Water: The Critical Asset for a Sustainable Future with Dr. Pradipta Parhi

Hi, I'm Jeff Gitterman.

Thanks for joining us as we explore how to best take advantage of changing times and shifting markets.

Today our guest is JP Morgan executive director Dr.

Prad Parhe.

As a member of JP's climate tech team, he's here to talk about water and why water is a key strategic asset.

Prad, welcome.

Thank you, Jim.

So glad to have you here today, but I always like to get started on this show by just finding a little bit of background on why are people in impact, why are they focused on water.

Give us a short, you know, trip down memory lane of your journey to impact investing.

Thanks, Dave, for inviting me.

So, you know, I'm a fan.

I've been following your show.

I think you're really early in terms of talking about climate resiliency.

I really appreciate that.

So I'll just start with a little bit of my brief background, the intro to climate.

So it's almost 20 years.

I was doing my MBA in Japan, west coast of Japan.

And I chose a project to design a weather derivative contract for snow, snowfall risk, so that particular part has more than 1 m of snow every season, but it varies significantly affecting ski resorts, the budget of the city government for cleaning.

So it was really an interesting project and kind of got me interested in climate.

It was a very rushed project.

It was part of MBA.

Anyway, I ended up working for Merrill Lynch in Tokyo doing equity derivatives, but always the back of mind was to go back and understand like how, why I noticed all this variability in the snowfall, why the extremes happen, how do you predict them, and then ultimately, How do you manage those risks?

The risk can be soft type, meaning buying insurance or actually investing in our infrastructure.

So that kind of got me excited.

I came to do a PhD in climate and looking at all these different dimensions of optimal decision making around dealing with risk and uncertainty.

So ultimately through some startups and FinTechs and asset management firm ended up at JPM, so I've been here for 2 years now.

So my day job has three dimensions.

First, I talked to and advise venture capital and private equity and infra funds who are interested in technology and infrastructure themes.

Second, Advising corporates and startup founders of all sizes and scale and finally thought leadership and internal cross collaboration teams and talking about and teaching our other bankers this new kind of emerging technologies.

So we look at water, fusion energy, natural resources, critical metals, as you know, it's very hot these days.

But water specifically has been our key focus recently.

We wrote a white paper and we can talk about that in more details.

Yeah, I mean, let's start by just thinking about why is water such a critical topic today, and it's not just in the US, it's a global topic that really is taking off because of many different instances, but please talk to us a little bit about what JP Morgan's thinking about water and then tell us a little bit about the paper that you put out.

So yes, just for your audience, the paper is publicly available, so you can Google JPMorgan Water Resiliency US.

So this paper focuses on specifically US story, but we can get into other parts of the globe.

So the main thesis was that Water, if you think about the supply and the demand dynamics, was in equilibrium for a long time, particularly in OECD countries.

But that has been disrupted recently for many, many different factors.

So if we just start to talk about the demand side, To think about this is easier if you just think about like 3 Ds deglobalization, digitization, and decarbonization.

So if you think about, you know, tariffs and the recently whatever is happening in the macro, a lot of manufacturing is either coming back to the US or other kind of countries.

The supply chain is getting complicated and so that requires a new assessment and creates more demand.

And digitization, if you think about data centers, as you know, AI queries are 100x more energy consuming, and all these data centers actually require a lot of water for cooling and energy for cooling.

So in a way these are kind of interrelated, but energy is talked about a lot, but I think we forget about water.

So that's kind of the other factor in digitization.

And finally decarbonization.

We have of course an energy transition.

Of course the speed and scale is a little sometimes volatile, but broadly speaking, Any energy transition will require a different type of water demand.

For example, in the US, we are still going ahead with a lot of nuclear geothermal assets which are not necessarily less water intensive.

Yes, solar and wind are less water intensive, but when you think about the portfolio, we need more energy that will actually require more water.

And the other interesting factor there we highlight is we noticed a lot of this new energy manufacturing is coming up in some of the dry parts of the country, Arizona, Texas, so that all kind of adds to the demand side, pressure, and then the supply side.

Climate volatility, of course you know you have been talking about this for a long time.

My PSD was also to kind of look at the hydrological cycle and actually show like why and at what scale the probability distribution of the rainfall is getting extreme on both dry side and wet side, so dry side meaning more drought, wet side meaning more floods, and so these extremes, when they happen, all these factors are.

Getting more and more unpredictable.

So that's starting to kind of put pressure on the supply side and then another big supply side factor is the infrastructure.

So this country.

Most of the water infrastructure, if you think about dams, levees.

Piping systems, all these have capex cycle of 2030, 40, 50, up to like 100 years, and we kind of show that in the map in the paper that if you see most of these assets are kind of coming towards the end of their life.

So that requires massive investments in all this hard infrastructure.

And that creates a lot of pipe breakage, a lot of supply disruption, so that's like one more on the supply side.

