#Market Strategy — 26.02.2019

Urban Transformation: Promoting A More Efficient Water And Waste Management

THEME 7

With the fast growth of cities, it has become an absolute necessity to have a better water and waste management. To meet this challenge, public authorities are fixing themselves more ambitious targets for recycling waste, including plastic.

This theme identifies investment opportunities in companies offering innovative solutions for water management and a more efficient waste treatment.

Investment Theme 7 | BNP PARIBAS WEALTH MANAGEMENT

OUR RECOMMENDATIONS

Geographical region: this theme is global. Emerging Market and developed economies are concerned.

Asset class: this is an investment in stock markets through funds and individual stocks.

Risk profile: sectors involved in the theme—Industry, Chemicals, Technology—are dependent on the economic cycle and therefore rather volatile in stock markets. However, some activities (e.g. Utilities) are less sensitive to the financial markets (a beta below 1), which balances the theme, to some extent.

Investment horizon: long term

 

The "smart city" concept

Cities have grown rapidly over the past few decades. According to the United Nations' forecasts, urbanisation combined with total world population growth imply an additional 2.5 billion people living in urban areas by 2050. As a result, 70% of the population will live in cities by 2050. The largest urban areas will therefore face mounting problems of congestion, pollution and resource management. A design of the so-called "smart" city may offer solutions.

The concept of "smart city" covers all innovations used to manage effectively the assets and resources of a city. "Smart" cities offer solutions for greater efficiency in the areas of mobility, energy, housing, and water and waste management. Our investment theme focuses on the latter.

Opportunities in water and waste management, among other  

For a city, while water and waste management is not a major environmental challenge, it also ensures a good quality of life for its inhabitants. Building, modernising and enhancing the efficiency of utilities has become an absolute necessity.   

With regards to water management, three goals are targeted: i) provide access to water, ii) guarantee the quality and iii) optimise its use. Many innovative solutions are being developed in the areas of water treatment, the design of pumps/filters, automation and new optimisation techniques (smart metres, sensor networks, leak detectors), making networks more efficient and therefore generating cost savings. This results in offering a better service to local communities (municipalities) and a higher return on investment at companies, which are large consumers of water in certain sectors.

Waste treatment is also changing.  The traditional model (management from bin to rubbish tip) is leading to a circular economy model focused not only on waste management, but also on the reduction at the outset. Public authorities (e.g. the European Union) encourage rubbish-sorting, investments in recycling and the reduction of overcapacity in infrastructure for waste treatment based on incineration.  In this changing environment, we have identified opportunities for investors interested in collection methods, waste-to-energy solutions and any innovation that a company may offer in the field.

A new environmental challenge: plastic

Today, plastic is used in a myriad of industries, including Construction, Transport, Electronics and Packaging. The world production of plastic has increased by 190 since 1950, reaching 380 million tonnes in 2015 (Science Advance). For all their sustainability and usefulness characteristics, single-use disposable plastics (e.g. plastic bottles) pose serious problems for the environment.

Plastic is manufactured from fossil fuels and is not biodegradable by nature. Almost 26 million tonnes of plastic waste are produced every year in Europe. The potential for recycling plastic waste is often largely untapped. The reuse and recycling of end-of-life plastics is very low (9% of production), compared with other materials such as paper, glass or metals. The bulk of plastic production is made from natural sources.  In the face of this scourge, the European Commission confirmed in 2018 its goals for the production and use of plastic. By 2030, all plastic packaging used on the EU market will be reusable or recyclable in a cost effective way. The plastic recycling market will therefore grow in the coming decades.

In conclusion, many companies contribute to the development of new, more effective and cleaner mechanisms for water and waste treatment. Given the high potential growth in this activity, they represent an attractive investment opportunity in the long term. This theme covers sectors such as Utilities, Industry and Technology. The Chemicals industry also works closely with plastic recyclers to improve the value chain.

This theme is global as all mature and Emerging Market regions are concerned by the challenge of water and waste management.  Mature countries will need to upgrade their infrastructure, while Emerging Market economies will build new networks.

MAIN RISKS

This theme could come under pressure in the event of a sharp macroeconomic slowdown. Activities covered in this theme are often very sensitive to industry indicators (e.g. industrial production).

The main constraint weighing on projects is financing. We believe that financing conditions will remain attractive in 2019 only in the context of a gradual rise in rates. However, many governments and municipalities are suffering from a large debt burden, which is curbing new investments.

Some arbitrage operations may be carried out, depending on the level of commodity prices. Profitability of recycling projects may dwindle in the event of very low prices of certain raw materials.

This theme depends on the willingness of public authorities to support ambitious long-term goals in the treatment of water and waste.