How to invest in water – and should you?

Investing in water may not carry the hype themes like artificial intelligence (AI) tend to attract.

But water stocks can make refreshing additions to your portfolio, and won’t necessarily dilute your returns.

If you are wondering where to invest for 2026, or you’re just frustrated that your water bill has gone up, water stocks could provide some diversification, defence – and surprising potential for growth – during an uncertain time for the stock market.

Much of Southeast England is today (12 January) grappling with water shortages. Extreme weather conditions brought on by Storm Goretti, combined with creaking water infrastructure, have led to chaos.

This combination is anything but surprising. In fact, it is a convergence of several long-term trends that are exemplifying water’s status as the world’s most important resource.

“There’s no economy without water,” says Saurabh Sharma, fund manager of the Regnan Sustainable Water and Waste Fund. “There’s no sustainable economy without waste management. These are essential parts of our daily lives: if either of them stops working, the entire economy collapses.”

In 2023, the World Wildlife Fund ran the first ever assessment of the economic value of the world’s water systems, and calculated it at $58 trillion annually – equivalent to 60% of global GDP.

“However, water is becoming harder to access for the vast majority of the global population,” said Jasmine Savage, investment manager at Foresight Group. This is true both in emerging markets and developed economies like the US and the UK too.

“We’re seeing this demand-supply mismatch growing… by 2030, it’s projected that global water demand will be outstripping available resources by about 40%,” said Savage.

Water’s structural tailwinds

Thanks largely to its ubiquity, the investment case for water is being driven by several long-term trends.

Marc-Olivier Buffle, head of thematic client portfolio management, sustainability & research at Pictet Asset Management, looks at long-term structural changes – ‘megatrends’ that are playing out over decades – and believes that several impact the water investment thesis.

One of the major ones is urbanisation. In the 1950s, approximately 30% of the world’s population lived in cities. That figure had passed 50% by 2011, and is expected to rise to 70% by 2050.

“You cannot build a city that is efficient without proper water infrastructure and proper water networks, both on the drinking water side and the waste management side of the equation,” says Buffle.

Another megatrend that Buffle and his team link to water is that towards increasingly health-conscious societies.

“The general trend is towards delivering water at your tap that is completely free of microorganisms, bacteria and viruses, but also of chemical compounds, micro-pollutants and so forth.”

Per- and polyfluoroalkyl substances (PFAS) – also known as ‘forever chemicals’ – are a prominent case in point on the pollutant front. These synthetic compounds, used in a huge range of products from non-stick pans to waterproof jackets, have been shown to cause significant health impacts, even at low concentrations, but are accumulating in water systems.

Governments are beginning to regulate more heavily against PFAS. That could create a headwind for water suppliers, but it creates opportunities for other companies in the value chain that develop systems to monitor and analyse the levels of these chemicals in water systems.

Another megatrend is climate change. This creates problems for water infrastructure companies, both in the form of too little water (droughts) or too much water (flooding).

“These extremes are increasing with climate change, and that has led to the need to develop new infrastructure for the resilience of water systems,” says Buffle.

Similarly, Savage breaks the water investment thesis into three pillars: the growing supply-demand imbalance, chronic water infrastructure underinvestment and environmental and pollution concerns.

In terms of addressing these long-term drivers, it helps to categorise the kinds of companies that comprise the investible universe of water companies.

Investing throughout the water value chain

Not all water investments are the same.

The water supply companies that most of us will be most familiar with day to day – Severn Trent (LON:SVT), United Utilities (LON:UU.) and Pennon Group (LON:PNN) – are utilities companies and as such perform a broadly defensive role in portfolios. They have steady demand across cycles (no-one cuts back on water use during a downturn) and they generate predictable, compounding income.

Because of the way they are regulated, water utilities companies have good visibility over their earnings and capex in the medium term (three to five years ahead), enabling them to pay very stable dividends.

The wider value chain in the water investment landscape is more varied. It consists of water treatment system manufacturers, equipment suppliers, water analytics companies that monitor water quality levels, and construction companies that build things like reservoirs or water channels.

Equipment manufacturers include Xylem (NYSE:XYL), Thermo Fisher Scientific (NYSE:TMO) and Agilent (NYSE:A). All three are involved in producing products for PFAS monitoring and/or treatment, ultrapure water, and many other facets of water management.

Water industrials sell into the utilities companies as an end market. They are more economically sensitive and can be more cyclical, but also offer investors the potential for short-term growth. They are effectively the picks and shovels stocks of water investing.

But while they offer greater growth potential than utilities companies, water industrials also benefit to an extent from the theme’s overall defensiveness.

“If the utilities themselves have good visibility over their capital spend and their operational expenditure programmes over a three to five year period, the industrial companies will also benefit from a fairly stable demand base,” says Savage.

Shorter-term water tailwinds

While most of water’s drivers are long-term and structural, there are also some shorter-term trends that have impacted the space.

One of these is demand for ultrapure water. This is a particularly important input in semiconductor manufacturing, as well as other industrial processes.

“When you’re making a small chip, you need water that is clean of all impurities,” says Sharma.

A Japanese firm called Organo (TSE:6368), for example, supplies water to Taiwan Semiconductor’s (TSMC) operations. Organo effectively operates a service, because companies like TSMC require constant supply of exceptionally high-quality water, and need engineers from Organo on site to ensure its delivery. It’s a high-margin business, too, given the level of profits available to semiconductor manufacturers.

So increased spend on AI data centres (which are themselves famously water-intensive) is driving demand in this part of the water market.

How to invest in water

Water investments can act as a diversifier in a portfolio. Because most of the demand drivers are long-term and structural, the theme as a whole is less susceptible to the economic ups and downs that impact other parts of the stock market.

But because there are multiple types of water company, it can offer growth opportunities as well as defensive qualities.

Most water funds capture this dual nature of water investing. Pictet Water takes a barbell approach in order to offer steady reliable returns through water utilities on the one hand, and growth potential through the more industrial components of the water ecosystem.

“It should allow you to have relatively good returns during good times, but also a bit of defensiveness if you have a crash or a period of economic instability,” says Buffle.

Regnan’s Sustainable Water and Waste Fund has around 18% allocated to utilities, and around 64% to industrials, as of 28 November 2025. The rest of the fund is mostly in consumer discretionary and materials stocks.