WEBVTT Kind: captions Language: en 00:00:01.480 --> 00:00:06.840 We are starting with the topic of water and I am extremely pleased to welcome Gerhard Wagner here. 00:00:06.840 --> 00:00:13.360 Gerhard, you have a doctorate in climate physics, are a CFA Charterholder and have over 20 years of experience 00:00:13.360 --> 00:00:20.200 on the financial markets with a special focus on sustainable investments, but of course also on the topic of water, 00:00:20.200 --> 00:00:23.280 which has accompanied you for many, many years. 00:00:23.280 --> 00:00:25.120 Let's start with the first question. 00:00:25.120 --> 00:00:31.320 What are the challenges in this topic, which concerns us all, from a sustainability perspective, 00:00:31.320 --> 00:00:33.640 but also from an economic perspective? 00:00:33.640 --> 00:00:34.920 With pleasure. 00:00:34.920 --> 00:00:41.360 Two of the 17 UN sustainable development goals are directly related to the topic of water. 00:00:41.360 --> 00:00:45.240 Goal number 6, which is about 00:00:45.240 --> 00:00:51.800 ensuring access to drinking water and sanitary facilities for all people. 00:00:51.800 --> 00:00:54.320 And goal number 14 is about 00:00:54.320 --> 00:00:58.320 protecting the oceans, protecting life under water. 00:00:58.320 --> 00:01:03.480 And these are the two UN sustainable development goals that are directly related to water. 00:01:03.480 --> 00:01:10.840 Reduce the demand for water and decouple the demand for water from economic growth. 00:01:10.840 --> 00:01:17.360 How do you manage this over time and what are the implications in this area? 00:01:17.360 --> 00:01:22.440 The challenge is to provide drinking water for everyone. 00:01:22.440 --> 00:01:24.744 When I think of New York, for example, 00:01:24.744 --> 00:01:30.698 we need to supply 20 million people with clean drinking water. 00:01:30.698 --> 00:01:32.330 This is an enormous challenge. 00:01:32.330 --> 00:01:34.800 Wnd we have to make the wastewater from New York 00:01:34.800 --> 00:01:40.720 or from this industry in New York so clean that the oceans are not polluted. 00:01:40.720 --> 00:01:44.520 However, if we now look to the medium term, 00:01:44.520 --> 00:01:49.160 we also need to harmonise demand with water supply. 00:01:49.160 --> 00:01:56.560 The water supply, which is renewable, is approximately 4,000 cubic kilometres. 00:01:56.560 --> 00:01:59.785 This is the water that is available to us from the rivers. 00:02:00.334 --> 00:02:07.240 The current demand for the water is around 4,300 cubic kilometres. 00:02:07.240 --> 00:02:12.561 If you imagine it, that's a cube with a side length of 16 kilometres, 00:02:12.561 --> 00:02:14.360 twice the size of Mount Everest. 00:02:14.360 --> 00:02:18.200 The problem now is that the demand for water 00:02:18.200 --> 00:02:21.200 has risen steadily over the last few years or decades. 00:02:21.200 --> 00:02:25.000 If things continue as they have over the last 20 or 30 years, 00:02:25.000 --> 00:02:32.560 we will have a water demand of 5,500 cubic kilometres in 2050. 00:02:32.560 --> 00:02:40.000 And this delta, the 1,500 cubic kilometres that you can see here on the graphic, 00:02:40.000 --> 00:02:44.880 will then be provided through stored groundwater. 00:02:44.880 --> 00:02:49.000 But this is not sustainable, because they will be emptied at some point. 00:02:49.000 --> 00:02:57.080 The major challenge is therefore to decouple water demand from economic growth 00:02:57.080 --> 00:03:00.720 so that demand roughly corresponds to supply. 00:03:00.720 --> 00:03:04.080 In the large order of 4,000 cubic kilometres. 00:03:04.080 --> 00:03:07.680 You are talking about supply and demand, you are clearly talking about a deficit 00:03:07.680 --> 00:03:13.720 and a water crisis that we are slowly but surely moving towards. 