Where are the investment opportunities in water?

For World Water Day 2022 portfolio managers share their strategies

Investors need to think outside the utilities box when it comes to water risks and opportunities, commenters have said on World Water Day 2022.

Water and its surrounding infrastructure present plenty of opportunities for investors. Global Water Intelligence expects growth to continue to meet the $7.5-$23.1trn needed in the area by 2030. Similarly, Emergen Research said it expects the global digital water market to grow at a 12.1% CAGR between 2020 and 2028, highlighting the increasing digitalisation of the utilities market as driving growth over the period.

But utilities, which have high water consumption and intensity, aren’t the only area to watch. “Regulated utilities are often perceived as the only ‘play on water’,” Regnan said. “However, regulated utilities only represent less than 20% of the investable universe and even these businesses can pass through costs to customers and generate robust returns.”

Investment opportunities exist across the water value chain and different segments offer distinct fundamental exposure. The water value chain comprises pump and valve manufacturers, water treatment companies, water storage providers, network operators, metering and billing companies, wastewater treatment firms, and more. According to Aanand Venkatramanan, head of ETF investment strategies at Legal & General Investment Management, water can also be used as a diversifier – in the L&G Clean Water Ucits ETF, the overlap with the MSCI is just 1%.

Where to look

Investors need to think outside the box when it comes to water investment and firstly, as with anything investment-related, measurement is important. In a recent Sustainalytics report, Water-related risks and challenges, the firm predicted the number of companies reporting on water stress and other water metrics will grow as pushes for transparency continue. Companies can be encouraged to report on water withdrawal, water consumption and water intensity.

Next, consider overlapping sectors. “It’s impossible to talk about water without also talking about food,” said Felix Odey, portfolio manager of the Schroder Food & Water Fund. “Agriculture uses 65% of the world’s fresh water, but almost half of it is currently wasted. Greater investment is needed in irrigation and drainage systems. It’s not enough just to build such systems; making sure they are adequately maintained is crucial to keeping them running efficiently.”

Technology also plays a vital role. “The demand for water can be lessened through efficient technologies and practices around irrigation and water reuse,” said Matt Sheldon, senior portfolio manager on the KBI Global Investors’ Water Strategy.

Regional differences must also be taken into account. For example, Australia’s water market is considered the most sophisticated in the world, according to Nick Waters, portfolio manager at Riparian Water Strategy. “Australia is the world’s driest inhabited continent and a region where agricultural production is typically not limited by the suitable fertile land, but instead by the availability of water,” he said. “Australia’s water market framework was established with the aim of facilitating the economically efficient allocation of water while promoting environmental sustainability.”

He added: “Australian water entitlements (perpetual rights to a share of water from a particular water resource and held separate to farmland) are a nuanced and intriguing asset class. Water entitlements in the Southern Murray-Darling Basin (sMDB), as measured by the Aither sMDB Index, have increased in value on an annualised basis by 8.0% over the period July 2008 through December 2021, with the ability to also generate stable annual yields. Water entitlements offer low correlations with other asset classes, a genuine source of alternative returns and have proven to be resilient during periods of economic contraction relative to traditional assets.”

Water managers have therefore found opportunities in a wide range of companies. The Fidelity Sustainable Water & Waste Fund managers Velislava Dimitrova and Cornelia Furse have invested in companies providing water filtration solutions over those that distribute replacement water cannisters.

Meanwhile, Ingrid Kukuljan, head of impact and sustainable investing at Federated Hermes, gives an example of a water solutions company: “Xylem encompass all stages of the water cycle – from smart water infrastructure analytics to water treatment. Its product range is entirely focused on water technologies. For the five-year period to 2019, the company achieved a 20% reduction in water use intensity and a 28% reduction in greenhouse gas emissions. Targets for 2025 include reaching 100% renewable energy and 100% process water recycling at major facilities.

“In addition, Xylem’s Carbon Disclosure Project (CDP) scores have improved from 2017, when the company was awarded a ‘C’ for Climate Change Disclosure and a ‘B’ for Water Security Disclosure. Xylem now scores an ‘A-’ in both areas, respectively.”

Looking ahead, the Fidelity duo highlighted there are many more water investment opportunities out there to exploit: “The story of water and waste is as old as civilisation itself, yet, from an investment perspective, companies in these sectors remain relatively under-explored by investors. This, despite the fact that they benefit from structural growth drivers such as resource scarcity, urbanisation and population growth and offer opportunities for growth and diversification.  Humanity’s demand for water is growing and pressure on water resources is increasing due to overuse, pollution and climate change. It is therefore more important than ever that companies provide better stewardship of all water sources.