Investment opportunities (1/7)

Why water is becoming a safe investment

Population growth, galloping urbanisation, environmental degradation: water resources are under pressure. That does not mean there are not opportunities for investors to investigate. Photo: Shutterstock

Population growth, galloping urbanisation, environmental degradation: water resources are under pressure. That does not mean there are not opportunities for investors to investigate. Photo: Shutterstock

The planet experienced as many droughts in 2022 as it had in the 500 years of statistics analysed by the EU’s Copernicus programme. Is that an investment opportunity?

The planet is running out of water, according to the EU’s Earth observation programme, Copernicus. But that fact has been misunderstood by investors, according to the co-founder and senior portfolio manager at Thematics Asset Management, a subsidiary of Natixis Investment Managers, Arnaud Bisschop. In reality, three dynamics are colliding:

Water efficiency: while consumers, industry and farmers are all striving to reduce water consumption to mitigate the growing competition for water resources, companies are devising, testing and bringing to market new solutions to tackle problems one by one, such as the over-consumption of water by agriculture, which requires 41% of water in developed countries and 90% in developing economies;

- Pollution: water is available, but pollution often makes it unfit for human use, another issue on which many industrialists have become involved;

- Water infrastructure: developing countries in the throes of urbanisation have growing needs, and economies that are already more established need to renew their infrastructures.

A huge market is opening up, and the media hype is overheating. Bisschop stated: “The universe of companies now represents a market worth $800 billion dollars a year, which is expected to grow by 6% to 8% a year, with these companies having a combined market capitalisation of over $3trn. The broad and diverse set of opportunities means that, over long periods, some value drivers will grow and offset slower growth or falling values in other parts of the market. Over the last two or three years, for example, the main overall driver has been the pollution control segment, while covid has focused on water quality assessments and the quality of water used in healthcare applications linked primarily to covid testing.”

Standing still is not an option

Alliance Global Investors has said: “There is a significant sustainability (and financial) opportunity in developing new solutions and technologies to address the various water challenges. These opportunities include:

“- Directing capital to opportunities aligned with SDG 6: Unesco has estimated the annual cost of providing the necessary infrastructure for clean water and sanitation in 140 low- and middle-income sovereign states at $114bn.”

“- Water efficiency solutions: these will not only focus on reducing water intensity, but also on developing new production processes and products that are less water-dependent, combating pollution and creating efficient water infrastructure.”

All the more so, stated AGI, as inaction would cost much more: 6% of European GDP, from €9bn today to €65bn a year in 2100.

Stock to watch

American Water Works Company is the heavyweight of the sector, with a capitalisation on the NYSE of $28bn. In five years, its share price has risen 60.7% to $146. It supplies water to 14m people in 24 states, and its dividend has grown steadily since 2008. “Our investments in infrastructure and our success in signing new purchase agreements for regulated acquisitions (26 acquisitions in 2022 compared with 23 in 2021) have paved the way for our expected growth in 2023 and beyond”, said Susan Hardwick, CEO since 2022. The company plans to continue to invest in the business, forecasting between $22bn and $25bn in capital expenditure over the decade to drive growth.

Read the original French version of this article on the Paperjam site. This article is not intended as investment advice. Be sure to carefully investigate any company mentioned in the press before taking an investment decision.