The case for waste and water investing

Bertrand Lecourt

— 19 January 2021

With continuing growth in our world population, improving water and waste management is becoming a vital issue for governments and businesses to address. As standards of living surge and drive consumption, these rapidly evolving industries have the potential to make a significant impact on public health, economic prosperity and environmental protection.

“Today, humanity uses the equivalent of 1.75 Earths to provide the resources we use and to absorb our waste. This means it now takes the Earth one year and eight months to regenerate what we use in a year.” (Source: Global Footprint Network, https://www.footprintnetwork.org/our-work/ecological-footprint/)

There is an opportunity for investors to harness growth in demand for these services and contribute to their capacity for sustainable resource management for the benefit of both people and the planet.

Policy reforms foster opportunity
A global focus on policies that support responsible and efficient use of resources and materials is giving rise to greater regulatory scrutiny of water consumption and waste disposal practices.

Major public and private spending is expected to support a wider range of technologies, products and services that enable more efficient management of water and waste. This complexity in the value chain for both sectors gives rise to investment opportunities in companies where innovation is driving sustainability and growth.

Competition for a scarce resource
A secure water supply is as much an economic imperative as it is a goal for a sustainable future. Many industries rely on water for production, from agriculture to energy, from mining to semiconductor manufacturing. With the expected acceleration in demand for water for human consumption and industrial production, it’s clear that companies, and governments are both facing a future where access to water is high on their agenda.

Technology for water-wise operations
Only 0.5 per cent of the water on our planet is available as fresh water.1 Solving the equation of growing demand for this finite supply is creating a flourishing water industry that supports less wasteful distribution and use of water as well as water treatment and recycling. Water infrastructure and technology companies are supplying everything from filter membranes to pumps and equipment and software to track data and analytics for water usage and quality. For both businesses and consumers, there is an economic incentive to seek out sustainable solutions to reduce water consumption.

Waste management: From linear to circular
The disposable culture of developed economies is spreading to developing countries, driving growth in waste of all kinds. The World Bank estimates that by 2050, developed nations will produce 25 per cent more waste, East Asia 50 per cent more and South Asia twice as much.2 For cost-effective, environmentally friendly solutions to manage this waste, more businesses and governments are looking to a circular economy, where resources are recycled or returned to nature instead of being discarded. With China putting an end to waste imports from 2018, many countries have been given no choice but to find onshore solutions for managing waste.

Developed countries are also introducing policy measures to support a circular economy. The European Union (EU) is leading the charge with 2018 legislation aiming to recycle 70 per cent of municipal waste and 80 per cent of packaging waste by 2030.3 These steps toward mandating a sustainable approach to waste management create many opportunities for businesses to profit from supporting a longer lifespan for resources, as well as protecting the environment from the burdens of resource extraction and the hazards of discarded waste.

Suited to sustainable portfolios
The Fidelity Sustainable Water & Waste Fund is the first in our Sustainable Fund range in Australia. We apply an exclusion framework and environmental, social and governance (ESG) screening so that at least 70 per cent of the portfolio is invested in companies exhibiting sustainable characteristics, and the remaining 30 per cent are showing improving, or potential for improving, characteristics.

Our proprietary ESG ratings go beyond an analysis of governance to arrive at an assessment of risk exposure for each company compared with their peers. We also take into account a forward-looking assessment of ESG criteria and incorporate all these inputs into our final valuation.

Through a unique combination of water and waste investment opportunities, we believe this fund offers strong diversification for global equities, as well as significant growth potential and a boost to the ESG profile of an investor’s portfolio.

Bertrand Lecourt, portfolio manager, Fidelity Sustainable Water and Waste Fund