Managers of a fund focusing on water scarcity and waste-related challenges talk to this news service about forces at work including the impact of thirsty data centres in powering AI, and highlight the managers' favourite stocks.

Population growth, urbanisation, ageing infrastructure and pollution are some of the reasons water is becoming a scarce resource. More recently, the growth of AI and the requirement for data centres to drive it, has put strain on the availability of clean water.

Data centres require access to power and water, for cooling. A single hyperscale data centre, for instance, can consume the equivalent amount of water for around 100,000 homes and this is creating a need for increased infrastructure in both power and water. In 2023, energy use by US data centres reached 4.4 per cent of total US electricity consumption and this, along with increased use of water, is expected to grow further.

These forces create an opportunity for investors to benefit from the upgrading and building of new infrastructure and will benefit a range of businesses that the Regnan Sustainable Water and Waste Fund is exposed to, the managers of this fund have told WealthBriefing. We spoke to Saurabh Sharma and Bertrand Lecourt, the fund's managers.

“We are using more and more water, which is a finite resource, and we need to build new infrastructure to help solve the water scarcity challenge. Our fund helps to achieve this,” Sharma, fund manager at Regnan, told this news service in an interview.

The UK-domiciled fund aims to generate long-term outperformance by investing in the listed shares of sustainable companies that provide solutions to global water and waste related challenges.

“It’s about resource management. We invest across the water value chain, including, for instance, water drainage and waste water treatment. The fund has provided consistent returns in recent years, and we have had a good start to this year,” Lecourt continued.

“We are investing heavily in waste water re-use,” Sharma added. Although AI uses a lot of energy and water, the fund is not specifically designed to solve the AI problem, but it can help this both directly and indirectly. Sharma emphasised that the fund’s aim is to invest across the water value chain and to find the best investment opportunities.

“For example, we invest in Japan-listed Organo which provides ultra clean water treatment services for electronics and industrials. One of their clients is Taiwan Semiconductor Manufacturing Company (TSMC), a major semi-conductor producer producing chips for Apple and Nvidia” he said. Organo, which shows strong momentum, is largely driven by demand for water treatment systems in the semiconductor and industrial sectors.

“Equipment from Japan’s Ebara, another holding, also goes into data centres and others,” Sharma continued. Ebara has outperformed the Nikkei 225 index, and is an industrial manufacturer of pumps, turbines, precision machinery and semiconductor manufacturing equipment.  

There has been a lot of rainfall in London recently and Lecourt highlighted the need to efficiently capture this rain for reservoir capacity. “A lot of rain in cities is polluted and has to be filtered. Water bills are increasing due to underinvestment in water infrastructure for many years and this needs to be improved,” he said. “There are a lot of different ways to capture, filter and return clean water and that’s why we invest in companies across the value chain.”

Top 10 holdings in the fund include Brazil’s Sabesp that collects, treats, and distributes water. It also engineers and constructs water distribution, infrastructure and water treatment systems. Another top holding is Watts Water Technologies that designs, manufactures, and sells a line of products to the water regulation and control markets. The company has manufacturing plants and distribution channels in the US, Canada, and Europe, as well as a joint venture in China.

Holdings also include Veolia Environnement which provides optimised resource management services, while Zurn Elkay Water Solutions Corporation provides drainage solutions. Meanwhile, American Water Works provides drinking water, wastewater, and other water-related services across the United States

Top countries include Japan followed by the UK, Latin America, emerging Asia, as well as Europe ex UK and North America.

Other views

Leigh Hazelton, principal on the infrastructure team Hamilton Lane, a US private markets investment firm, also recently highlighted that data centres require access to a lot of power and water. He sees opportunities for upgrading infrastructure for water, saying that this can benefit both data centres and households alike as infrastructure is often poor in remote areas.

Karen Kharmandarian, head of thematic equities at Paris-headquartered Mirova, a subsidiary of Natixis Investment Managers which specialises in sustainable investing, also recently emphasised that the increasing need for power and water for AI is creating investment opportunities. But he drew attention to risks involved, looking at the extent to which AI can go ahead sustainably and to what extent energy and water consumption by these firms can be a limiting factor to their growth. See more here and here.

Regnan specialises in sustainable and impact investment, serving as the Resilient Systems brand within the wider Perpetual Group (including J O Hambro), acting as a centre for sustainability practices. It is also the brand used for J O Hambro Capital Management sustainability and impact investment strategies. The Regnan strategies aim to deliver thematic, sustainable and impact investment solutions that navigate clients through complex and interconnected systems. The strategies’ approaches are based on the three pillars of thematic research, constructive corporate engagement, and collaborative advocacy. The pillars aim to deepen the knowledge of investee companies, support sustainable shareholder returns, and encourage the adoption of best practice to support a more sustainable financial system.