A substance as necessary for life as water can also be life threatening. And therein lies investment opportunity.

Central Europe suffered some of the worst flooding in recent memory, while massive monsoons in northern India displaced thousands and left hundreds dead and contributed to severe flooding in China. In the US, crops in the southern part of the country were decimated by drought, while Colorado suffered devastating flooding and rain in the Northeast broke dozens of records.

With severe weather events—most of which involve water—becoming increasingly common, this year’s “Global Risks 2013” issued by the World Economic Forum put water hazard right up there with wealth gaps and unsustainable government debt as one of the biggest risks facing businesses today.

But water risk runs much deeper than just hurricanes (or monsoons depending on which part of the world you live in) and droughts.

Over the past half century, the global population has doubled and water consumption and usage has almost tripled, while demand for clean water grows by about 6 percent each year.

That growing pressure often creates scarcity, particularly in emerging markets. According to the World Bank, 80 countries suffer chronic water shortages and almost all of them are in the in developing world. Half of China’s largest cities have insufficient access to clean water and only about 20 percent of South Americans have reliable access to clean, safe water.

Given the sheer scale of the water challenge, there are a number of ways investors can play water scarcity.

The first is to focus on infrastructure companies that lay the groundwork for easier water access, such as France-based Veolia Environment (NYSE: VE).

Veolia was a pre-recession darling, as a number of countries, both developed and emerging, embarked on an infrastructure investment binge before the Great Crash of 2008 busted budgets. In late 2007, Veolia was trading at a princely $96 per share and commanding premiums by almost every valuation metric.

But thanks to the recession and some operational stumbles, the company’s valuation has fallen back to earth with shares currently trading at around just $15. Despite that, it remains one of the largest wastewater and desalination companies in the world, with operations in more than 66 countries.

Over the past few years, management has been engaged in an ambitious restructuring program, working to cut EUR170 million in costs by the end of this year and reducing its reliance on the still weak French economy. After a number of recent deals, the French contribution to revenues has fallen to just 34 percent of revenues.

Management has also become much more selective in the types of geographies of the projects it takes on, mitigating the issues the company has encountered in the past when contracts languished or were broken due to unrealistic goals and timelines. It is also refocusing on areas such as Eastern Europe and China, where the company has an excellent track record of getting jobs done.

Because of those efforts, while analysts still take a somewhat cautious view of the company, Veolia is expected to turn in earnings per share (EPS) of $0.45 and grow earnings by 42 percent in 2014, hitting $0.64 in EPS.

The stock also is trading at just 0.7 times its book value and just 0.2 times sales, with a forward price-to-earnings (P/E) ratio of 14.2.

Pall Corp (NYSE: PLL) is another company that provides water filtration, separation and purification technology, but it tends to focus more on industry users. Just as we all need clean, fresh water to drink, a number of industrial users such as pharmaceutical makers and chip manufacturers require pristine water for their manufacturing processes.

Pall operates in two main segments: Pall Life Sciences and Pall Industrial, with each segment comprising about half of the firm’s annual revenues.

Pall Life Sciences is made up of smaller segments including: Biopharmaceuticals (67 percent of Pall Life Sciences’ annual revenues), Medical (16 percent), and Food & Beverage (17 percent).

Pall Industrial is also made up of smaller segments including: Process Technologies (60 percent of Pall Industrial’s annual revenues), Aerospace (19 percent), and Microelectronics (21 percent).

The firm’s business is renewable, because 85 percent of its sales are derived from products that are consumed and need to be repurchased. These customers are sometimes required to repurchase its products to avoid stiff fines due to strict environmental laws against water pollution (e.g., the Clean Water Act) that are enforced by the Environmental Protection Agency (EPA).

Due to its innovative culture and the fact that its products are required by customers in the industry it serves, Pall Corp has a very strong competitive advantage. There is also a high barrier of entry into this industry and potential competitors would find it hard to challenge Pall’s market position. Although industry barriers do not fully guarantee the long-term success of any business, it makes a would-be competitor think twice before entering the market.

Revenue for the company’s fiscal first quarter rose slightly from $627.6 million in the same period last year to $629.8 million. But largely thanks to restructuring charges ($9.2 million) and slightly higher interest expenses ($6 million), net income fell from $339.5 million in the same period last year to $71.5 million, or $0.63 in EPS.

Revenue from the company’s industrial division dropped 3 percent year over year to $311 million, as process technology sales fell by 15 percent. That was partially offset by a 5 percent increase in aerospace sales and a 9 percent increase in microelectronics.

As usual, though, the life sciences division continued to post strong growth with sales up 7 percent year-over-year, largely thanks to strong increases in medical and food and beverage sales.

Management stood by its fiscal 2014 guidance, forecasting pro forma earnings growth of between 9 percent – 15 percent, with revenue growing in the low to mid-single digits. So far, analysts haven’t altered their outlooks either, holding at full-year EPS of $3.40 on revenue growth of just more than 3 percent.

Portfolio Updates

Please see yesterday’s issue of Global Investment Strategist, in which I sold KEYENCE Corp (Tokyo: 6861, OTC: KYCCF) and added Ternium (NYSE: TX) and Market Vectors Vietnam ETF (NYSE: VNM) to the portfolio.