Water is the new oil - and most portfolios haven't noticed

Water covers most of the planet, but less than 1% of it is fresh, accessible and drinkable. As populations grow, aquifers deplete and droughts become more frequent. As a result, competition for water is expected to heat up, especially for the countries marked in red in the map below.

Therefore, governments from the Gulf to California are turning to a costly but reliable fix: turning seawater into something you can drink. That shift is creating a long-term investment theme that stretches well beyond the water utilities investors already know.

The theme splits into three parts: the companies that own and build desalination plants, the businesses that filter and treat the water once it comes out of the sea, and the energy providers that keep those power-hungry plants running.

At the plant-ownership end, Veolia Environnement operates seawater reverse osmosis facilities across dozens of countries and became the world's largest listed water group after absorbing rival Suez in 2022. On a smaller scale, Consolidated Water runs desalination plants across the Cayman Islands and the Bahamas and is expanding into the US, including a $204 million Hawaii project that is currently working through permitting ahead of construction. Saudi-listed Acwa, rebranded from ACWA Power earlier this year, has gone further still, pairing huge desalination contracts in the Gulf and West Africa with the renewable power needed to run them, positioning itself as both water producer and energy supplier in one.

Much of the Gulf's older desalination infrastructure still runs on a different approach from the reverse osmosis plants used elsewhere in this piece, even as Acwa's own newest megaprojects have moved to reverse osmosis. Many long-established Middle Eastern plants use thermal desalination, essentially a large-scale version of boiling a kettle. Seawater is heated until it turns to steam, and because steam is pure water vapour, the salt and minerals get left behind. That steam is then cooled and condensed back into fresh, drinkable water. It's a reliable, well-proven method, and Gulf states built much of their existing capacity around it because it can run on waste heat from power stations, and energy in the region has traditionally been cheap. The trade-off is that thermal desalination uses far more energy per litre of water produced than the membrane-based reverse osmosis method, which is why the region's newer capacity, including most of Acwa's recent projects, has swung firmly towards reverse osmosis, even as older thermal plants remain a meaningful part of the installed base.

That energy angle matters more than most investors realise. Desalination is one of the most power-intensive processes in industrial infrastructure, since forcing seawater through a membrane at high pressure takes a lot of electricity. This is where Energy Recovery comes in. The Californian firm makes pressure exchangers that recycle energy from the reverse osmosis process itself, cutting a plant's power bill by recovering energy that would otherwise be wasted. It is a smaller, more specialist stock than the plant owners, but one directly geared to how cheaply the industry can produce water.

Once seawater has been desalinated, or river and wastewater need cleaning up for reuse, filtration technology takes over. Xylem is the largest pure-play water technology name in the sector, supplying pumps, membranes and smart metering systems used to treat and move water through municipal networks and spot leaks before they become costly. Pentair plays a similar role, with a filtration and water solutions business that spans everything from industrial desalination equipment to residential water treatment systems.

For investors who want broader exposure rather than picking individual names, water-focused exchange-traded funds bundle together utilities, equipment makers and treatment specialists in one trade, spreading the risk that any single contract or project runs into trouble. Options include the Global X Clean Water ETF, First Trust Water ETF and, for a UK-listed option, the iShares Global Water UCITS ETF.

Key points to consider

As with any infrastructure theme, the risks are real. Desalination plants are capital intensive and can take years to build, leaving revenue exposed to construction delays, permit hold-ups and government contract terms. Energy costs and interest rates also weigh directly on project economics, since most plants are financed with long-term debt against long-term water supply contracts. For investors comfortable with those risks, water scarcity offers something rarer in markets: a trend that only moves in one direction.

It's also worth noting that this thematic space isn't naturally low-fee. Water ETFs cluster at 0.50% to 0.65% a year, roughly five to ten times what you'd pay on a plain vanilla index tracker, so anyone diversifying through a fund rather than individual stocks is paying a real premium for that convenience.

Finally, this is a theme built for patience rather than quick turnarounds. Desalination projects typically involve a multi-year development and permitting phase before construction even starts, followed by operating contracts that run 20 years or more, so the underlying businesses are structured around decades, not quarters. Share prices can still swing sharply in the short term on a single delayed permit or a missed earnings estimate, as Energy Recovery's shareholders found out this year, but the investment case itself plays out over a much longer horizon. That makes the sector better suited to investors building a position to hold through multiple project cycles than to anyone looking for a fast trade.

Companies mentioned in this article: Veolia Environnement, Consolidated Water, Acwa (formerly ACWA Power), Energy Recovery, Xylem, Pentair, Global X Clean Water ETF, First Trust Water ETF, iShares Global Water UCITS ETF