And finally I would add groundwater depletion.

So depending on where you are, your water source is not always the fresh rainfall.

It's usually more groundwater and in many parts of the country, particularly in Texas, People use water from an aquifer called Ogallala, that's the largest waterfall, and you know 13, like a lot has been depleted.

I think the balance is not doesn't look good, so people have to be more aware and start to recharge groundwater and like be conservative about that.

So these are kind of the factors which are totally disrupted that supply demand dynamics and on the top, if I add the last one, we highlighted PFAS forever chemicals.

So a lot of new regulations are coming up because people are getting aware about health impacts of water and these pollutions have caused different kinds of diseases and so the new discovery is saying like this has to be eradicated.

And we kind of highlighted one on the upside, the liability could be up to $1 trillion for TFA remediation.

And some companies have already made billions of fines.

I mean these, these all are kind of adding to this interesting dynamic.

Of course it's risk, but it's also opportunity.

It's unbelievable because we see supply and demand equations on things that aren't necessary for living every day play out all the time in the markets.

This is an example of something that we haven't figured out how to live without.

We can't live without water, and it's some of the biggest supply and demand disequations that we've seen in any market, so.

As you know, we've been looking at this for 10 years now and can't understand why the markets aren't moving more towards water.

When you did the paper, do you have any insights into what's holding back investment flow to water and then what other insights for investors were in the white paper?

Yes, so the one thing we did after kind of writing the white paper was to do a consultation.

So I organized a roundtable during New Climate Week.

So we got 35 who's who of water, the leading private equity, venture capital, multilateral banks, the rating agencies, one of the largest asset managers.

Um, to really understand and validate some of these hypotheses and what you're asking like why the market is not moving.

And so to take away from that, I would put them in like two big buckets one.

The water users, the corporates who are using water, think about of course the large paper companies or the semiconductor companies or the food and beverage.

Budweiser, the Hyperscalar, right, so everybody who are using water is starting to kind of think and plan for water resource because it's a business risk, right?

It's business interruption risk because some of these are strategic investors, you know, 30, 40 years of view in terms of where you are putting in the next semiconductor plans or your data center, right?

So these companies, the message was.

What we found was that water is not tracking as well as carbon in terms of the quality of disclosure.

And quantity of disclosure.

So in the room, for example, the asset manager was there.

So there are complications around water sector, the way you kind of measure it.

But that realizing is kind of coming up and up in terms of the discussions, investor relations engagement.

So from that meeting our takeaway was if you are a corporate who use water, you have to do multiple things and we kind of chatted out the recommendations, the best practices, you know, a few things are like you have to of course plan for water.

You have to.

Do a lot of strategic alliance with the solution provider.

So things like that.

And then we go to the other side of the coin which is the solution providers.

Here we are talking about large water companies who provide technology.

But also middle market and smaller startups who are all working to kind of solve some of these challenges, and here we highlighted and we noticed that there's a bigger role to be played by private equity and venture capital folks because this is a highly dynamic situation and these guys are kind of fast movers in the space.

So going beyond the USA, we really focused on that at least for the first part of this conversation.

We're looking at places like India and Pakistan where there's potential for wars occurring because of lack of water.

Can you give us a little bit of the dynamics you're seeing globally?

You don't have to focus just on war as a situation, but certainly water is a global issue.

And what I was, if I could just back up for one second.

When we talk about the hydrological cycle, a lot of people don't really grasp what is happening, but basically, maybe you could explain it as a climate scientist better than I can.

But the warmer the air gets, the more moisture it can hold.

And just because it's holding more moisture doesn't mean it releases that moisture as rain over a year, so you can have less rain occur. because the air could hold more moisture, but you could also have more rain in a shorter period of time because the air is holding more water.

So we're dealing with droughts and floods that didn't occur at lower temperatures.

Did I get that?

Yes, yes.

So that that was actually my PhD thesis to just understand and talk about why we see this contrasting response on drier side and wetter side.

And also there are a few other things like seasonally they're happening at different times and also especially there is more or less predictability.

But broadly speaking, what you said is exactly right.

For every degree warming, the atmosphere can hold like 7% more moisture.

That means when the environmental conditions are suitable and it actually rains, it will rain more.

But there is another interesting dynamic which is when it's warming, somehow the warming is a little greater at a higher altitude than the ground level.

Basically the bottom line there is that the atmosphere is becoming more stable.

That means it will try to suppress rainfall.

So that's why you actually expect more or longer dry spell.

So that kind of explains very high level like why you see this contrast.

Now take us globally around the world.

So, so of course this we talked about a lot about US.

We are thinking a lot about now India, like other bigger markets where water is a critical.

Natural resource for basically growth, and India is a good example because India India is a semi-arid country.

The monsoon is highly volatile.

They actually call Rainfall as the finance minister of India.

