ACS Group-Investment in Water Infrastructure

March 2023

At ACS Group, water infrastructure is a theme we’ve identified in the ACS Sustainable Future Fund as having both strong financial and Socially Responsible Investing merits.

We believe increased urbanization will put strain on municipal infrastructure, including existing water infrastructure.  To grow sustainably, cities must address the need for updated and modern water infrastructure. 

What is Water Infrastructure?

According to the US Environmental Protection Agency (EPA), water infrastructure includes all man-made and natural features that move and treat water. It can be classified into three segments:

In North America and Europe, the vast majority of water infrastructure is government owned and managed.  However, the suppliers of components for this infrastructure, such as pipes and valves are typically for-profit companies, including several publicly listed companies.  As such, the largest customers of these companies are governments, and government funding drives much of the investment in water infrastructure.

Why is Water Infrastructure Investment Crucial?

Much of the water Infrastructure in the US and Canada was built in the early 20th century and is long overdue for upgrades.  The American Society of Civil Engineers (ASCE) estimates as of 2019, the total capital spending gap on water infrastructure in the US is upwards of US$81 billion.  The Federation of Canadian Municipalities estimate C$50 billion alone needs to be invested to renew water infrastructure in Canada that are in poor condition. According to OECD, European Union would need a cumulative additional spend of EUR289 billion by 2030 to comply with guidelines.

To this end, ASCE estimates the US has a water main break every two minutes and results in the lose of 6 billion gallons of treated water each day. 

Outdated water infrastructure has serious consequences on quality of life. In 2014, Flint, Michigan witnessed the catastrophic effects of outdated water infrastructure when over 100,000 people, including close to 12,000 children, were exposed to elevated lead levels from aging lead pipe systems.  Elevated lead exposure could lead to serious health issues, including reduced intellectual functioning and increased chances of Alzheimer’s.

The stability of water infrastructure will be further stressed by changing weather patterns brought on by climate change.  It is anticipated that these less predictable weather patterns may create more major weather events, such as urban flooding, stormwater management issues and droughts.  Having the necessary infrastructure in place will be even more critical.

US Funding for Water Infrastructure

The Biden administration passed the Infrastructure Investment and Jobs Act (IIJA) that provides funding of up to US$55 billion to upgrade US water infrastructure.  This includes US$12 billion on wastewater/stormwater management systems and US$4 billion on remediating synthetic chemicals (PFSA) in drinking water. IIJA also includes dedicated funding of US$15 billion to replace lead pipes in the United States.  However, the Brookings Institution estimates the cost of replacing lead pipes from the US drinking water system will exceed US$28 billion, so while this is a welcome step, we note that there will likely be much more funding required in future to address this infrastructure need.

The ACS Investment Thesis

From a Socially Responsible Investment perspective, we believe that access to clean drinking water and sanitization is a fundamental human right.  We believe that government owning and operating water infrastructure ensures that equitable access to this human right is best preserved.  To enhance the government’s ability to effectively deliver on this, we view the role of private industry as critical.  We highlight that the private sector has brought about innovations in water infrastructure that reduce potable water losses and mitigate urban flooding. 

Some of the most exciting innovations we’ve seen recently in water infrastructure are:

From a financial investment perspective, as the approved funding makes it way to the state and local governments, we expect the water infrastructure companies to benefit from increased order backlog that will help drive revenue growth and earnings visibility. We see companies providing drinking water infrastructure to be the early beneficiaries of the upgrade cycle, followed by suppliers in wastewater and stormwater infrastructure. Our expectation is the spending is not a one-off event, as the need to upgrade and maintain the infrastructure will continue to drive strong demand for the water infrastructure suppliers and contractors. 

From both our SRI and financial perspective, at ACS, we are constructive on companies that play important roles in the modernization of water infrastructure.  This area of investment is a focus for us and supports our thesis on Sustainable Cities.

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Sources Cited

  1. American Society of Civil Engineers, “Report Card for America’s Infrastructure”, https://infrastructurereportcard.org/cat-item/stormwater-infrastructure/ accessed Feb 2023
  2. Various organizations, “Canadian Infrastructure Report Card”: http://canadianinfrastructure.ca/en/index.html, accessed Feb 2023
  3. Brookings Institution, “What would it cost to replace all the nation’s lead water pipes?”: https://www.brookings.edu/blog/up-front/2021/05/13/what-would-it-cost-to-replace-all-the-nations-lead-water-pipes/, accessed Feb 2023
  4. Environmental Protection Agency, “Bipartisan Infrastructure Law”: https://www.epa.gov/system/files/documents/2021-11/e-ow-bid-fact-sheet-final.508.pdf, accessed Feb 2023
  5. OECD, “Roundtable on Financing Water”: https://www.oecd.org/water/Session2-Financing-needs-and-capacities-for-water-related-investments-in-Europe.pdf, accessed Feb 2023