—around 720 million people—living in countries with high and critical water stress levels.[2]
However, there is a path to adaptation. Innovative solutions are emerging across water cleaning and reuse, global infrastructure investment, and heavy-use areas such as data centers. There is a race to develop better technology and approaches to managing resources, and the Reynders, McVeigh investment research team has its eyes on companies that are positioned to lead the way.
Improving access to clean water
Most drinking water in the United States comes from surface water, including lakes and reservoirs. While easily accessible, these sources are vulnerable to pollutants, such as algae, industrial waste, and pesticides. In addition, increasingly severe storms linked to global warming can corrupt reservoirs or damage the infrastructure that supports them, creating a constant need for new sources of potable water.
Hurricane Helene stands as a powerful example; in September 2024, the storm created an immediate crisis in North Carolina. As noted by the Associated Press, “It damaged water utilities so severely and over such a wide inland area that one federal official said the toll ‘could be considered unprecedented.’ As of Thursday, about 136,000 people in the Southeast were served by a nonoperational water provider and more than 1.8 million were living under a boil water advisory, according to the Environmental Protection Agency.”[3]
The world will need to be forward-thinking as it deploys alternatives to fill supply gaps, provide potable water in emergency situations, and support overall continuity of water access to the population.
Investment Spotlight: Veralto
As the world grapples with water scarcity, companies that specialize in water cleaning stand out as critical to a more sustainable future. Veralto, a leading player in this field, is making significant strides in developing technologies that can treat and recycle water at a scale large enough to meet the needs of industries and municipalities. Spun off from Danaher in 2023, Veralto operates in two main segments: water quality and product quality. The Water Quality division alone generated $3 billion in sales in 2023, emphasizing its critical role in water management.[4]
Veralto’s Hach brand provides essential water quality testing equipment used by utilities and industrial clients. This type of accurate testing is a vital step in ensuring that wastewater can be effectively treated and reused. Veralto’s Trojan Technologies division also specializes in ultraviolet disinfection and reverse osmosis filtration, which are crucial for purifying water. These systems are widely adopted in municipalities and industries that require treated water to meet high standards of cleanliness.
One notable example of Veralto’s impact is its use in Orange County, California. The company’s systems help recycle up to 100 million gallons of wastewater per day for the county, transforming it into potable water that meets drinking water standards.[5] As water becomes more scarce in regions like the Western United States, the importance of such technologies cannot be overstated.
Bridging to a modern infrastructure
In the United States and abroad, water infrastructure is antiquated and in desperate need of modernization. Pipelines, treatment plants, and reservoirs are deteriorating, and pipe breaks, inaccurate water meters, and outdated equipment are costing utilities and municipalities billions of dollars annually. In fact, the Environmental Protection Agency estimates that one out of every six gallons of treated water is lost due to leaks and other inefficiencies.[6]
In response to these challenges, governments are dedicating massive amounts of funding to rebuild and upgrade water systems. The U.S. Bipartisan Infrastructure Law, passed in 2021, allocates $50 billion to strengthen the nation’s water systems, making it the largest federal investment in water infrastructure in history.[7] This funding supports a wide range of projects, including the replacement of outdated pipelines, the construction of new wastewater treatment plants, and the implementation of advanced technologies to monitor water usage.
Federal funding is a major driver of innovation, but the private need for improved commercial infrastructure is also creating demand for better water management systems. Industrial water use accounts for a significant portion of water consumption globally, and companies are under pressure to reduce their environmental impact and capture long-term cost savings by improving resource efficiency. These tailwinds are creating opportunities for solutions to help the corporate world manage and conserve water more effectively.
Investment Spotlight: Xylem
Xylem, a global leader in water technology, is playing a pivotal role in addressing these challenges. The company’s water infrastructure segment, which makes up 29% of its sales, provides the pumps and treatment systems that transport and clean water for utilities and industrial clients.[8] Additionally, Xylem’s advanced leak detection technologies, such as the SmartBall platform, help utilities prevent significant water loss en route to consumers.
