Talking Heads – A new focus on investing in water

This is an edited audio transcript of the Talking Heads episode on Aqua

Hello and welcome to this week’s BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing investing in the stocks of companies operating across the water infrastructure, utilities and treatment sectors. I’m Andy Craig, Co-Head of the Investment Insight Centre, and I’m joined today by Justin Winter and Harry Boyle, who are both portfolio managers for the water strategy at Impax Asset Management. Welcome, gentlemen, and thank you for joining me today.

Justin Winter: Hi, Andy. It’s great to be here.

Harry Boyle: Hi Andy,

AC: Harry, if I can start with you, could you talk us through the water-related themes which have become more and more less important recently and explain why they have become more or less important?

HB: There are probably six main drivers to growth within the sector. First and foremost, that’s water scarcity. Secondly, it’s climate change, Third is water pollution, fourth is urbanisation, fifth is ageing infrastructure and sixth is new and new industries and new demand for water. Of those six drivers, five have become even more important and possibly urbanisation is the only one that stayed the same.

Dealing with water scarcity, it’s very unfortunate to hear of droughts in California during the winter months. It just points to how stressed certain large economies, whether it’s China, Taiwan or California – very productive parts of the global community – how water-stressed they are. [On] climate change,  we’ve seen repeated incidents of very high rainfall in the last five years and that’s set to continue impacts the Western world, but it’s far more economically impactful for countries around the equator. On the pollution side, we’ve got coming legislation around PFAS that is going to have a huge impact on how consumers view clean water. So, whether it’s for agricultural runoff or chemicals coming into our water systems, both regulators and consumers are very focused. Pollution as a driver has definitely dialled up in intensity in the last two years and that’s only going to continue over the next five to 10 years.

AC: Harry, can you just explain to our listeners who are not aware what PFAS stands for?

HB: The way to think about it, it’s a group of 80 odd chemicals known as forever chemicals. The easiest example is if you’ve ever worn a jacket that really keeps you bone-dry when it’s hammering down with rain, the one of those PFAS chemicals will have gone into that jacket to make it truly water resistant. They are also in frying pans and those type of kind of kitchenware. Because they last forever, they have found their way into our water system and therefore into drinking water. It’s likely that we will consume them. Forever chemicals tend to be industrial heartlands, particularly in the US.

AC: Thank you. That’s very clear.

HB: So, moving onto the fourth one, which is urbanisation. That’s particularly present in a place like India. In the western world, 75-80% of the population tend to live in cities or large towns. In India, you’re probably in the 55-60% mark. Another 20% of the population is likely to shift towards cities in the coming decades. That puts pressure on the water system. Aging infrastructure, our fifth big driver, is getting a lot of headlines, particularly in the UK and mainland Europe, because governments are now putting in place packages that will allow the water utilities to spend a lot more money to fix ageing infrastructure and build new water treatment facilities. And finally, probably the most topical, is around the semiconductor value chain. Those can be very thirsty industries, and they need ultrapure water and quite a lot of it. And likewise, datacentres for cooling the servers. Clearly the water sector is a very broad sector affecting many industries and business sectors.

AC: Justin, perhaps I could turn to you. We’ve had elections in the US and Germany and the new administrations are now taking office. Could you talk us through how you think the elections will affect the water sector?

JW: So, in the US, there is heightened uncertainty now related to things like trade policies and regulation. We’ve seen moves in interest rates and that feeds through to what’s happening in the real economy, whether it’s consumers or businesses investing. The great thing about water is that water is used everywhere in the economy. The impact in the in terms of how we’re thinking about the portfolio is probably related more to the trajectory of growth. There are more questions now about how rapidly growth is going to continue or if in the short term there might not be a recession in the US. That feeds through into how we think about the valuations of the underlying holdings. There’s still activity, but a slowing of these policies turning into regulation. The good news about water is it’s less partisan.

Something like forever chemicals or PFAS is a global problem. There are regulations and in Europe, France is putting through very strict rules on PFAS. In the US, the new administrator of EPA [Environmental Protection Agency} is very supportive of regulating PFAS. The moves to regulate PFAS are continuing. There’s wide support for addressing issues like microplastics, not to mention issues around lead pollution in various cities in the US. Water is less at risk in terms of big changes compared to other areas around sustainability. That’s going to be a driver on the water side for decades. So, a mixed picture in the US. In Europe, it varies by region. After the elections in Germany, the move towards addressing underinvestment in infrastructure includes water infrastructure. Water touches everything, like storm water management for roads, for instance. Broadly speaking, higher growth in Europe feeds through to demand for solutions around water. All these things feed through to what we’ve seen for decades in water: demand for solutions continues to grow at a rate above broader economic growth.

AC: If I can just pick up on the point you’re making about solutions. When we think about the solutions that are being sought within the water sector and combining that search for solutions with the new technologies, the water industry is not at all as sleepy as some people might imagine it to be.
Could you talk to us, Harry, about the sort of technological innovation that’s going on within the sector at the moment?

HB: There are probably three main areas. The first area is around smart metering and that’s about basically the consumer and businesses using and then monitoring how much they use. By understanding how much gets used, you can begin the process of limiting when and how much water one consumes. The second is around leak detection. In old cities like Rome, Paris, London, New York, it can be extremely tricky. More technology is coming along to monitor the pressure within a system of pipes. By  monitoring the pressure and the flow rate of water within those pipes, you can begin to understand when stress might happen. If you can get to identifying that with a combination of smart metres and sensors and control software, you can get to that leak before it bursts. And finally, desalination remains an extremely important technology, particularly in the hotter parts of the world. It’s having a mini-revival. A combination of better membranes and being able to pair it potentially with a solar plant or a solar farm means that the energy intensity and the cost of using a lot of electricity can be taken down. I would say those are the three big ones.

AC: Well, that’s good news for consumers and the water sector. Justin, just to finish our discussion, can you talk to us about how the theme’s growth prospects and valuations have behaved over the last 18 months?

JW: If you go back 18 months, until maybe three months ago, the US was continuing to power ahead in the face of much higher interest rates and mortgage rates. Compare that to Europe where things were much more muted and the recovery post-Covid was not what had been seen in the US. The valuations were tied to that. Generally speaking, the higher growth in the US has been accompanied by higher ratings. Some of that is justified, but there were certainly opportunities in Europe that looked undervalued. Last year, in terms of performance, indices were really driven by the mega-cap tech names within the water space. Performance last year of the water sector was a long way behind those global indices. What we’ve seen so far this year is more resilient performance and the tech names coming off. That’s also linked to flows out of the US into Europe looking for value opportunities. The growth outlook within water still looked as strong as it’s ever been.

We’ve run a water-dedicated strategy for over 15 years, and we’d never seen a relative rating as low as it was at the end of 2024. So, in terms of looking for opportunities and looking forward three or five years, there are reasons for optimism. We’ve seen that already starting to work in 2025. Overall, within the water space, we remain very optimistic about the medium- and long-term growth prospects. Water isn’t something that can be disrupted. Water is needed for everything. You’ve got all the other drivers around climate change and water scarcity and emerging contaminants. The valuation relative is looking very attractive.

AC: Well, thank you both very much. That was a very comprehensive review. We seem to be having a resetting of investment parameters at the moment. We will see how that plays out over the rest of 2025.

JW: Thank you, Andy. It was great speaking with you again.

HB: Thank you, Andy.

AC: That’s it for this week’s episode of Talking Heads. If you’d like to learn more about our investment insights, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig, and Justin Winter and Harry Boyle, portfolio managers for the water strategy from Impax Asset Management. Please do join us again next week. Until then, take care.