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PORTFOLIO PERSPECTIVES | WHITE PAPER – 5 Min

Investing in a critical global resource: water

In this article:

    In this paper, Impax Asset Management, a delegated manager of BNP Paribas Asset Management, discusses the fundamental drivers of the global water industry’s growth and regulation. Both are shaping priorities in the sector. What does this mean for the opportunity set for investors? What are some of the evolving technologies and solutions that could shape the market? Here is a shortened version of the paper presenting the main points. 

    Rising living standards are reinforcing long-term demand growth for water. However, water resources are strained by overconsumption, pollution and the effects of climate change. Such problems do not just affect the emerging world – ageing infrastructure compromises reliable supply and contributes to pollution across the developed world.

    To address these challenges, investment in the industry must increase significantly. The UN estimated in 2020 that an extra USD 260 billion would be needed each year to realise its Sustainable Development Goals by 2030. Some governments directly support the sector: the 2021 US Bipartisan Infrastructure Law included USD 55 billion for improving water-related infrastructure.

    Expanded fiscal support and investment by utilities and water users should trickle down to suppliers of products and services, creating opportunities across the water value chain.

    The case for investing in water

    Here, we discuss the interrelated trends that support long-term investment in the water industry.

    WATER SCARCITY

    This challenge emphasises the need for better water management, to avoid waste and unsustainable consumption. An absence of effective water pricing – in many parts of the world it is essentially free – contributes to poor management. Alongside better policy, products and services that can improve the efficiency of water usage can significantly reduce pressure on freshwater sources.

    GROWING POPULATIONS

    Growing populations will not only raise demand for drinking water, but also for products and processes that rely on water such as agriculture and industry.

    CLIMATE CHANGE

    Climate change is leading to more intense droughts, and the amount of water stored on land in the forms of soil moisture, snow and ice has dropped sharply. Rising sea levels are expected to increase the dissolved salt content of groundwater supplies in vulnerable coastal areas and put millions at risk of flooding.

    POLLUTION

    A tightening regulatory environment supports innovative approaches and technologies that address water quality issues, from water testing technologies to wastewater treatment.

    URBANISATION

    Urbanisation poses two major challenges. First, providing clean water and sanitation to more people in a concentrated area. Second, increased flooding risks due to water run-off from impermeable surfaces such as roads and roofs.

    INFRASTRUCTURE

    Investment is needed in water and sanitation infrastructure including upgrades in the developed world. This creates opportunities, from companies that supply products integral to moving water around economies to companies engaged in developing and constructing utilities’ systems. Smart monitoring technologies can identify leaking pipes and predict faults before they occur.

    NEW INDUSTRIES

    Vast volumes of water are used to cool servers and maintain operational temperatures. Making semiconductors is water-intensive. Potential droughts and water scarcity pose operational risks given the water intensity of processes. Innovative water management solutions including closed-loop systems can play an important role in addressing such sustainability challenges.

    Regulation

    Here, we consider three main areas of regulatory focus.

    WATER QUALITY

    Around the world, water quality standards are becoming increasingly stringent. Compliance with tighter regulations will involve vast investment in improved water infrastructure, supporting opportunities for companies across the global water value chain.

    ‘FOREVER CHEMICALS’

    Awareness of one specific water quality issue has been rising in particular: the presence of perfluoroalkyl and polyfluoroalkyl substances (PFAS) in drinking water and water courses. Regulators are introducing new standards supporting long-term demand growth for water testing and treatment.

    BIODIVERSITY

    Regulators are turning their attention to water since water quality and the state of biodiversity are interconnected. A keener focus on addressing biodiversity loss, and related risks to businesses and global society, should support opportunities for products and services that can address, or at least alleviate, the pressures on ecosystems, for example through testing and treating water.

    Investment opportunities

    Here, we present some long-term opportunities.

    WATER UTILITIES

    There are selective opportunities for investors in the companies that operate water treatment and supply infrastructure, providing clean water, wastewater and sewerage services. Utilities that demonstrate progressive water stewardship processes face lower regulatory risks in the form of potential fines or the loss of their social licence to operate.

    WATER INFRASTRUCTURE

    There are three overarching categories. 

    • Network equipment products such as specialised pipes, pumps and valves that assist in the transmission of water.
    • Parts and systems that distribute water around buildings and within industrial processes.
    • The design and construction of water infrastructure projects from inter-regional transmission projects and groundwater assessments to flood defence planning. 

    WATER TREATMENT, EFFICIENCY AND TESTING

    We can break the opportunities down into three broad groups. 

    • Services or products that enable the chemical or non-chemical treatment of water.
    • Products and services improve the water efficiency of processes or reduce water demand.
    • Products and services enable the testing of water quality. 

    Evolving technologies and solutions

    Here, we discuss some of the most promising innovations.

    ADVANCED TREATMENT

    Membrane filtration has transformed water treatment processes by mitigating the need for certain chemicals to separate out impurities. Advanced oxidation processes are useful in wastewater treatment. To remove organic pollutants, they typically combine the use of oxidants such as ozone and hydrogen peroxide with ultraviolet (UV) radiation and catalysts such as titanium dioxide.

    ADVANCED MEASUREMENT

    Advanced flowmeters provide reliable, real-time insights that help operators respond quickly to changing conditions. Advanced measurement systems can help farmers track moisture levels, acidity and salinity in the soil, weather conditions and crop health. This data can help conserve water and maximise crop yields.

    DETECTING NEW CONTAMINANTS

    Among solutions that can measure PFAS compounds in water is high-resolution mass spectrometry. To detect microplastics in water, flow cytometry can be used. Techniques to detect waterborne viruses – and so trigger effective policy responses – include next-generation sequencing.

    DATA AND SOFTWARE

    There are promising applications that are already delivering efficiencies and improving regulatory compliance. 

    • Sophisticated hydrological modelling software
    • Geospatial data solutions to create up-to-date databases of water pipe networks and improve modelling
    • Compliance management software to ensure utilities adhere to evolving regulations governing water quality and environmental standards. 

    SMART IRRIGATION

    Innovative ‘smart irrigation’ approaches integrate technology to optimise water usage and crop yields. They can be applied in major end-markets beyond farming, including gardening and the management of urban green spaces and golf courses.

    WATER REUSE

    Water re-use systems often combine processes including biological treatment, filtration, evaporation, disinfection and demineralisation. They are now being embedded to optimise and mitigate water consumption, and alleviate local water scarcity issues.

    Outlook

    Impax firmly believes that water represents an exciting opportunity set for investors. By carefully choosing companies exposed to this theme, we can build a high-quality portfolio of stocks that is well balanced between economically resilient businesses and firms that are more growth oriented.

    Tightening regulation, combined with structural drivers, should support opportunities for expertise-led active investors to outperform over the years and decades ahead.

    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.

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