For 15 years, RobecoSAM has been investing in solutions to the global water challenge.
Senior Portfolio Manager Dieter Küffer reflects on how investment in the water sector has become more mainstream since making a splash in the investment industry with the RobecoSAM Sustainable Water Strategy 15 years ago.
How did the idea for a water-focused investment strategy arise?
It was clear fifteen years ago that the world was facing a water crisis. We identified trends that were having an impact on water, including climate change, urbanization, crumbling water infrastructure and water pollution.
We also knew that these challenges could not be fixed overnight. So companies that were active in the areas of water distribution and management, advanced water treatment, and irrigation technologies presented interesting investment opportunities.
Why did water seem like an attractive investment theme at the time?
Water is a limited resource with no adequate substitute. We need water for everything: for our personal use, to grow food, and produce virtually all the goods required for our survival. This is particularly true when it comes to human consumption, agriculture and some industrial processes. Therefore, the need to find adequate solutions was – and still is – critical.
Our generation and future generations will need to cope with a limited supply of water while demand grows exponentially. Take the growth of global demand for meat and how this affects water consumption. As a burgeoning middle class increasingly demands more meat, the need for water rises drastically.
“We need water for everything: for our personal use, to grow food, and produce virtually all the goods required for our survival. Therefore, the need to find adequate solutions is critical.”
Producing 1 kg of meat requires significantly more water than producing 1 kg of grains
Liters of water per kilogram of food.
One kilogram of beef requires six times more water than the amount of water required to produce one kilogram of rice, and nearly ten times more than the amount needed to produce one kilogram of bread.
Urbanization has also put pressure on water consumption. In 1950, only 29% of the world’s population lived in cities. But by 2030, the UN expects this number to skyrocket to 60%.1 Not only do people in urban areas have a more water-intense lifestyle, but they also require services – especially wastewater treatment – and extending basic sanitation will require huge investments.
Finally, pollution has rendered much of our global water supply undrinkable and unsafe for use. These are just a few of the many developments that will continue to shape the water sector.
Tell us about the early days of the strategy.
We launched the Sustainable Water Strategy with EUR 1 million shortly after the September 11, 2001 terrorist attacks on the World Trade Center in New York. The market was still shocked by these events and risk aversion was high. Nevertheless, the strategy’s strong performance during the early years attracted attention, and some of the largest private banks in Europe and Asia began to promote our water strategy aggressively in 2006. As a result, the assets under management in our water strategy grew to over a billion within the following 12 months.
What have been some of the greatest achievements in the water sector since the strategy was launched?
There has been substantial progress in the provision of water and water-related services between 1990 and 2015. For example, 2.6 billion people gained access to safe drinking water. During this same period, 2.1 billion people gained access to sanitation.2
What are some of the most difficult water-related challenges facing the world today?
Droughts, water shortages and floods comprise most of our water-related challenges nowadays. These have been exacerbated by the over-exploitation of water resources and climate change. Northern China, parts of India and California have all faced major droughts in recent years. These droughts hurt the agricultural sector as well as industrial production and power generation.
In short, many parts of the world are faced with either too little or too much water, and today’s infrastructure is unable to cope. As a result, more investment into water infrastructure and technologies is urgently required.
“The price of water is still too low. When water prices are too low, people tend to take it for granted.”
How is water affected by climate change?
The Intergovernmental Panel on Climate Change (IPCC) expects that water scarcity and floods will intensify with the rise of greenhouse gases.
Climate change has an undeniable impact on both the availability of water and investment opportunities in water sector. Longer droughts have led to the construction of reservoirs and dams. Governments along coastal, water-stressed areas such as Singapore and Israel have invested in desalination and water recycling in order to overcome their shortages. We believe that demand for these two solutions will grow over the next several years. Moreover, because the agricultural sector depends heavily on a stable water supply, we believe that farmers will invest in water-efficient solutions, such as micro-drip irrigation.
What are some of the most exciting new water technologies?
Micropollutants, which are small traces of chemicals ensuing from the growing intake of pharmaceutical drugs, have increasingly found their way into the water supply. Because micropollutants are not completely biodegradable, conventional treatment cannot fully remove them from the environment. These chemicals can harm our endocrine systems and have a negative impact on ecosystems.
