The Winter edition of our periodical magazine WHEB Insights received a very warm reaction from most quarters, but on receiving his copy, one eminent member of the House of Lords grumbled that he ‘didn’t believe in climate alarmism or in resource scarcity – other than rare exceptions, most importantly water’. His lordship’s perspective on climate change is unusual, but his concerns about water are not. Of all the themes we invest in, water is often seen as the most interesting, but in our experience, investing in this area is not as straightforward as it might seem.
There is no doubting the scale of the problem both in terms of water scarcity, but also water contamination. 70% of industrial wastes are dumped untreated into waters in developing countries, and 60% of China’s groundwater is now unfit for human consumption. It gets worse though. Because this water is used to irrigate crops, the problem is shifting to farmland. For example, 12.5% of farmland is now heavily polluted by heavy metals along the Hunan Xiang river which runs through Hunan province before joining the Yangtze[i].
The technologies to address these issues have been readily available for many years. What has been missing though have been the regulations, and perhaps more importantly, the political will to enforce higher standards. But it does look at last like things are beginning to move on this front in a number of markets, most notably in China. Industry has typically derided the enforcement of environmental standards, but new policies requiring industrial discharges to be continuously monitored (with the data being relayed directly to the regulators), criminal charges for illegal discharges and active enforcement by the local police have entirely changed industry’s attitude to these issues.
While there do now appear to be real teeth to the regulatory agenda which in turn is driving compound annual growth rates in water treatment of 10-30% and project level returns of 10-20%[ii], for investors in listed companies, there are still challenges to get real exposure to these trends. In many areas the industry is dominated either by large conglomerates such as GE and Dow Chemical, for whom water treatment is often a commodity business and a small part of their overall operations, or by utilities that are focused on municipal contracts that tend to be lower margin and lower growth.
There are, however, a few opportunities both in developed and developing markets. Ecolab is one business that we hold in the FP WHEB Sustainability fund which has evolved its water treatment business from being focused on supplying commodity chemicals for treating water, into a service focused on water efficiencies. We’ve also recently started a position in CT Environmental Group a fast-growing business operating in a sweet-spot combining a focus on the high margin, high growth industrial wastewater treatment market and a geographic footprint in the fast growing market of China.
CT Environmental is one of a handful of businesses that are seeing their markets rapidly expand as the Chinese authorities get to grips with decades of pollution. And with only 31% of wastewater currently being treated, we see this as a market that is set to grow substantially over the coming years.