Water investing to become ‘high growth area’ in next decade

World Water Day on 22 March is a time to take a closer look at the wet stuff that makes up about 60% of the human body, the damage its scarcity can have on populations and countries, and how it is both a source of risk and opportunity for investors.

The theme of World Water Day 2024 is ‘Water for Peace’. According to the UN, more than 3 billion people worldwide depend on water that crosses national borders*. Yet, only 24 countries have cooperation agreements for all of their shared water*. Conflicts inevitably arise.

Battles over resources will only increase as the impacts of climate change worsen, and populations grow. As the UN points out: “Public health and prosperity, food and energy systems, economic productivity and environmental integrity all rely on a well-functioning and equitably managed water cycle”.

Large scale investment is being directed to this aim. As one of the largest lenders to the global water sector to date, with more than €86 billion for over 1,700 projects**, the European Investment Bank (EIB) is making water security and climate change adaptation a priority.

In 2023, the EIB invested about €4.1 billion in the water sector**, supporting investment that increases secure access to water resources, protects against floods and other destructive water-related events, and ensures reliable provision of sustainable and affordable water and wastewater services to promote resource efficiency across energy, chemicals, and water.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

Water as an investment

Investors should take note of the areas the EIB is focusing its cash, and consider putting their money towards them too. “Water is becoming an unpredictable resource and the infrastructure we use to control it is old and inefficient. The opportunities for water investment are therefore exciting,” says Mark Rogers, manager of the WS Montanaro Better World fund.

It is not just the amount of investment in the water sector that makes it an attractive area, but also the longevity of this spending, Mark points out. “It is likely to be ongoing for many years to come. As such both equity (long term) and debt (short term) investors can play a role in providing the capital.”

This is a global opportunity. In developing markets, there is an absence of water infrastructure. Investment will be needed to assist the more than 2 billion people without access to safe drinking water***, and almost half the global population who experiences severe water scarcity for some of the year****. In developed markets the problem is ageing water infrastructure, and crucially stopping leaks and preventing pollution.

Investing can happen across the whole water value chain from the highly regulated water utilities, to those industrial companies that provide the equipment, such as meters, drainage systems and technology.

For example, David Harrison, manager of the Rathbone Greenbank Global Sustainability fund, generally looks for the ‘picks and shovels’ companies – which create the tools or services an industry uses – that are a key part of the water ecosystem and cannot easily be displaced.

“Often these are mid-size businesses that are sometimes less well known, but enjoy strong market positioning and earnings visibility,” he says. Like Badger Meter, which David has held in the fund since 2018^. A US based company, it manufactures industrial water meters, and has invested significantly in digitally linked meters that allow customers to more quickly identify issues in water infrastructure, reducing leakage.

Alternatively, investing in regulated water companies is a way to deploy capital at attractive, regulated and inflation linked returns. Bertrand Cliquet, manager of the Lazard Global Equity Franchise fund, invests in United Utilities, provider of water to the North West of England, for example.

The opportunities for investors in the water sector, in infrastructure and beyond, are, he adds, “increasing markedly”, as the UK Environment Act mandates companies to step up investment in environment-related areas such as reduction in river pollution, improving bathing beaches and reducing sewer outflows incidents.

“As such, investors in regulated water companies can expect a very forecastable stream of returns that will be largely immune from the economic cycle. This should result in a steadier stream of returns with substantial capital preservation benefits,” Bertrand says.

Our closing thoughts

Water as an essential resource means it is in demand regardless of what is happening in the wider economy. Population growth, urbanisation, and industrialisation, all drive the need for clean and safe water solutions globally.

Investing in the water sector, like all investing, is not without its risks. David Harrison says, as ever, it's important to focus on the quality of the underlying business and not just the water theme. “Moreover, many of the companies involved in the water space can face ‘lumpy’ orders on a quarterly basis. This can cause volatility in the share price, so a view on the long-term trends remains critical,” he says.

Investors do need to be picky about where they invest in water. But it is undoubtedly going to be a significant theme to follow (and get ahead of) in the coming decade.

If we want to achieve the UN Sustainable Development Goal of ensuring clean water and sanitation for everyone, according to the EIB we must increase current global spending on water fourfold, to more than $1 trillion per year (1.21% of global GDP)^^.

Lazard’s Bertrand Cliquet is clear about the path of the next 10 years: “Water investing will become a high growth area as companies have to solve many important challenges. It means that an increased role of equity investors will be required.”

*Source: United Nations, World Water Day 2024
**Source: European Investment Bank, 2023
***Source: UN Water, July 2023
****Source: Intergovernmental panel on climate change, October 2022
^Source: Rathbones Group, March 2024
^^Source: European Investment Bank, 22 March 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 21/03/2024