The water and waste theme is driven by a number of visible and long duration mega trends. These drivers include population growth; urbanisation; ageing infrastructure (that needs to be repaired or replaced); climate change and the effects of changing weather patterns on existing infrastructure; sustainability of resource consumption; and changes in the volume and composition of waste.
Companies exposed to the value chains of these core themes should provide above benchmark returns across the market cycle. Over the next year, we expect momentum for sustainable water and waste practices to accelerate as governments, consumers and corporates shift to more sustainable solutions to help save our planet.
What could surprise markets in 2022?
Inflation will continue to be an ongoing feature of 2022. Our focus remains on identifying companies operating in industries with high barriers to entry and attractive competitive dynamics populated by rational players, and to own businesses with some kind of competitive advantage. This approach is particularly important in inflationary environments, as these companies are more likely to be able to price for higher input costs and offset inflationary pressures.
Extended Producer Reforms and associated legislation will also start to impact the sector in a more meaningful way in 2022. These reforms intend to shift the full cost of collection, recycling and responsible end-of-life disposal of products onto producers. Europe is currently leading the way in adopting these reforms. For example, the UK is enforcing a mandatory plastic tax in April, which will be levied on manufactures and importers of all packaging containing less than 30% recycled plastic. With the introduction of these reforms, firms have no choice but to address and adopt plastic recycling efforts; this presents risks for plastic producers and users, but meaningful opportunities for those with recycling capacity.
Positioning for what lies ahead in 2022
Increasing focus on climate resilience, especially following COP26 could provide meaningful tailwinds for the water and waste sectors. For example, climate risk mitigation initiatives could result in increased investments into flood risk prevention (sewer overflows etc) and water infrastructure to help with droughts. Within the water sector, the approved US$1tn US infrastructure bill will support c.US$100bn of water infrastructure investment. This includes upgrading infrastructure, disaster mitigation measures, modernisation, and water quality remediation to get rid of unwanted and persistently polluting chemicals.
One of our core areas of focus is on sustainable waste practices. We look to invest in ‘future waste solutions' - businesses that recycle, recover, reuse, or reduce waste, or legacy incumbent waste providers that are shifting their businesses towards more sustainable waste practices. We have high conviction that adoption of these solutions will increase. We are continuously looking for new ways to get exposure to this, identifying future recycling winners, or solutions that reduce waste.
Our twofold approach to sustainability, focuses both on sustainable company practices (across all E, S and G attributes) and products that facilitate sustainable water and waste practices. Often these two things go hand-in-hand; companies with products or solutions with an environmental benefit (which are heavily represented in our universe) tend to be more aware of sustainability factors. We believe that by investing in companies with good sustainable practises, you can protect and enhance investor returns for clients and ESG is integrated throughout our investment process.
Accelerated momentum into sustainable water and waste practices is expected over the near term due to increased regulation, changing consumer behaviours, and shifting corporate practices. As a result, increased earnings, higher returns and subsequent higher multiples of companies exposed to the value chains of sustainable water and waste practices can be expected. By favouring companies with strong competitive dynamics due to superior technologies or solutions, returns will not be competed away, translating into high returns for our portfolio.
This post was funded by Fidelity International
This content is for investment professionals only and should not be relied upon by private investors.
The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Water & Waste Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can also use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0122/370213/SSO/NA