The Water and Waste story is a tale of civilization and economic progress

Water is essential for life on earth and is a precious, yet underappreciated and undervalued resource. It is used in nearly all forms of economic activity including food production, industrial manufacturing, textiles, energy production and materials extraction – put simply ‘there is no economy without water’ yet ‘there is no sustainable economy without waste management’. This is why we include a ‘waste’ component to our investing – the two segments work together.

“There is no economy without water, no sustainable economy without waste management.”

Water

Continuous need for water generating economic issues

We withdraw more water over time creating a water GAP

We use more water as population grows (% growth since 1900)

Aggregated global water supply gap by 2030, billion m3

Source: Regnan, Shikpmanov 1999, US Census bureau 2011; IFPRI; McKinsey analysis, 2009.

Waste

The waste market is doubling over the next decade

Waste becomes a new resource

Past and projected global waste generation

Projected waste generation by region (SSP2, business as usual)

Three projections to 2100 for waste generation spell very different futures. In the first Shared Socioeconomic Pathway scenario (SSP1), the 7bn population is 90% urbanised, development goals are achieved, fossil-fuel consumption is reduced and populations are more environmentally conscious. SSP2 is the ‘business-as-usual’ forecast, with an estimated population of 9.5m and 80% urbanisation. In SSP3, 70% of the world’s 13.5bn live in cities and there are pockets of extreme poverty and moderate wealth, and many countries with rapidly growing populations.

Source: Regnan, OECD 2013, Nature 31 October 2013. All opinions and estimates constitute the best judgment of Regnan as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Regnan. *Organisation for Economic Co-operation and Development. *Organisation for Economic Co-operation and Development.

5 common long-term growth drivers

The combination of both water and waste themes is a truly differentiated and unique proposition and one that has been pioneered by the investment team. Companies exposed to these two themes share similar long-term fundamental growth drivers:

Urbanisation and concentration of population

More people living in the same place, increasing scarcity and creating wealth

Consumption driven economy

As we get richer we use more water and reject more waste

Infrastructure adaptation for developed and developing countries

Pressure on water networks and capacity to deal with waste, from collection to disposals to recycling

Supportive regulatory environment

Boosting the trend and is a positive source of growth

Support physical constrained world

Finally, we live in a real world and these are issues, which need to be fixed or the economy stops

These long-term growth drivers have existed for thousands of years and will be around for many years to come. They are what makes the water and waste universe such an attractive area for investment.

Many water and waste solutions are interconnected and intrinsically linked. In order to deal with more circular solutions for waste, economies need water (i.e. to clean plastic before recycling, water is used in paper recycling and products are cleaned with water before re-use) but water solutions also need sound waste management systems (i.e. collection, prevention of solid, liquid or gas waste polluting water resources). The water and waste nexus is a reflection of a healthy, functioning body integrating water and matter, and sustainably managing used water and waste. Failure to manage these two together efficiently generates unsustainable economies.

Water and waste companies also provide unique diversification characteristics when combined. Companies in these sectors typically operate locally with limited overlap across geographies and sectors providing a low intra-correlation within the portfolio.

Key strategy characteristics

Global

We invest in globally-listed equities – we have a universe of up to 400 names in 30+ countries with a market cap of around US $2 trillion. Our high conviction portfolio of typically 35-50 stocks with attractive upside and risk/return profiles provides significant diversification benefits, particularly given the extremely low overlap with global equity portfolios* (there is no technology or pharmaceuticals exposure).

This is a unique strategy looking beyond sector biases by finding the best global opportunities from the water and waste value chains.

Portfolio characteristics:

Typically 60% water and 40% waste
Targeting greater than 80% active allocations
Minimum 70% sustainable characteristics
Enhanced active management combines both defensive and growth stocks that will benefit from long-term structural drivers

The portfolio provides diversification benefits given the extremely low overlap with global equity portfolios.

* as compared to the MSCI ACWI index

Thematic

We invest across the entire value chain of water and waste management companies with a focus on equipment goods, services and utilities.

We look at companies’ core business models focusing not only on sales and profits, but also on how much of their value is exposed to the global water and waste investment theme definition.

The Strategy has a distinctive, replicable investment process, in an area which remains under-researched.

Sustainable

We invest in highly-rated or improving ESG names providing impactful solutions in water and waste and actively engage with our portfolio companies*.

The strategy benefits from the Regnan Centre’s expertise, which includes:

ESG thematic and stock research – utilising the Regnan Centre’s Sustainable Value Assessment (SVA) methodology
Corporate engagement and advocacy in pursuit of enhanced ESG practices and performance
Proxy voting
Implementation of exclusions

*Source: MSCI ESG ratings & Regnan’s proprietary Sustainability Assessment.

Lead drivers supporting water and waste

“Perpetual momentum”

Population growth

Urbanization

Infrastructure gap

Wealth creation on consumption

Health issues and regulation

Scarcity of resources

Scarcity and climate

Few players and barriers to entry

Source: Bloomberg 6 September 2021. Water Index represents S&P Gb Water USD Net Total Return Index, Waste Index represents BNP Paribas Global Waste Management Total Return Index USD, MSCI All Country World Index USD. All Indices in USD.

Strategy Characteristics

Increasing awareness of the sustainability issues we face mean the strategy operates in a supportive environment backed by global trends. Population growth, environmental constraints, supportive regulation, urbanisation rates and global wealth creation are all working in our favour. We would expect the strategy to outperform the broader market over the market cycle with bottom-up stock selection the key driver of returns.

Underlying long-term relative performance

Water & Waste indices vs. MSCI All Country World Index (net total return)

Source: Bloomberg 31 December 2021. Waste Index represents BNP Paribas Global Waste Management Total Return Index USD, Water Index represents S&P Gb Water USD Net Total Return Index. All Indices in USD.

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