Timely thematic topic: Catalysts driving secular growth in the water sector

Water & Environment 2/25/2021
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Key Facts

  • Secular growth in water sector features near-term catalysts, including a potential infrastructure package and expansion of corporate sustainability initiatives
  • Technology adoption is at an inflection point following the impact of COVID-19
  • Water sector expected to benefit from growing flows into sustainable investments

Catalyst #1: U.S. infrastructure and corporate sustainability programs

We believe we are at the outset of a long-term secular growth cycle propelled by increased investment in solving the intensifying global water crisis. In our view, the solutions to water scarcity, poor water quality, and the challenges from climate change are upgrading water infrastructure and adopting innovative technologies. In the near term, water is positioned to benefit from two prominent catalysts – a potential U.S. infrastructure package and growth in corporate sustainability initiatives.

  • The Biden administration’s potential $2 – 3T infrastructure package is projected to include dedications to improving water and wastewater infrastructure and integrating water efficiency and quality monitoring Increased water quality standards, a high priority of the administration, is set to drive increased investment in filtration, treatment, and testing systems.
  • We expect to see an increased focus on and expansion of corporate sustainability programs. In recent years, the focal point of corporate ESG and sustainability initiatives has been carbon, but water is gaining more attention, as evidenced by Microsoft’s recent announcement of targeting net zero water operations by 2030. To meet sustainability goals, we believe corporates will increasingly turn to water technologies to lower their water footprint.

Catalyst #2: Technology adoption

Technology advancements are transforming the sector, providing attractive investment opportunities by accelerating growth and expanding margins of companies developing and deploying water technologies. We are at an inflection point of adoption following COVID-19’s impact on the sector, with a long runway of growth.

  • Growth of digital technologies, including real-time leak detection, remote monitoring, and advanced analytics, is reducing water loss (~34% of water globally is lost during transmission), facilitating capital-efficient infrastructure improvements, and spurring corporations to outsource water operations to water specialists.
  • Improvement in filtration and treatment technologies are enabling increased use of alternative sources of water, including water reuse and desalination, both of which represent less than 5% of water supply today. These technologies are also driving adoption of point-of-use treatment that allows for customization of water to desired specifications. Applications range from advanced treatment of water in the manufacturing of microelectronics to customizing taste of water for food and beverage.

Catalyst #3: Fund flows

Investment in sustainable products continued its growth trajectory in 2020, with net flows doubling 2019 levels and increasing 10x the amount in 2018. Water was a key contributor to this growth, with AUM in publicly listed vehicles hitting a record high at year end.

Looking ahead, we believe water will continue to garner flows as the shift of mainstream portfolios to sustainable investments persists. We also expect water to benefit from investors expanding their sustainability exposures beyond current areas of focus, such as clean energy.

Notably, water shares a number of the same trends as clean energy, from the rate of change in technology to favorable regulation, but now water trades at discount versus the historical premium.

This commentary contains certain statements that may include “forward-looking statements.” All statements, other than statements of historical fact, included herein are “forward-looking statements.” Although Ecofin believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect; actual events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. You should not place undue reliance on these forward looking statements, which speak only as of the date of this publication. Ecofin does not assume a duty to update these forward-looking statements. The views and opinions in this commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment or tax advice and is not intended to predict or depict performance of any investment or any fund managed by Ecofin. This publication is provided for information only and shall not constitute an offer to sell or a solicitation of an offer to buy any securities.