Essential assets: investing in water and waste for long-term growth

Investments in water and waste benefit from eight key advantages, according to a Q&A with Bertrand Lecourt.

1. Water and waste are considered ‘invisible infrastructure’ – essential but often overlooked. What is the long-term investment thesis behind these companies and why should investors consider them now?

Water is essential for life on earth and is a precious resource yet is under-appreciated and undervalued. It is used in nearly all forms of economic activity including food production, manufacturing and energy production. Put simply ‘there is no economy without water’ yet ‘there is no sustainable economy without waste management’.

The waste sector offers an array of long-term secular growth opportunities as waste generation is expected to grow at double the rate of the global population by 2050. Water and waste have the same long-term structural drivers, offer the same solutions and work well together from an investment perspective.

We believe equities in this area offer highly visible and stable earnings and are backed by a positive regulatory and corporate environment. Helped by these long-term structural drivers behind the theme, water and waste companies have outperformed the broader market for nearly two decades.

These companies have historically demonstrated a solid upside-downside capture showing resilience during down markets and rising with the market in a rallying environment. Given the themes’ perpetual nature and return profile, investors are increasingly seeing water and waste as a long-term investment opportunity.

2. The water and waste sector has grown from 30–40 companies in the 1990s to around 360 today. What developments explain this expansion?

The investment universe spans the full value chains: on the water side – pumps and valves, treatment companies, utilities, wastewater recycling, and metering/billing; on waste side – integrated management, industrial/hazardous waste, recycling, and waste-to-energy.

Structural drivers like ageing infrastructure, urbanisation, growing consumption and regulation have spurred demand for enhanced services, drawing new entrants. The investable universe has grown from 30-40 companies in the 1990s to around 360 today, fuelled by new IPOs, private firms going public, and new companies scaling into listed entities.

3. How does the inclusion of water and waste help to diversify a broader investment portfolio?

From an asset allocation perspective, global diversified funds have been heavily exposed to the technology and communications sector. The Regnan Sustainable Water & Waste strategy works as a very good diversifier within global strategies with structural exposure tilted towards industrials and utilities. Given the lack of mega-caps within our universe, water and waste also serves as a diversifier from a market-cap perspective. The tilt to mega-cap tech worked well in the last decade when technology, led by ‘Mag 7’ stocks, drove the markets. As inflation potentially persists and interest rates stay higher than the past decade, we will likely see a change of leadership in the coming decade.

4. The industrial water market is growing dramatically. What role do ultra-pure water systems and industrial treatment technologies play in the portfolio – and how large is their growth potential?

The rapidly growing demand for data centres, driven by AI models and cloud infrastructure, is leading to rising demand for water treatment systems. Ultra-pure water production equipment is essential for the electronics industry, particularly in semiconductor manufacturing, where it is used for cleaning and processing wafers.

Suppliers such as Organo and Kurita Water Industries are positioning themselves as key suppliers of the next wave of technology. Organo has achieved over 13% revenue CAGR over the last three years and is expected to grow further by high single digits over the next three years.

Industrial water treatment and reuse is also experiencing significant growth globally, driven by technological advancements. The focus on water reuse and recycling has become a cornerstone of industrial water management strategies. Innovative solutions are being implemented to save billions of cubic meters of water by optimising treatment processes and reducing contamination. There’s a growing emphasis on ultrafiltration and membrane bioreactors to reduce the water footprint of manufacturing processes and enhance reuse opportunities.

5. How does the inclusion of water and waste companies in a portfolio help to manage inflation, trade tariffs and volatile commodity markets?

History has shown that these companies have effectively navigated through inflationary environments and have shown pricing power. Regulated utilities pass through costs via automatic inflation-linked adjustments and periodic price reviews, while integrated waste managers generally index fees to CPI-plus and secure annual pricing. Further, industrial water equipment tends to be essential heavy goods, which have good pricing mechanisms compared to consumer discretionary spending. Fragmented markets favour dominant players, enabling opportunistic pricing amid volume resilience. Mild inflation even supports cash conversion and returns, as prices rise faster than costs.

While political and macroeconomic uncertainties continue to create headwinds for various sectors, the water and waste industries remain largely insulated from these pressures. In particular, much of the infrastructure underpinning these industries enjoys bipartisan political support due to the essential nature of the operations. Notably, many companies operating in this space are domestically focused, thereby reducing their exposure to global trade disputes and shifting tariff policies.

Lastly, a small part of the strategy such as waste to energy, recyclers, and chemical companies will have direct commodity linkage, while most utilities, services, tech vendors and equipment makers are only indirectly exposed via input costs or pass-throughs.

6. How resilient are water and waste companies to geopolitical risks, election cycles or protectionist measures?

These services are universally essential with no alternative – everyone needs clean water and effective waste management, making the sector inherently bipartisan and politically uncontroversial. Governments of all types prioritise infrastructure reliability, ensuring steady support regardless of electoral shifts.

Moreover, the majority of companies in our portfolio operate locally, with limited exposure to international tariffs. The portfolio is primarily invested in service providers. Water utilities and integrated waste management firms derive c. 100% of revenue domestically. Their operations are shielded from direct tariff effects.

While some equipment is sourced globally, this indirect exposure mirrors broader inflationary pressures rather than targeted risks. A handful of global holdings may face impacts but have demonstrated pricing power historically. Mild inflation even benefits the fund through cost recovery.

Water and waste are bipartisan essentials, insulated from political volatility as governments prioritise reliable services.

7. Waste-to-energy, biogas from landfills and the circular economy are seen as key technologies. Which of these innovation areas do you currently see as the biggest economic levers – and where are investors still too cautious?

Waste must be viewed as a valuable resource for long-term sustainability. The growth in population, urbanisation, and consumption makes sustainable waste management a critical global challenge, even under full circularity.

With room for landfill running out in some countries, energy recovery from waste is expected to play an increasing role. Improving landfilling processes and technologies can dramatically reduce GHG emissions, with state-of-the-art operations able to reduce emissions by up to 90%. Reuse and recycling are certainly one of the most sustainable long-term solutions saving virgin materials and lowering the energy demand for production.

Nevertheless, in the short-term, these resource-driven segments are susceptible to temporary commodity price swings, a recognised downside for these segments of waste management businesses. Positively, however, the long-term secular demand for sustainable material recovery provides a strong counter-narrative and investment thesis.

8. The fund invests in core market leaders such as Waste Management, Republic Services and Veolia, as well as in specialised regional players such as Japanese waste companies. What role do regional differences in market structure, regulation and consolidation play?

All markets differ in maturity stages – from North America’s consolidated giants like Waste Management and Republic Services to Europe’s scale players like Veolia and Asia’s fragmented landscapes. Understanding each stock’s nitty-gritty in terms of local regulations, consolidation dynamics, and growth levers is key to capturing alpha in our world.

For example, a lesser-known favourite is Daiei Kankyo, a leading Japanese waste management and recycling firm. It operates in a highly fragmented Japanese waste-management market, with the top four companies accounting for less than 4% of the market. The company is targeting at least ¥10bn in acquisitions over three years. Daiei Kankyo recently released its medium-term strategy, and we are encouraged by its near-term plan of maintaining a 35% Ebitda margin while it continues to invest in growth areas, including public-private partnerships. Shareholders’ returns also remain a priority, with a consolidated dividend payout ratio above 33%.