00:03:13.720 --> 00:03:18.200 So it's a very big challenge that is crying out for solutions, 00:03:18.200 --> 00:03:20.280 that can therefore also bring growth. 00:03:20.280 --> 00:03:26.640 What are the investment areas in the water sector that you consider to be particularly relevant 00:03:26.640 --> 00:03:29.000 and interesting from an investment perspective? 00:03:29.000 --> 00:03:35.080 We have three areas: water technology, water suppliers and water protection. 00:03:35.080 --> 00:03:40.800 So water technology is about which products help 00:03:40.800 --> 00:03:45.000 to get the water efficiently from the water source to the consumer. 00:03:45.000 --> 00:03:50.080 and to purify the water so that it is of drinking water quality. 00:03:50.080 --> 00:03:53.400 And also to purify the wastewater 00:03:53.400 --> 00:03:56.800 so that it can be discharged back into the rivers and oceans. 00:03:56.800 --> 00:04:01.520 The water suppliers are the companies that operate the water infrastructure. 00:04:01.520 --> 00:04:04.006 They tend to have a defensive character. 00:04:04.006 --> 00:04:07.329 The whole issue of water protection is also important. 00:04:07.329 --> 00:04:12.017 When we think of landfill sites, for example, it is absolutely crucial 00:04:12.200 --> 00:04:17.120 that no chemicals from the landfill sites end up in the groundwater. 00:04:17.120 --> 00:04:22.880 And that is why this must be done very conscientiously and all companies that contribute 00:04:22.880 --> 00:04:27.880 to protecting water reserves are also interesting as an investment theme. 00:04:27.880 --> 00:04:32.880 The three areas make absolute sense along the water value chain. 00:04:32.880 --> 00:04:36.600 Of course, we are particularly interested in this from an investment perspective, 00:04:36.600 --> 00:04:39.760 because the characteristics are also different, as you mentioned. 00:04:39.760 --> 00:04:47.040 What are the growth prospects and growth opportunities along these three investment themes in the water sector? 00:04:47.040 --> 00:04:52.600 What is fascinating is that there is actually above-average growth 00:04:52.600 --> 00:04:56.520 in all areas compared to global economic growth. 00:04:56.520 --> 00:04:59.960 Let me start with the water technology shown in the graphic. 00:04:59.960 --> 00:05:01.520 I mentioned three companies there: 00:05:01.520 --> 00:05:07.276 Xylem is a company that manufactures pumps to transport water from A to B. 00:05:07.560 --> 00:05:11.520 Lindsay is a company that makes drip irrigation 00:05:11.520 --> 00:05:13.400 or irrigation for agriculture. 00:05:13.400 --> 00:05:15.680 And Badger Meter manufactures water meters. 00:05:15.680 --> 00:05:21.760 All of these companies will grow by 6 to 8 per cent over the next two years 00:05:21.760 --> 00:05:25.320 and we expect this growth to continue in the medium term. 00:05:25.320 --> 00:05:27.960 In the centre you can see water suppliers. 00:05:27.960 --> 00:05:31.600 First is an American water supplier, American Water Works, 00:05:31.600 --> 00:05:35.320 SABESP, a large water supplier from Brazil. 00:05:35.320 --> 00:05:40.480 And these two water suppliers are also growing significantly faster than the global GDP 00:05:40.480 --> 00:05:47.520 because the demand for well-purified water is increasing. 00:05:47.520 --> 00:05:50.120 And the last one is water protection. 00:05:50.120 --> 00:05:56.800 This also involves advising companies on how water can be better protected 00:05:56.800 --> 00:05:58.440 or on business models. 00:05:58.440 --> 00:06:00.680 This is also an above-average growth topic. 00:06:00.680 --> 00:06:05.680 Tetra Tech is a well-known company that advises companies on how to use water as a resource. 00:06:05.680 --> 00:06:09.080 We are also seeing above-average growth in this area. 00:06:09.080 --> 00:06:12.720 You mentioned water quality, which is of course linked to water protection. 