The unprecedented drought in California could become more commonplace in the U.S. and around the world in the coming decades. And that has significant implications for the future of investing.

After all, water is not only essential for sustaining life, it’s also a crucial resource for key sectors such as energy, agriculture and manufacturing and, therefore, economies as a whole.

Water scarcity is already a problem in fast-growing emerging markets. And given California’s example, the developed world may face similar challenges.

Indeed, the United Nations has warned that the world’s water supply will fall short of demand by 40% within 15 years.

Much of that stunning statistic is due to the rapid population growth, urbanization and industrialization taking place in the emerging markets.

While the developing world’s rising middle class is helping drive new growth, it’s also placing greater demands on the global water supply. In fact, the UN says that several countries are already nearing the point at which demand will exceed supply.

Consequently, more and more experts are acknowledging that competition for water could very well change the value proposition of companies and industries that fail to take strategic steps to manage this resource.

Investors are also starting to take notice. According to the environmental consultancy CDP, institutional investors and other professional money managers are increasingly asking companies to detail their water resource strategies and explain the implications from an investment standpoint.

And famed Goldman Sachs investment strategist Abby Joseph Cohen has observed, “A key question for leaders and investors is whether inadequate and unevenly distributed water resources will limit economic growth, especially in emerging countries and what constructive role business can play in addressing water problems.”

Understanding the Nexus

But addressing water scarcity will likely prove to be an incredibly complicated undertaking, in part because this crucial resource is closely interrelated with other crucial resources.

As William Sarni, who leads Deloitte’s Water Strategy practice, recently wrote, “It takes water to produce energy; it takes energy to source, treat and distribute water; and both water and energy are required to produce food. The interdependence of these three resources is known as the water, food, and energy ‘nexus.’”

Since actions taken with regard to one resource are likely to affect the other two, Sarni believes the answer is for businesses to work together to develop technology and policy solutions around the nexus of water, energy and food.

The cost of inaction is best evidenced by Brazil, whose persistent drought has caused a ripple effect throughout the country’s economy.

“The biggest shock will come from food costs because the ongoing drought is pushing up the price of fruits and vegetables,” the Wall Street Journal reports.

Brazil’s drought has also driven electricity prices sharply higher. In years past, hydroelectric power has provided nearly 80% of the country’s electricity. But the drought has forced power companies to use more expensive thermoelectric power plants to compensate for the dwindling reservoirs behind hydroelectric power plants.

Even without the record drought, Brazil was already facing economic straits, with the economy forecast to flatline this year. And the WSJ says that water and energy rationing could further pare Brazil’s economic growth by as much as 2 percentage points.

But Brazil is hardly alone on this matter. China is also dealing with water scarcity.

And these days, one doesn’t need to travel too far to witness water scarcity’s economic impact.

According to Sarni, water scarcity is now affecting both energy and food production in California, with measurable impacts on the state economy and private business. According to a recent report, the economic loss from the drought is expected to widen to $3 billion this year from $2.2 billion in 2014.

Last year, for example, California’s agriculture sector suffered an 11% decline in planted acreage, which led to job losses and steep drops in production of corn, rice and cotton.

And similar to the situation in Brazil, Californians are also paying higher rates for electricity–about $1.4 billion more than the average over the three-year period through October 2014–due to the drought-induced shift from hydropower to gas-fired generation.

Clearly, investors will have to start taking water scarcity into account when investing in companies with exposure to regions facing these challenges.

But there’s also an opportunity to profit from innovation and business development as water utilities work with industries to use water more efficiently.

Water utilities are already a favorite among income investors because the essential nature of the service they provide helps drive steady dividend growth.

And we believe water utilities will become more essential than ever, as the need for infrastructure upgrades and greater efficiency spur further consolidation.

For subscribers, we detail the latest earnings reports for our top water utility holdings.