There was no efficient method for eliminating these chemicals 15 years ago. However, solutions such as disinfection with ozone, chlorine dioxide, UV radiation or purification using membrane filters are now available. Switzerland is the first country to implement a nationwide plan to reduce these chemicals in its water supply and will invest approximately CHF 5 billion over the next decade to remedy the situation.
Which water-related technologies offer high growth opportunities?
As water becomes scarcer, water reuse methods offer the best and cheapest solutions for meeting demand. Some water treatment technologies offer high growth opportunities, particularly desalination, water recycling and reverse osmosis, micro and ultrafiltration technologies – these are expected to grow over 10% per annum over the next couple of years.
United Nations Sustainable Development Goal #6 aims to “ensure availability and sustainable management of water sanitation for all” by 2030... Is this realistic?
There have been tremendous achievements in water provision since 1990. Yet approximately 1 out of 10 people still do not have access to safe drinking water, and around 2.4 billion people still do not have access to basic sanitation.3
We certainly have our work cut out for us, but achieving this goal will also require collaboration between the public and private sector, political desire, regulations and creative thinking from enterprising individuals.
What are the greatest challenges to achieving this goal?
Although water has become a precious commodity in many areas of the world, the price of water is still too low. Adequate water prices are an important mechanism to encourage consumers to use water more conscientiously. When water prices are too low, people tend to take it for granted, leading to waste. However, we also recognize that access to water is a basic human right, and people in poor areas must continue to have access to water to meet their needs. So striking the right balance between making water affordable while at the same time covering the costs of the service is the greatest challenge for the water sector.
Does the Sustainable Water Strategy contribute to any of the other SDGs?
Yes − many of today’s global sustainability challenges are interconnected.
For example, according to the World Health Organization, water-borne diseases affect approximately 1.5 billion people per year. By investing water treatment technologies, the strategy also helps reduce the number of deaths and illnesses from water pollution and contamination, which is one of the specific targets of SDG #3 focusing on health and well-being.
“The water market is expected to grow between 5–6 % annually until 2020, reaching USD 1 trillion by 2025.”
Or take SDG #2, for example, which aims to reduce hunger through sustainable food production. Micro-drip irrigation in the agricultural sector helps farmers reduce their water intake by up to 70%, while improving crop yields.
There are positive social benefits to water investment as well. For example, women and girls in Africa and Asia often spend up to 6 hours per day collecting water.4 By expanding access to water for these populations, we contribute to SDG #4 (access to education) by freeing up children’s time so they can go to school, and SDG #5 (Gender Equality) by freeing up women’s time so they can pursue other activities that give them financial independence.
How can investors and the private sector contribute?
Investors can mobilize capital towards companies that are developing solutions to the water challenge. Many investors are realizing this, particularly those that are interested in impact investing, meaning that they wish to generate a positive environmental and social return alongside financial return.
The private sector is also expected to play a significant role in consolidating the water industry, which is very fragmented and has seen a flurry of privatization over the decades. Given the budget constraints of many governments, this consolidation is expected to continue.
Regulators increasingly view privatization as a way to improve the safety and quality of the service delivered to the customers.
How has the strategy performed?
The RobecoSAM Sustainable Water Strategy has returned 8.9% (EUR) per annum gross of fees between September 2001 and June 2016, while global equities as measured by the MSCI World returned 4.6% (EUR) per annum over the same time. The RobecoSAM Sustainable Water Strategy outperformed the MSCI World by more than 4% per year, while the systematic risk measured by beta was mostly below 1, and absolute risk was in line with the MSCI World.
What makes the Sustainable Water strategy attractive?
Demographic change, urbanization and changing consumption patterns have led to an increased use of water. The only solution is via investment into innovative technologies that make the best use of our limited water resources. Therefore, the RobecoSAM Sustainable Water Strategy is an attractive addition to the portfolio of both private and institutional investors seeking long-term growth. The water market is expected to grow between 5–6% annually until 2020, reaching USD 1 trillion by 2025. As all the major long-term drivers remain intact, we can also expect promising growth opportunities beyond 2025.
1 UN Department of Economics and Social Affairs Population Division: World Urbanization Prospects, the 2014 Report
2 World Health Organization and UNICEF Joint Monitoring Programme (JMP). Progress on Drinking Water and Sanitation, 2015 Update and MDG Assessment.
3 World Health Organization and UNICEF Joint Monitoring Programme (JMP). Progress on Drinking Water and Sanitation, 2015 Update and MDG Assessment.
4 UN Water factsheet on water and gender, World Water Day 2013.