So So if you think about the US versus like other countries, I think it's easier to think about OECD like developed countries versus other developing countries.

In developed countries, what we are trying to focus is Upgrading the legacy assets infrastructure and a few new regulations around PAS, while in the developing countries, a lot of assets don't exist.

For an example, in this US you probably have more than 80% of wastewater which is treated before it goes to the rivers of the system.

In India it could be opposite.

More than 50% is not treated.

So that means a lot of new infrastructure has to come in.

So that's one.

So there will be new green infrastructure around water.

Second big aspect is because this is new, you can introduce new business models and whatever lessons we can learn from other parts of the globe.

And one of the ideas there is.

Decentralized infrastructure.

So there are people experimenting with different business models.

For example, China has done much more top down large scale infrastructure while India has to go with more hybrid, few top down large scale, but more and more.

Distributed building scale, smaller scale infrastructure upgrades.

So that's kind of the big difference.

So we basically see that, you know, with GDP growth and other kinds of industrial urbanization.

Many of these countries also have to invest a lot in water.

I imagine one of the issues that a company like JPMorgan is that JPMorgan can invest in a $5 million water project because it's just too small for them to look at.

So when you look at JPMorgan, what kind of product offerings are we seeing coming to the marketplace?

JP Morgan, first of all, I would like to say like it's a very proud.

We have been like helping water sector around different financing solutions for a long time.

And within the company, if I could just highlight like how it's organized, I sit within the commercial corporate investment bank.

So just talking about CIB's mandates from investment bank side we provide of course M&A mergers and advisory solutions, equity capital market solutions, debt capital market solutions.

So these are the big ticket large cap.

Solutions, but what we have noticed is there is actually a lot of water companies who operate in the middle market and also even early stage startups.

So there are new teams who are looking at middle market.

So within the corporate bank, commercial bank, we have lending products, treasury services, other kinds of payment solutions.

So when I look at it, I feel like we have tried to fill all the financing gaps across the life cycle economic cycle.

And within the investment bank we have of course sector expertise and what when you think about it, it's a complicated structure and you know we cover it through diversified industrials if you're talking about pumps, pipes, if you are talking about chemicals because the treatment requires a lot of chemicals, so the chemical industry coverage, we have natural resources which would cover utilities and recently we have also increased our focus on public financing.

Again, covering a lot of public utilities and finally I would like to highlight a much more focus on what we call a financial sponsors and strategic investor group because what we see is this group of investors can provide risky capital and are actually getting more and more active in infrastructure space.

So what's next for the water sector?

I mean, we have, as you've laid out for us, we have extreme demand.

Occurrences and we have problems with supply.

So this equation between supply and demand, which is always good for any investment cycle, is there, but we also desperately need water to live.

So when you look at the future, the next 5 to 10 years for water and water investing, what do you see?

Yes, so I think it depends on where you are, so I can just maybe talk about three big ideas here.

If you're in the USA or OECD countries, we would, the public finance we tracked is kind of going down, so the private sector financing has to come up and kind of compensate, and we kind of highlighted in that paper we might need $2 trillion.02 trillion dollars over the next two decades for all the infrastructure, all the gaps I mentioned.

So private capital is probably the theme for US and OECD countries.

When you move to India and other developing countries.

We might have to think about privatization, long term concessions, other kinds of mechanisms where Private sector solutions might have better reliability, service quality, and better acceptance by the consumers.

So we might see those kinds of trends in other countries.

And then finally when we talk about technology.

The biggest leverage is actually in the membrane technologies and a lot of desalination technologies.

If you think about, you know, a lot of people, of course we live around the coasts and for example India, Chennai, particularly the city has one of the largest desalination plants in Asia, even if it's expensive.

When the water shortage is too extreme, you don't have a choice but actually invest in that expensive solution.

So the big challenge for technology solution provider would be can you bring down the desalination cost membrane technology and other kinds of technologies will be key to make sure like people can afford because affordability is always a big issue.

And then so that's kind of the tree on the next trend, but if I have to.

Pinpoint to one particular central theme in this is actually affordability.

That's what we heard from all the stakeholders.

Because people have expectations like water is almost free compared to let's say power, Wi Fi, AI, I mean you are ready to.

Pay for other services.

So the only way to realize that is when you actually start to see this risk business interruptions, service quality, diseases, and we think there is already those kind of experiences and the momentum is building, so there is no choice but to actually accept that it's not a free service.

You pay for good quality and hopefully that then drives all this cap expense.

Amazing.

I think we covered a lot of ground here.

That was really excellent.

I enjoyed having you so much, Prod, on the show.

Love to have you back again to cover some of the other areas that you focus on around adaptation and impact, but thanks for being here today.

Thank you, Jeff.

Really great to talk to you.

Thanks again for spending time with us as we continue looking at new solutions and innovative ideas always from the floor of the New York Stock Exchange.