00:06:12.720 --> 00:06:18.133 Can you go a little deeper there and give us some more insights? 00:06:19.169 --> 00:06:24.920 There are very different areas, different challenges in terms of water quality. 00:06:24.920 --> 00:06:31.720 A new topic for the public but not new to experts, are so-called PFAS. 00:06:31.720 --> 00:06:37.040 PFAS stands for: Per- or polyfluorinated alkyl substances. 00:06:37.040 --> 00:06:38.800 A difficult term. 00:06:38.800 --> 00:06:44.560 These are persistent toxic chemicals that did not actually occur naturally in the environment. 00:06:44.560 --> 00:06:48.960 They have entered the environment through our chemical processes. 00:06:48.960 --> 00:06:53.200 Now the problem is, or it has been recognised, that they can be carcinogenic. 00:06:53.200 --> 00:06:57.680 And that's why the aim is to keep them below a threshold value in drinking water. 00:06:57.680 --> 00:07:02.720 The Environmental Protection Agency in the USA in particular has very high standards. 00:07:02.720 --> 00:07:07.480 And now it's a question of ensuring that drinking water throughout the country 00:07:07.480 --> 00:07:14.120 is really free of these PFAS contaminants. 00:07:14.120 --> 00:07:15.720 There are two processes. 00:07:15.720 --> 00:07:20.720 Now you can see from which water reserves I can get drinking water 00:07:20.720 --> 00:07:22.480 that is not yet contaminated. 00:07:22.480 --> 00:07:26.480 Or if they are contaminated, I need additional purification stages 00:07:26.480 --> 00:07:29.600 in order to achieve drinking water quality. 00:07:29.600 --> 00:07:35.080 This is an example of a new challenge in dealing with water purification. 00:07:35.080 --> 00:07:36.640 We have understood. 00:07:36.640 --> 00:07:42.000 From a sustainability perspective, water is an extremely important and relevant challenge. 00:07:42.000 --> 00:07:45.000 Along the areas of technology, supply and protection 00:07:45.000 --> 00:07:49.280 we have different characteristics with growth opportunities. 00:07:49.280 --> 00:07:51.480 If you pull it all together now, Gerhard. 00:07:51.480 --> 00:07:53.280 What makes the topic unique? 00:07:53.280 --> 00:07:57.960 The fascinating thing for me is that there is no substitute. 00:07:57.960 --> 00:08:02.880 In 5 years, in 10 years, in 50 years, our need will always be the same. 00:08:02.880 --> 00:08:06.720 We want to get clean drinking water from the water taps. 00:08:06.720 --> 00:08:14.760 And that is why it is a very defensive investment theme that is not jeopardised by disruptive change. 00:08:14.760 --> 00:08:21.840 But it will remain a growth topic because the purification of drinking water 00:08:21.840 --> 00:08:24.440 and wastewater is becoming increasingly demanding. 00:08:24.440 --> 00:08:28.400 When we talk about implementation on the investment side, 00:08:28.400 --> 00:08:36.720 what is the focus of the investment process and what makes it unique in your view? 00:08:36.720 --> 00:08:42.240 So in the investment process, we look for companies that will grow their fair value over time, 00:08:42.240 --> 00:08:44.200 as we say in the financial industry. 00:08:44.200 --> 00:08:45.320 How does that work? 00:08:45.320 --> 00:08:51.000 We need above-average growth and above-average attractive returns on capital. 00:08:51.000 --> 00:08:55.400 Or more precisely, the return on capital must be higher than the cost of capital. 00:08:55.400 --> 00:08:59.680 We find growth through this topic research. 00:08:59.680 --> 00:09:04.120 What are the biggest challenges when purifying water? 00:09:04.120 --> 00:09:08.160 And then we dig deeper and see which technology has the strongest growth, 00:09:08.160 --> 00:09:12.160 for example to separate PFAS from drinking water. 