Marketing communication
Companies focused on water supply, demand efficiency and waste management can add defensive growth to portfolios
There is general agreement that water is important and that its importance is growing. There is less agreement over why water is important. Misconceptions about water are widespread. Perhaps the most common is that water is scarce. However, from the perspective of space, the Earth might appear to have too much water rather than too little.
The issue is local, rather than global. Other misconceptions include the idea that ‘wet’ countries can’t be water-stressed. And yet, the UK – a pretty wet country by most measures – may run out of water in 20 years according to the UK’s Environment Agency because of population growth, lack of storage infrastructure and climate change.
Confusion Regarding the Definition
And then there’s the concept that water challenges mainly reside in emerging markets. While that idea may have legitimacy if we are talking about kilometers of pipes, consider the cost of replacing 250-year-old water and sewerage pipes in New York City, one of the most densely-populated urban areas in the world.
In other words, there is confusion regarding the definition of what water issues actually are, how they can be addressed and whether the solutions represent an investable theme.
What Are Our Water Issues?
Water issues relate to the global imbalance between water demand and water availability. To address this challenge, solutions can be broken down into three segments, according to Arnaud Bisschop, a founder and owner of Thematics Asset Management, an affiliate of Natixis Investment Managers.
These are demand efficiency, pollution control and water infrastructure. Of the three, demand efficiency is the highest growth segment as water users in many parts of the world adapt to increasing water constraints. Consumers, industry and farmers are all striving to reduce water consumption to mitigate increasing competition for water resources.
A growing number of companies are developing technology-led services and equipment to increase efficiencies. These range from domestic showers and irrigation systems to solutions for heavy industries such as oil and gas and agriculture.
Heavy Users
Bisschop says: «Farmers are heavy users of water but pay little for it, so have little incentive to improve efficiency. Companies have to be highly innovative to address that kind of challenge.» The second segment, pollution control, is about measuring pollution and managing waste.
Professional waste management service businesses, for instance, are seeking ways to prevent water table pollution. Pollution monitoring equipment is now deployed across the globe to track water flows and facilitate effective enforcement of increasingly strict water quality standards.
The last segment, water infrastructure, focuses on the catch-up of decades of underinvestment in existing water infrastructure assets of Developed economies and on putting new systems in place in high-growth emerging markets. Urbanization drives the increased demand for this new water and wastewater infrastructure, while systemic failures, leakage and even pollution scandals provide some of the main drivers for water market growth globally as refurbishment spending requirements climb ever higher in developed countries.
Managing Utility Networks
Meeting water infrastructure supply challenges include building and managing utility networks, while municipal authorities increasingly hire concessions operators to run water services. Meanwhile, technology providers are developing both basic and sophisticated components to help plug gaps in water infrastructure.
Investments are also required to improve the treatment of water to tackle a rapidly increasing number of water contaminants, as well as to comply with stringent regulations.
Investing in Water as a Theme
So what, exactly, is the investment opportunity? «It is not uncommon for people to think that the opportunity is to buy water, the physical commodity,» says Simon Gottelier, a founder and owner of Thematics Asset Management. There is no cohesive single market for water, but there is a market for the kinds of services described above.
«It is a pretty diversified universe, with close to 300 global companies that fit into these three segments,» says Gottelier. This universe of companies now represents an 800 billion-dollar-a-year market that is expected to grow by 6 to 8 percent annually, with these companies having a combined market capitalization of more than three trillion dollars.1
The wide and diversified opportunity set means that, over extended time periods, some drivers of value will surge and offset lower growth or falling values from other parts of the market. In the last two or three years, for instance, the biggest overall driver has been the pollution control segment, as Covid put the spotlight on water quality assessments and the quality of water used in healthcare applications relating primarily to COVID testing.
Defensive Growth Across the Cycle
The approach provides investors with defensive growth over the long term given this diversification and the correlation with long-term demographic drivers. Water is a natural resource that is in high demand no matter the prevailing macroeconomic winds.
And because water-themed assets are often real assets, or directly linked to real assets, they can be effective inflation hedges. «We think this is a suitable offering for investors who want to contribute globally to the sustainable use and protection of water resources while generating long-term growth through an investment process that systematically incorporates ESG,» says Bisschop
1 Source: Thematics AM December 2021. Research and Markets «Global Water and Wastewater Treatment Outlook Report 2022».
Thematics AM is an affiliate of Natixis Investment Managers
- Find out more here.
Disclaimer:
This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. All investing involves risk, including the risk of capital loss. This material is provided for informational purposes only and should not be construed as investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The views and opinions expressed are as of the date indicated and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich. Thematics AM is an affiliate of Natixis Investment Managers
Thematics Asset Management French SAS (Société par Actions Simplifiée) RCS Paris 843 939 992 Share capital: €191 440 Regulated by the AMF (Autorité des Marchés Financiers), under no GP 19000027. 20, rue des Capucines 75002 Paris www.thematics-am.co
