While
it
is
only
one
private
company,
Thames
Water’s
recent
issues
have
highlighted
the
wider
challenges
facing
investors
seeking
to
make
a
positive
environmental
contribution
through
equity
exposure
to
UK
water
utilities.
Popular
with
income
investors,
such
companies
are
regulated
monopolies
often
viewed
in
the
equity
market
as
defensive
bond
proxies
due
to
their
regular
dividend
payments.
In
an
environment
where
interest
rates
are
near
their
peak,
and
eventually
begin
to
fall,
they
may
perform
well.
Yet
this
remains
a
sector
facing
major
problems.
For
investors
targeting
positive
environmental
impacts,
these
issues
go
well
beyond
controversies
over
high
debt
levels,
underinvestment
and
shareholder
distributions.
Should
You
Put
Water
Companies
in
an
ESG
Portfolio?
For
equity
funds
with
a
dual
objective
that
seek
to
have
a
positive
environmental
impact
and
generate
financial
returns,
the
environmental
records
of
these
firms
questions
their
suitability
for
such
a
strategy.
In
some
ways
the
UK
water
utility
sector
is
hostage
to
its
Victorian-era
infrastructure.
Its
age,
outdated
design
and
struggle
to
cope
with
population
growth
have
led
to
two
major
problems
in
particular
–
leakage
and
contamination
–
which
have
now
come
to
widespread
public
attention.
Leakage
is
a
considerable
problem,
as
a
large
amount
of
water
in
the
UK
is
simply
lost:
around
20% is
leaked
or
wasted
between
abstraction
by
companies
and
consumption
by
households.
In
a
country
is
which
hosepipe
bans
are
now
commonplace,
and
some
schools
were
recently
forced
to
close
due
to
a
lack
of
water
supply,
this
is
a
major
concern.
Contamination
through
sewage
represents
an
additional,
and
toxic,
issue.
The
UK’s
archaic
combined
sewer
system
means
that,
in
times
of
heavy
rainfall,
sewers
flood
and
overflow
into
rivers.
This
is
a
problem
that
is
only
getting
worse,
as
climate
change
causes
more
frequent
and
extreme
rainfall
events.
The
high
cost
of
upgrading
the
UK’s
water
infrastructure
means
the
utility
companies
are
unable
to
properly
address
the
problems
without
hiking
customer
bills
to
unacceptable
levels.
This
is
somewhat
of
a
catch-22
for
UK
water
utilities,
which
need
to
spend
more
but
are
constrained,
especially
given
the
current
cost
of
living
crisis.
Which
Stocks
Are
on
The
Right
Side
of
The
Problem?
Good
water
treatment,
management
and
provision
are
all
essential
aspects
of
protecting
and
restoring
the
natural
environment,
both
now
and
in
the
future.
Fortunately,
companies
developing
the
solutions
to
meet
these
objectives
are
abundant
and
investible.
Water
Ecosystems
is
one
of
the
four
key
investment
themes
comprising
our
listed
equity
impact
Biodiversity
strategy.
We
seek
to
invest
in
sustainable
companies
that
support
the
SDGs
with
a
focus
on
Clean
Water
and
Sanitation
(SDG
Six),
Responsible
Consumption
(SDG
12)
and
Life
Below
Water
(SDG
14).
Halma,
for
example,
is
a
high-quality
company
with
a
portfolio
of
water
and
other
environmental
businesses.
It
is
a
lesser-known
business
to
global
investors,
but
well
known
domestically
for
its
capital
discipline
and
impressive
track
record
in
growing
small
businesses
with
promising
products
and
services
in
the
water
and
environmental
sectors.
Water
testing
is
a
major
theme
with
a
number
of
other
companies
we
hold,
including
Agilent
and
Thermo
Fisher
–
both
US
companies
making
high-quality
environmental
testing
equipment.
Advanced
Drainage
Systems
(ADS),
another
US
company,
specialises
in
water
technologies,
specifically
stormwater
drainage,
and
sources
waste
plastic
from
across
the
country,
before
recycling
it
into
high
specification
plastic
pipe.
Plastic
pipe
is
replacing
concrete
pipe,
which
is
more
expensive
(to
make
and
to
install)
and
has
inferior
performance
characteristics.
ADS’s
demand
is
further
supported
by
a
strong
infrastructure
investment
outlook
as
well
as
increasing
extreme
weather
events
driven
by
climate
change.
Another
interesting
company
in
this
space
is
a
Japanese
business
called
Kurita
Water
Industries,
an
expert
in
providing
ultra-pure
water
–
essential
in
the
manufacture
of
semiconductors.
Water
Treatment
and
Regulation
Looking
ahead,
there
are
a
number
of
forthcoming
developments
in
water
treatment
which
could
potentially
offer
investors
interesting
opportunities.
One
in
the
US
relates
to
PFAS,
one
of
the
so-called
“forever
chemicals”,
which
increasingly
can
be
found
in
water
bodies
and
sources
and
are
notoriously
persistent
in
the
environment
and
in
our
bodies.
Earlier
this
year
the
US
government
issued
a
rule
that
would
require
communities
to
test
and
treat
water
for
a
number
of
these
toxic
chemicals.
Firms
such
as
Xylem,
a
leading
global
water
technology
company
which
recently
acquired
treatment
solutions
firm
Evoqua,
could
benefit
in
the
future
processing
and
testing
of
water
for
PFAS.
More
broadly,
there
are
opportunities
in
the
US
for
investors
with
companies
working
to
improve
water
resources.
One
is
Ecolab,
which
works
in
various
aspects
of
the
treatment,
purification,
cleaning
and
hygiene
of
water,
while
Valmont,
which
has
origins
going
back
to
the
1940s,
builds
efficient
water
irrigation
equipment
for
agriculture,
used
across
the
globe.
More
incidental
exposure
to
water
and
its
environmentally
positive
impact
is
also
possible
through
firms
such
as
Dutch
engineering
and
design
consultancy
Arcadis.
This
company
is
a
leader
in
land
reclamation,
which
is
a
particular
issue
in
the
low-lying
Netherlands.
This
expertise
is
going
to
become
ever
more
essential
as
climate
change
impacts
coastlines
around
the
world
through
rising
sea
levels,
flooding
and
extreme
weather
events.
The
environmental
cost
of
inundation
is
rising
–
such
as
direct
species
loss
and
soil
salinisation
–
and
therefore
we
think
there
should
be
durable
demand
for
Arcadis’s
services
for
years
to
come.
With
climate
change
having
an
ever
more
deleterious
impact
on
the
planet,
water
is
going
to
become
an
increasingly
vulnerable
and
valuable
resource.
Equity
investors
seeking
to
have
a
positive
contribution
on
global
water
supplies
have
plenty
of
options
but
should
not
be
indiscriminate
in
the
water-related
companies
in
which
they
invest.
Tom
Atkinson
is
an
equity
portfolio
manager
at
AXA
Investment
Managers
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