2022 was one of the most expensive years on record for water-related disasters. Droughts in Europe cost more than USD 20 billion, as did droughts and flooding in China.[1] Similar episodes in South Africa, Brazil, Pakistan and Australia caused a further USD 20 billion worth of damages.
Aside from such events, the world’s water resources are under strain. There is a significant gap between supply and demand, as well as concerns about water quality and inadequate infrastructure.[2]
It’s no surprise that the United Nations’ Sustainable Development Goal 6 “Ensure availability and sustainable management of water and sanitation for all” seeks to improve infrastructure, encourage responsible consumption and ensure access to clean water and sanitation.
What are the implications for investing in the water industry?
Four categories of solutions providers
We face diametrically opposed problems of drought and flooding, but these issues can be addressed by investment in four areas.
Firstly, for storm water, there needs to be better infrastructure – more efficient pumping and drainage systems – than exists currently.
Secondly, in drought conditions, better solutions are needed for optimising the use of what little water is available, including – our third potential investment category – large-scale treatment infrastructure so that water can be re-used.
The final category is utilities. These companies are to provide safe drinking water, deal with wastewater and invest in infrastructure that minimises wastage (leakage) and maximises delivery.
Improving disclosure and management
Company strategies and goals are an important part of the solution. One of our key areas of focus in our engagement with companies is to encourage them to disclose their water risk more fully and to include more strategic goal-setting around water issues.
In many ways, water is a more complex issue than greenhouse gas emissions (GHGs). Unlike climate reporting, there are few globally agreed frameworks to measure water impact. It is also typically a local issue. This is why disclosure has historically lagged on this topic.
The good news is that many companies are improving in this area. Ceres, a sustainability not-for-profit organisation, has approached 72 companies through its Valuing Water Initiative.[3]
Focusing on companies with large water footprints across a range of sectors – from hi-tech to luxury goods – it aims to help improve disclosure and water management.
Companies themselves are becoming more proactive in responding to clean and wastewater regulations. This is leading to greater demand for the solution providers we invest in.
One of the largest challenges is the decade-long underinvestment in infrastructure. The effects can be seen in many parts of the world. The main consequence is not being able to deal with steeply rising demand for clean water and sanitation systems as populations grow and become richer.
Billions of dollars needed
The American Society of Civil Engineers has quantified this investment shortfall at USD 2 billion in 2019,[4] rising seven-fold – unless the situation is quickly and seriously addressed – to USD 14 billion, or some USD 3 300 per household, by 2039.[5] We believe closing that gap represents a large and attractive investment opportunity.
The latest US infrastructure investment legislation, covering roads, bridges, railways and the power network, will support long-term economic growth. We believe it will drive greater demand for water products.
In Europe, the EU Water Framework Directive focuses on outcomes rather than, for example, measuring contaminants entering water systems. It can help drive companies (and regulators) to prioritise issues, for example the quality of bathing water.
In short, the legislative environment, addressing both climate change and underinvestment in infrastructure, looks set to have direct positive impacts for established and start-up companies that provide water solutions to every activity sector.
In any economic environment
We believe the current environment of rising interest rates, impending (US) recession and energy supply stress does not weaken the attractiveness of water-related investing.
While companies seeking financing for water-related solutions are not immune to economic cycles, the opportunity set is broad, from more cyclically exposed sectors to more defensive.
Defensive opportunities include pharmaceuticals and consumer staples. Water infrastructure improvements take many years and projects transcend boom or bust cycles, translating into long-lasting demand for water solutions.
One consequence of recession in the US, and lower trend growth in China, could be more onshoring of manufacturing activity. This can be significant for the water industry.
If the US onshores more semiconductor fabrication facilities, for example, it would boost orders for ultrapure water and treatment plants to enable water recycling and re-use. This could be a further investment opportunity. Of a possible USD 20 billion investment in such a semiconductor facility, 5-8% – USD 1 to 1.6 billion – can be expected to be water-related, according to research by consultants Global Water Intelligence.
Unstinting demand
Addressing water issues – both scarcity and deluge – requires immediate as well as long-term solutions. Demand is not going away, regardless of economic cycles.
We believe there is a highly diverse range of investment opportunities across consumer and industrial end-markets, and in developed and emerging markets, to tap into that growing need.
References
1 See Which climate disasters were the costliest in 2022? | World Economic Forum (weforum.org)
2 See Why water shortages must be placed on the climate-change agenda | World Economic Forum (weforum.org)
3 See Valuing Water Finance Initiative | Ceres
4 See Chronic Underinvestment in America’s Water Infrastructure Puts the Economy at Risk | ASCE
5 Same source as for footnote 4
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund’s) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.
Comments