Happy World Water Day! Water is often taken for granted but with demand rising and scarcity increasing in the era of climate change, it's clear that the prudent management of water is key to humans in the coming decades. But is it an investible opportunity?
Water cannot be considered a commodity like any other, exhaustible but still replaceable. With climate change, population growth and changing lifestyles in many emerging countries, the focus on the water sector has steadily increased over the years, precisely because the preservation of water resources will be one of the key challenges of this century.
Water, Always Needed But Hard to Access
According to the latest UN World Water Development Report, water use has increased globally by about 1% a year over the past 40 years and is expected to grow at a similar rate until 2050. There are about 1.4 billion square kilometers of water on our planet, but only 3% of this is fresh water: moreover, most of this fresh water is glaciers.
Thus, approximately 0.5% of the total water is adequate to meet human needs.
Due to transport and accessibility difficulties, with population growth, water supply and demand will become more unbalanced between regions, to the disadvantage of arid areas.
Therefore, the management of water sources and the efficient distribution of water will be an increasingly important activity in the future, especially in developing countries.
As access to clean, potable water becomes increasingly scarce, a thematic investment opportunity presents itself. Water contributes significantly to sectors such as agriculture, food production and even semiconductor manufacturing. Given the central role it plays in many sectors, the opportunity to invest in water is reinforced by its growing demand and unstable supply.
On World Water Day - an anniversary established by the United Nations in 1992, with the aim of focusing attention on the importance of fresh water and supporting the sustainable management of scarce resources, addressing the global water crisis - we decided to analyse investment opportunities in this sector and the characteristics of mutual funds and ETFs exposed to the theme of water management.
Funds for Investing in Water
Currently, the Morningstar Equity Sector Water category has around 50 open-ended mutual funds and ETFs domiciled in Europe. The table below shows the 10 largest by assets.
Last year, European sustainable funds experienced net outflows for the first time, particularly those labelled as Article 8 under the SFDR. Identified mostly as sustainable funds, water sector equity strategies also recorded net redemptions in 2023 (€1.5 billion, £1.29 billion), essentially all concentrated in the last quarter of the year.
Especially suffering in this respect were the Pictet Water fund (the largest in the category by assets), with €800 million withdrawn by investors in 2023, the Fidelity Sustainable Water & Waste Fund (€630 million net redemptions) and the RobecoSAM Sustainable Water Equities, with €480 million of net outflows.
Despite outflows, category assets rose slightly during 2023. At the end of February, these funds managed a total of €30.1 billion at European level, when five years earlier the assets were only €12.6 billion. These strategies, like all thematic funds, experienced great popularity during the covid pandemic, as between March 2020 and December 2021, assets under management jumped from €14.8 billion to €35.3 billion.
Water Funds - Might Need Diluting
Investors wishing to invest in water funds should remember that these portfolios can be quite concentrated and should be used wisely as part of a diversified portfolio. As an example, the Amundi MSCI Water ESG Screened UCITS ETF invests in only 33 companies, with the top 10 names accounting for 65% of assets. In contrast, Pictet's strategy - among the most diversified - has 75 names, with the top 10 weighing in at 37% of the portfolio.
Since it is difficult to invest directly in water rights or to have direct exposure to the price of water, water sector equity funds mainly invest in water utilities, water transportation companies, companies that produce water treatment and/or purification equipment and companies that can be considered leaders in water efficiency. Among the most prominent names in the portfolios of these strategies are Xylem Inc (XYL), Pentair PLC (PNR), American Water Works Co Inc (AWK), Tetra Tech Inc (TTEK), Ecolab Inc (ECL) and Ferguson (FERG).
“The water sector sits comfortably at the intersection of climate, nature and social issues, creating investment opportunities for all sustainability-oriented investors,” explains Deepshikha Singh, head of stewardship at La Française AM.
“Most investments in the water sector have so far focused on services that meet the public demand/need for water. However, there are many established companies and new start-ups that are working to solve water security problems using innovative technologies and solutions. According to several studies, the addressable global market opportunity for the water and wastewater industry is estimated at between $700 and $800 billion,” she says.