00:09:12.160 --> 00:09:19.200 What makes the theme of water unique in our approach and our thematic funds in general? 00:09:19.200 --> 00:09:24.200 So we look at three pillars in our investment process. 00:09:24.200 --> 00:09:31.120 The first is that we want the topic of water to be the driver for profitable growth at the company. 00:09:31.120 --> 00:09:36.400 In other words, the solution contributions so that we can get the water problem under control. 00:09:36.400 --> 00:09:42.160 Then we have a sustainability approach in our bottom-up analyses, for all our investments, 00:09:42.160 --> 00:09:45.800 so we do ESG integration when selecting securities. 00:09:45.800 --> 00:09:48.360 So we also look at social criteria. 00:09:48.360 --> 00:09:53.360 And in terms of environmental sustainability, all of our funds have a climate target. 00:09:53.360 --> 00:09:58.160 So the companies we invest in will reduce their CO2 emissions over time 00:09:58.160 --> 00:10:03.400 to the extent necessary to achieve the Paris climate agreement. 00:10:03.400 --> 00:10:06.640 The important thing is that we are risk-aware. 00:10:06.640 --> 00:10:16.320 This means that each of our investments has undergone an internal financial analysis. 00:10:16.320 --> 00:10:20.520 We diversify across various business models. 00:10:20.520 --> 00:10:25.120 We do not want to have more than two similar business models in our portfolio. 00:10:25.120 --> 00:10:31.160 And over the economic cycle we can change the balance between defensive water suppliers 00:10:31.160 --> 00:10:36.080 and cyclical water technology companies 00:10:36.080 --> 00:10:39.720 and thus adapt optimally to the economic environment. 00:10:39.720 --> 00:10:45.680 I see the water fund, like all other thematic investments, is of course Article 9 SFDR classified. 00:10:45.680 --> 00:10:50.320 If we then look at the portfolio of securities included in a water fund, 00:10:50.320 --> 00:10:54.040 what are the key aspects in the context of portfolio construction 00:10:54.040 --> 00:10:56.480 that you take into account as a portfolio manager? 00:10:56.480 --> 00:11:02.440 The most important point is quality, as I mentioned earlier. 00:11:02.440 --> 00:11:06.520 The return on capital must be higher than the cost of capital. 00:11:06.520 --> 00:11:14.880 We base our portfolio construction on the MSCI World for the composition of regions. 00:11:14.880 --> 00:11:17.800 So the majority of the portfolio is in America. 00:11:17.800 --> 00:11:24.800 Compared to the MSCI World, however, we have an overweight in small and mid-capitalised companies. 00:11:24.800 --> 00:11:25.840 Why? 00:11:25.840 --> 00:11:31.280 Because the issue of water and the solutions to the water challenge 00:11:31.280 --> 00:11:36.320 are directly reflected in the companies' profit growth. 00:11:36.320 --> 00:11:39.080 Now to summarise and conclude. 00:11:39.080 --> 00:11:43.120 What speaks in favour of the concept and what makes it special? 00:11:43.120 --> 00:11:46.960 And why should investors pay more attention to water? 00:11:46.960 --> 00:11:49.360 So, as I have already mentioned, 00:11:49.360 --> 00:11:55.480 we invest in companies that are growing profitably because of their contribution to water protection. 00:11:55.480 --> 00:11:59.320 The attractive thing about the water sector is that we know today 00:11:59.320 --> 00:12:08.600 that in 5, 10 or 50 years' time we will still want clean drinking water and will have to treat wastewater. 00:12:08.600 --> 00:12:12.000 This makes it a defensive sector, but one that is growing at an above-average rate 00:12:12.000 --> 00:12:15.920 because water purification is becoming increasingly demanding. 00:12:15.920 --> 00:12:18.240 Gerhard, thank you very much for your comments 00:12:18.240 --> 00:12:20.800 an extremely exciting long-term topic.