Investing for a sustainable world is a discipline which can really get the imagination going. One pictures a clean, utopian future and subconsciously intertwines this vision with the infinite opportunities derived from the transition to clean energy systems or the efficiency gains through technology and artificial intelligence. But the one principle that forms the bedrock of our approach is that to build a sustainable economy, that means promoting sustainable outcomes in all sectors, transitioning the thinking, and the approach, within all disciplines. When building a diversified portfolio, there will always be a place for clean energy names and technology enablers just as these grandiose concepts will always warrant column inches. But they should be teamed with, perhaps the less fashionable sectors, which are equally critical.
The title of this blog is a quote from Bertrand Lecourt, fund manager of the Regnan Sustainable Water and Waste Fund. In his recent video update he outlines some of the inner workings of a strategy which, since being introduced into the Sustainable World portfolios in 2022 has been our best performing global equity fund. In fact it outperformed the MSCI ACWI over the last year with 0% exposure to the magnificent 7. It is quite the result when you consider that this area may not grab the immediate attention of sustainability investors… well, perhaps we should look again.
“There is no economy without water, no sustainable economy without waste management”.
Why water?
Did you know that to form an apple it needs 125 litres of water? Or your afternoon snack sized chocolate bar, which needs 1,700 litres! The amount of water we use per day, your water footprint, is a staggering 10,000 to 15,000 litres. We are living in a society of hyper consumerism increasingly powered by fast fashion and TikTok trends. As the world consumes more and more, we consume vastly more water. This is exacerbated by population growth and that population moving more than ever to cities, where water infrastructure is particularly critical. Fresh water is becoming a scarcer resource, comprising only 3% of global water supply. Therefore, the need to transport it and clean it in a more efficient and sustainable way is an urgent need.
Why waste?
A growing population, and exponentially growing consumption leads to more discarded waste, which does not disappear overnight. Did you know that a milk carton takes five years to decompose? And a foam plastic cup, 50 years! Everything you consume in less than two years becomes waste, and as we transition to a more sustainable economy, creating circularity within our consumption must be central to our thinking. The waste value chain can include sanitisation, cleaning, collection, recycling, with an overarching focus of making the process more efficient and more sustainable, reducing CO2 emissions in the supply chain and avoiding environmental degradation.
Why together?
The Regnan fund is investing in companies providing solutions to these water and waste challenges. Which of course provides a fantastic long-term investment case, but realistically this is a pre-requisite for any sustainability focused investor. The cherry on the cake is the way they invest across both sectors, across both respective supply chains, allowing for diversification both between themes as well as within each theme. By combining the two sectors they can deliver an approach which focuses on quality, profitable companies with high financial strength.
Why in our portfolio?
This style serves as a ballast. Predictable, growing companies that are making money today to compliment investments in the sustainable winners of tomorrow. The fund offers true and meaningful diversification to our other holdings. Water and waste are two of the most inelastic goods/services on the planet. They have always been critical and as long as humans are alive we will always need clean accessible drinking water and the efficient, sustainable management of our waste.
In the short term, these necessities fair well in a potential recession. Further, these services only make up a small portion of household bills so thus, looking forward, a more inflationary environment may in fact be an opportune moment for the quality names within the portfolio as incremental cost increases can be passed onto consumers. Looking out to the medium term, the fund managers envisage significant public investment via repairs in the western world, no more so than in the UK where you may have read about the mounting issues surrounding Thames Water. As well as with new projects in emerging markets. Within financial markets, we have seen heavy concentration in the magnificent 7 US companies which is unsustainable. As the market broadens out, we expect these companies to be rewarded for their consistent and clear growth trajectories.
So, the strategy breeds both financial opportunity as well as clear and measurable environmental and social outcomes. Lastly, through our TAM Sustainable World portfolios, we can offer our investors access to a discounted fee version of this fund, given our early backing of the team post their move to Regnan. It is our job to unearth the leading managers of tomorrow, today. We believe with the Sustainable Water and Waste fund, we have done just that.