Water: a pipeline of responsible growth opportunities

Key points: 

• Water stress and scarcity is being faced by billions of people worldwide¹
• Appetite for increased regulation and legislation is becoming evident
• Water treatment, management and testing companies may offer promising opportunities for investors

Investors are becoming increasingly aware of the value of natural capital, and how our future as both a global community and, indeed, economy is reliant upon maintaining and preserving biodiversity. To do this successfully, identifying companies which contribute real and measurable impact in the battle to prevent and mitigate biodiversity loss is essential.

As a fundamental need for most forms of life on earth, it's not difficult to understand the importance of the responsible use and distribution of water in the pursuit of biodiversity preservation. The scale of this realisation has been growing in recent years, as governments and corporations respond to pressure to implement more sustainable water practices. Developments such as the 2021 Infrastructure Bill in the US, and its support for water and infrastructure company investment, are leaving these companies well placed to potentially benefit from renewed long term growth potential - as well as enabling them to have material positive impact for biodiversity.² This view is supported by the UN in their set of Sustainable Development Goals (SDGs), which highlight the importance of water across the ecosystem. Only 3% of the water resources on earth is fresh water with an even lesser number for potable water; increasing the amount of water available for a multitude of uses is increasingly becoming a global priority.³ We think water has been one of the most undervalued commodities in the world and is in the process of being revalued more highly by these supportive regulatory and policy developments.

The power of three

AXA IM’s impact investment expertise combined with our partnership with Iceberg Data Lab allows us to use detailed and credible metrics to hone our focus onto companies which have the strongest potential to promote the goals of UN SDG 6 – Clean Water and Sanitation for all. To have systemic, positive, and synergistic impact, the issue of water scarcity needs to be tackled on three fronts: water availability management, providing access to sustainable water sources, and water quality and safety.

Xylem is a water technology company which develops and maintains solutions for the delivery and use of drinking water, as well as the treatment of wastewater on an industrial scale. The largest source of its revenue is derived from water infrastructure designed to collect, treat and distribute wastewater. It also offers water solutions and services to commercial, residential and industrial clients alongside advanced, ‘smart’ water meters and analytics. The company’s commitment to research and development allows it to develop sophisticated ways to improve efficiency and reduce needless waste from inadequate water distribution systems or lack of detailed measurement capabilities. As global water demand rises with population growth, it is estimated that almost six billion people will suffer from clean water scarcity by 2050, further strengthening the demand to minimise its loss.⁴ Xylem’s Q3 results were promising, prompting raised guidance for the rest of the year and encouragingly the company has a large source of potential demand from emerging markets.

Another company tackling water availability and preventing avoidable loss is Evoqua, which offers outsourced water management and treatment services for corporations across the full water lifecycle. Crucially, Evoqua’s capabilities include the treatment of influent and effluent water for various purposes, including drinking water quality and releasing or reusing treated water safely back into the environment. This ability to help corporations to reduce their water footprint (in line with UN SDG 12, Responsible Consumption and Production) is likely to drive demand for Evoqua’s services, as corporations become increasingly under pressure from sustainably minded shareholders and adhering to tightening regulation becomes more onerous.⁵

Advanced water hygiene is the speciality of Ecolab, the global leader in water, hygiene and infection prevention products. The company benefits from a varied portfolio of clients and business segments; while a large portion of its revenue also comes from large industrial customers, it also provides specialised cleaning and sanitising products to industries as diverse as hospitality, government, education, health care and pharmaceutical companies. In common with other water companies, demand for water management services is growing and Ecolab is expected to benefit from the scale and sophistication of its primary Global Industrial water treatment and services business.⁶ Increased scrutiny on corporations from international biodiversity-aware organisations are also likely to add momentum to government and consumer driven investor sentiment, and to boost the profile of companies doing their part to address the complex issue of optimal water management in the face of scarcity.⁷  Furthermore, we expect policies such as TNFD (Taskforce on Nature-related Financial Disclosure), coming into force in 2023, to highlight the value of companies like Ecolab as their customers’ water usage and practises are subject to incremental scrutiny. 

Water treatment and management companies are able to develop and deploy increasingly efficacious ways in which to both improve the quality of existing infrastructure and to maximise the use of an increasingly precious natural resource. However, the success of these endeavours relies upon scrupulous analysis and testing capabilities to both identify risks, and to monitor the quality of fresh and treated water, making sure it’s adequately free of contaminants for its intended purpose. Here Eurofins Scientific joins the cause with its leading provision of analytical services, 900-strong laboratory network across 54 countries, and global operations. Its testing capabilities both inherently safeguard immediate human health, whilst also allowing other companies to develop pioneering capabilities to safely preserve water which might otherwise have gone to waste or caused disease. These testing facilities are therefore a crucial enabling factor to innovative water management and treatment companies, ensuring water quality remains within the strict tolerances set by public health bodies.

Companies shown are for illustrative purposes only as of 09/01/2023. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

Risks

No assurance can be given that our equity strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes specific risks, liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.