Water is essential to life on Earth – and plays an obvious role in agriculture and food production.

Yet you might not see all the ways in which companies across the economy rely on water. Water is used to cool data centers, dye textiles, mix concrete, generate electricity and suppress dust in mines. Water is also essential to create semiconductors for “smart” phones and devices, which require the liquid to be uniquely and highly purified.

As industrial demand for water rises, however, access is becoming precarious.¹ Water stores from rainfall, reservoirs and rivers are in decline.² In response, nearly a dozen U.S. states have recently passed laws limiting water usage.³

Faced with disruption in their water supply, companies are innovating.

We see forward-thinking companies across both public and private markets spearheading new approaches to monitor and optimize water usage – often deploying technology powered by artificial intelligence (AI). Change is already taking place in water-intensive industries – including agriculture, apparel and electronics – as existing companies adapt to water restrictions and newer startups drive change in sensor and filtration technology.

As an investor, you can look at these water-related developments as new opportunities to strategically deploy your capital across public and private markets.

New water policies reshape public access

While businesses and communities need water, it isn’t always easy to get or manage. Less than 1% of the Earth’s water is usable fresh water – and in recent years, climate change has made access to fresh water even less secure.⁴

In response to these changes, policymakers in Arizona, California, Colorado, Florida, Georgia, Nevada, New Mexico, New York, Texas and Washington have all introduced policies to regulate water use.⁵

These regulations vary widely. Some states have designed complex systems of water rights, while others have simply restricted residential water use. Some have incentivized the reuse of wastewater, while others have curbed companies’ ability to extract groundwater (which is how most farmers have historically irrigated their fields).

Regardless of the regulatory mechanism, each of these policies is designed to reduce and reprice water consumption. And across the United States, residents and businesses alike are feeling the squeeze.⁶

Companies adapt to restricted flows

Faced with uncertainty around their water supplies, some companies are adapting quickly while others are slower to change. In three particularly water-intensive sectors, we see attractive leaders mitigating risks and investing for resiliency faster than their peers:

Agriculture: Many of the new groundwater restrictions target farming, which is responsible for 80% of total fresh water withdrawals across the United States.⁷ In response, farmers are switching to “smart” irrigation systems that use water more precisely and avoid runoff. These systems enable some farms to use up to 99% less water than traditional or industrial approaches.⁸ With the global population expected to grow by 2 billion people over the next 30 years,⁹ spurring a need to increase food production, the “smart agriculture” market is expected to rise at a compound annual growth rate (CAGR) of 13.7% through 2030.¹⁰

Apparel: Textile production is responsible for 20% of the world’s fresh water pollution, and consumers are increasingly critical of the sector for its water waste.¹¹ Recently, a clothing company in California responded to the backlash by collecting old garments from customers and salvaging them to create premium new pieces. They successfully collected and recycled over 2 million garments in 2022, saving 24.3 million gallons of water in the process.¹² These innovations have drawn praise and profits. According to a recent study, 73% of consumers who care about sustainability now say they are willing to pay more for sustainable products (up from just 50% in 2022).¹³

Semiconductors: Historically, chip manufacturers have needed immense amounts of water to produce semiconductors. And semiconductors don’t just use fresh water – they require “ultrapure” water (1,000 times purer than drinking water) to clean the silicone layers during chip production.¹⁴ Faced with growing water scarcity, one semiconductor company in Texas changed its practices to reduce its water consumption by 68% per chip.¹⁵ The company now promotes its water management practices as a way to mitigate supply chain risk – which is a major concern for investors given the global chip shortage over the past three years.¹⁶

As cheap water gets harder to secure, we expect to see winners and losers in each of these sectors. We believe that the companies best positioned for success are those with the foresight and ability to proactively adapt to the evolving environment – making them more attractive long-term investments.

A rising wave of innovation – and opportunity

Some companies are moving beyond incremental change and creating entirely new technology to conserve and clean water more effectively and profitably.

New AI-powered sensors, for example, can help communities plan for natural disasters that would otherwise stress local water systems. Meanwhile, AI-powered diagnostic tools help companies to better forecast consumer demand, optimize distribution networks, identify repair needs and send out contaminant alerts.^17,18 These new tools include biosensors, “smart” meters, pumps, valves and even aquatic drones.

At the cutting edge of technology, commercial scientists are using electrochemistry and materials science to create new filters that can better purify wastewater. These new tools not only clean water but also capture high-value proteins, metals and minerals, which can then be salvaged and sold.¹⁹

Often, these breakthrough applications appear first in private markets, where investors ought to expect higher risk and potentially higher rewards for capitalizing early-stage technology. But opportunities may also arise in public markets, where companies are eager to apply new solutions to improve resiliency, reduce costs and find new sources of revenue.

Whether you’re interested in private markets, public markets, or both, the risks and opportunities that come from shifting water demands are well worth exploring.

We can help

To learn more about the opportunities in sustainable water technology that may better align with your values and financial goals, speak with your J.P. Morgan advisor.