What happens when the water runs out?
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The Aral Sea: A Case Study of Environmental Mismanagement
By Mark Evans, Global Equities Co-Portfolio Manager at GIB Asset Management
Monday 11th November
As COP29 kicks off today in Baku, all eyes are on Azerbaijan. With Trump’s re-election - and likely rollback of U.S. climate commitments – as well as controversy over the COP29 CEO’s alleged fossil fuel dealings, a shadow has been cast over the summit, fueling widespread scepticism. (2)
Incoming COP President, Minister Mikayil Jabbarov, recently emphasised water scarcity as a top priority on the forum’s Action Agenda. (3) And with the Aral Sea lying a few hundred kilometers east of Baku, the devastating historical consequences of mismanaged water provide a compelling backdrop to discussions on climate policy and water security.
The Aral Sea and why it is vanishing
During a recent visit to the Aral Sea with my family, I was struck with a powerful reminder: once the world’s fourth-largest inland body of water (approximately the size of Ireland), the Aral Sea now spans a mere 6,000 km², with 90% of its former seabed a now barren, salt-encrusted, chemical polluted desert. (5)
In the 1960s, as part of Khrushchev’s ambitious agricultural reforms, the Soviet Union (USSR) embarked on a large-scale water diversion project aimed at transforming the regions’ desert into crop and cotton farms. The outcome was calamitous, even in comparison to the USSR’s other infamous projects, and was ultimately labelled by the United Nations Development Program (UNDP) as "the most staggering [environmental] disaster of the twentieth century". (4) This catastrophe not only made local climate conditions harsher, but brought about devastating consequences to the local population, including elevated rates of cancer, kidney disease, and one of the highest infant mortality rates in the world. (5)
The root cause of the disappearance of the Aral Sea was the USSR’s doomed and environmentally disastrous economic rivalry with the USA, water leaks and poorly built infrastructure have restricted any real recovery. (5)(6) Khrushchev’s reforms, which were intended to boost cotton production allowed extensive leakage and evaporation. To this day 30-75% of the water from the Karakum Canal, the largest in Central Asia, is wasted. (7)
The investment relevance
While the Aral Sea project was devised over 60 years ago, the lessons are equally relevant today. The World Bank is forecasting that global water demand will exceed supply by 40% by 2030, emphasising the that the urgent demand for water management innovation remains. (1)
Investing in the water sector has traditionally posed significant challenges for equity investors, with damaging regulation, poor company management and limited investment options beyond interest rate sensitive utilities. However, recent technological advancements, regulatory shifts, and the increasing urgency of climate change have opened new opportunities. Investors who conduct deep thematic analysis and focus on companies with innovative technologies could be well-positioned to benefit financially. At the same time, these investment areas align closely with the United Nations' Sustainable Development Goals (SDGs), particularly SDG 6 (Clean Water and Sanitation), presenting investors with a chance to generate both returns and environmental impact.
A new opportunity in the water technology sector
This year, our Sustainable World team invested in Veralto, a newly-listed leader in global water quality management. Veralto has recently spun off from Danaher, a leader in global life sciences and diagnostics. The business is committed to helping ensure safe water access for 3.4 billion people worldwide. (10) Through its advanced analytical instruments and treatment technologies, Veralto plays a vital role in monitoring and safeguarding this critical resource. Veralto has inherited iDanaher’s strategy focused on strategic tuck-in acquisitions and operational excellence, positioning it for sustainable growth over the long term.
Veralto’s capabilities extend beyond traditional water testing, offering a suite of solutions across the water value chain. From Hach’s analytical instruments and ChemTreat’s industrial water treatment to Trojan Technologies’ UV disinfection systems, Veralto addresses key challenges in water disinfection and reuse. The company is at the more advanced end of the water technology spectrum, where specialised expertise and advanced solutions command premium pricing and deliver stronger margins.
Given the highly fragmented nature of the water technology sector, Veralto looks very well positioned to consolidate and enhance specialised capabilities, accelerating the development of solutions to critical challenges like water scarcity and safety. In 2023 alone, Veralto’s ChemTreat solutions helped customers conserve and recycle over 81 billion gallons of water, underscoring the company’s significant impact in addressing global water issues. (10) The company is well positioned to make future acquisitions by utilising its strong free cash flow (with over 100% conversion) and its ability to generate industry-leading returns.
All is not lost; the tide may be turning
The water crisis is a multi-trillion-dollar challenge that requires coordinated global efforts. By carefully investing in companies that are addressing inefficiencies in water management and infrastructure, investor have an opportunity to capture substantial returns from products and services that help solve this challenge. The Aral Sea tragedy is a stark warning of the high cost of inaction, but it also highlights the transformative potential of well-targeted infrastructure investment, as seen in the partial recovery of the Northern Aral Sea through the Kok-Aral Dam. (11)
As COP29 convenes in Baku, the lessons of the Aral Sea are clear: with political will, innovation, and capital, we can build more resilient and sustainable water systems that benefit both investors and society.
Reference list:
(1) World Bank (2024)
(2) Reuters (2024)
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