One of Xylem’s most important contributions is its advanced metering infrastructure, which allows utilities to monitor water consumption in real time. These systems enable utilities to detect leaks more quickly and increase efficient water usage by providing detailed data on consumption patterns. In 2024, Xylem’s measurement and control segment saw growth of nearly 25%, reflecting increased adoption of these technologies by utilities worldwide.[9]
Cooling a red-hot data center boom
Water scarcity and infrastructure concerns are broad challenges that have been building for decades. A more recent development is the issue of “resource hogs,” as data centers that consume vast amounts of energy are growing in size and number at a breakneck speed. This is only the beginning—demand for these centers is expected to increase nearly 10% annually in the United States until 2030, fueled by the rapid expansion of artificial intelligence (AI)-driven applications, gaming, streaming, and other digital technologies.[10]
Data centers require immense cooling systems to prevent overheating, and water is a key ingredient in maintaining optimal temperatures. These centers are therefore fast becoming some of the largest consumers of water in the tech industry.
As the industry expands, there is pressure to reduce the corresponding environmental footprint, especially in regions that are already grappling with water shortages. Consider that Arizona’s open geography makes it a popular spot for new data centers,[11] even as its primary water source, the Colorado River system, is all but disappearing. Texas faces a similar situation, with water demand expected to outpace supply in the next fifty years,[12] while hundreds of data centers are springing up and potentially accelerating this resource depletion. Companies that offer solutions in this space stand to be an integral part of the AI revolution, enabling data center expansion while preserving access to water.
Investment Spotlight: Vertiv
Vertiv, a leading provider of cooling solutions for data centers, offers water-efficient cooling systems that minimize consumption while ensuring reliable server performance. With 70% of its sales coming from the data center market, Vertiv is a dominant player in the sector, with a 30% market share.[13]
One of the key challenges that Vertiv addresses is the need to balance performance with resource efficiency. Cooling systems are critical for preventing equipment from overheating, but they must also be designed to minimize water use. Vertiv’s solutions include air-cooled systems that reduce reliance on water while still providing the cooling necessary for server-intensive operations. This approach not only helps data centers operate more sustainably but also reduces their operational costs.
As the data center market continues to grow, particularly in regions like North America and Asia, Vertiv’s role in providing efficient, sustainable cooling solutions will become increasingly important.[14]
Finding the backbone of water management
Water management is one of the world’s most pressing challenges. Multiple drivers make the issue a compelling theme, which is often approached by investing in utilities. At Reynders, McVeigh, however, we see a more compelling opportunity to invest in “backbone” players in the industry—those that are well positioned for growth as they help build a more sustainable world.
For more information on how we view these investments and why we believe water is a core theme for the future, contact our team today.
REYNDERS, MCVEIGH CAPITAL MANAGEMENT INVESTMENT RESEARCH
Patrick McVeigh, President & Chief Investment Officer
Eric Shrayer, Senior Vice President & Research Director
Clary Bruning, Equity Research Analyst
To learn more about our research, analysis and investment process, reach out to our team today.
[1] World Resource Institute, 2024
[2] United Nations, UN Water, Facts and Figures
[3] Michael Phillis, Jeff Amy, Brittany Peterson, A week after Hurricane Helene hit, thousands still without water struggle to find enough, Associated Press, October 5, 2024
[4] Reynders, McVeigh Capital Management, LLC, ed. “Veralto,” August 19, 2024
[5] Ibid.
[6] Tamy Weber, Trillions of gallons leak from aging drinking water systems, further stressing shrinking US cities, Associated Press, March 4, 2024
[7] U.S. Environmental Protection Agency, Bipartisan Infrastructure Law, Water Infrastructure Investments
[8] Reynders, McVeigh Capital Management, LLC, ed. “Xylem,” August 20, 2024
[9] Ibid.
[10] Srini Bangalore, Arjita Bhan, Andrea Del Miglio, Pankaj Sachdeva, Vijay Sarma, Raman Sharma, and Bhargs Srivathsan, Investing in the rising data center economy, McKinsey & Company, January 17, 2023
[11] Data Center Map, USA Data Centers
[12] Astrid Alvarado, Morgan Hecht, Moise Julot, Texas’ Water Demands Could Outpace Supply in Parts of Texas by 2070, Texas Comptroller of Public Accounts, September 2023
[13] Reynders, McVeigh Capital Management, LLC, ed. “Vertiv.” Boston, Massachusetts, November 2, 2023
[14]Ibid.
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