Talking Heads – Gestion de l’eau : à la recherche de solutions

This is an edited transcript of the audio recording of this Talking heads podcast

Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing investing in water and assets related to the provision of water. I’m Andy Craig, Co-head of the Investment Insights Centre, and I’m joined today by Justin Winter, Senior Portfolio Manager and Co-Portfolio Manager for the water strategy at Impax Asset Management. Welcome, Justin, and thanks for joining me.

Justin Winter: Thanks, Andy. It’s a pleasure to be back.

AC: A recent UN report confirmed continuously increasing demand for water, driven by the climate crisis, population growth and changing consumption patterns. This is putting huge pressure on water resources, with the number of people in cities facing water scarcity set to double to 2.4 billion in the coming decade. Clearly, this is a topic of great importance and potential for investors. The last time you joined us, we spoke about the impacts of climate change for investment. What notable developments have happened since then?

JW: The impact of climate change is still mounting. In Europe, we’ve had drought and water shortages, then floods in Italy. That is a characteristic of climate change – drought, then deluge, where warmer air holds more water leading to heavier rainfall. That will be with us for a long time.

Climate change has a continuing impact in terms of a water investment theme. One report last year by a group of consulting engineers estimated that between now and 2050 there will be USD 5.6 trillion worth of potential losses to global GDP. Water scarcity is a big part of that, but – apparently counter-intuitively – almost half of the losses is from storm water events. High intensity rainfall causes substantial economic damage and loss of life.

There is a lot of focus on water security in the US. In Arizona, Phoenix has stopped approving houses in parts of the city on concerns about the long-term viability of water supply. And the US Environmental Protection Agency has recently said USD 625 billion of drinking water infrastructure investment was going to be needed over the next 20 years. That’s 32% more than the estimate published five years ago.

AC: If we look more broadly at the global economy, one major topic is the offshoring of manufacturing in strategic industries. Do you see implications for water in terms of re-onshoring these strategically important assets?

JW: Semiconductor manufacturing in the US is now being re-shored for a number of reasons. There was a cluster in Arizona, where there were tax breaks going back many decades. Now USD 200 billion of new investment in semiconductor manufacturing in the US is coming through and a good part of that is going into Arizona. Some major manufacturers announced they are expanding there, but obviously it’s a place where there isn’t an abundance of water.

This is an important driver in terms of the water theme – with semiconductor fabrication facilities, around 6% of the investment cost will go into water infrastructure, either to produce ultra-pure water that’s used in the manufacturing process or to re-use water via a closed loop system. Water scarcity has increased the focus on water re-use, which increases the opportunities for companies that provide solutions for that. This will be the case for a long time, so the long-term investment potential looks compelling.

AC: Another recent media topic is the contamination of water supplies in Europe and the US by ‘forever chemicals’. What’s being done to address that issue?

JW: This is another huge opportunity for water industry solution providers. ‘Forever chemicals’ are a broad category of compounds used in consumer products and industrial manufacturing since the 1940s. There are thousands of types that together are known as PFAs, and they are very effective for resisting water, grease and stains and to put out fires.

For clothing, they are used for waterproofing. They repel stains on carpets, they are used in cosmetics and in food packaging such as pizza boxes and microwave popcorn bags. They are also in firefighting foam and used at airports and military bases.

Unfortunately, they don’t break down in the environment – hence the name ‘forever chemicals’. Research has shown that exposure to high levels of these chemicals is linked to a greater risk of cancer as well as reduced vaccine response in children, according to the US Center for Disease Control.

It’s very easy to come into contact with these chemicals – either through water or through food contaminated with polluted water – and they build up over time. In the US, it’s been found that nearly everyone has some amount of these chemicals in their blood. Forever chemicals have been found in the Arctic, in the open ocean, in polar bears and pilot whales – it is almost everywhere because it’s been used for so long and doesn’t break down.

In the Netherlands, there’s an old chemical plant next to which people are being told not to eat any vegetables they grow in their gardens. Because of the health impacts, there have been a lot of lawsuits, particularly in the US. Recently, there have been a number of legal settlements specifically around firefighting foam. The chemicals’ properties made them really good for putting out liquid fuel fires in particular – think about an airport, if there’s a crash and you’ve got liquid fuel, it catches on fire and needs to put it out. It’s a great application used since the 1960s – but then these chemicals don’t break down. They leach into the groundwater and end up in contaminating the drinking water.

From among the thousands of court cases addressing this issue, some recent settlements with US industrial companies proposed that they pay out between USD 10.5 billion and USD 12.5 billion over 13 years to hundreds of cities to help them upgrade their water treatment systems to filter out particular types of forever chemicals referred to as PFAs.

But this is just the early stages. Think about the major settlements in other industries in the past – for tobacco it is about USD 200 billion, for asbestos about USD 200 billion. Now think about how broadly PFAs have been used and the cost of removing them: it’s going to be a very significant amount of money over a very long time.

If you are a solution provider in this area, that’s a business opportunity for you. And those opportunities are broad. It includes consulting companies that put together programmes to resolve the issue, companies who make testing equipment, companies who run labs, companies who run the systems, and companies who make filtration products to remove the chemicals from the water supply.

Long-term drivers such as climate change and PFA clean-ups are providing a strong tailwind for companies that develop solutions, so there is a lot of mileage yet in terms of the water investment theme.

AC: Justin, thank you.

This presentation includes a discussion on current market events and is not intended as investment advice or an offer of products or services by BNP Paribas Asset Management. Please keep in mind that the information and analysis in this presentation is only current as of the publication date.