Talking Heads – Inversión en agua: de los chips al litio pasando por las PFAS

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This is an audio transcript of the Talking Heads podcast episode: Justin Winter, Investing in Water

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing investing in water. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Justin Winter, Senior Portfolio Manager at Impax Asset Management. Welcome, Justin, and thanks for joining me.

Justin Winter: Thank you, Daniel. It’s a pleasure.

DM: Investing in water can be put that in the context of broader sustainability-related investing. We really have seen good inflows in recent years, and the performance of water-related investing has been resilient. The underlying outlook remains quite good. During your last visit here at Talking Heads, you talked about reshoring, in particular semiconductor manufacturing and its relevance for water. Can you share some more thoughts with us on the topic and how things have evolved?

JW: Like many aspects of investing in water, [reshoring and semiconductor manufacturing] are long-term themes. I think reshoring will continue via the rebuilding of manufacturing output in places like North America, but also in view of supply chain risk management in Europe and Japan and elsewhere.

Semiconductor manufacturing is a key part of that. For historical reasons, a lot of US semiconductor manufacturing takes places in regions where water is scarce. In the south of the US, such facilities were built there from the 1940s because of its stable geology – no earthquakes like in California – but still close to Silicon Valley and there were tax breaks to set them up. Decades later, we’re seeing more water scarcity, particularly in that part of the US, which is a key driver [to find solutions] for water reuse.

One giant semiconductor company, TSMC in Taiwan, has water reuse rates of 85% to 90%. There is proven technology [for this] and that’s something now being employed in places like Arizona and New Mexico, because making semiconductor chips is a water intensive process.

There are also challenges in creating ultra-pure water to go into the manufacturing process. But as it goes through that process, you get contaminants that end up in the water. So, when TSMC looks to reuse the waste water, they classify it into about 35 different grades, each of which needs to be treated in a different way to be reused. It’s a complex process – you need specialist knowledge and products to deal with that.

Our water strategy invests in businesses that can help solve that challenge for manufacturers. It involves treatment at the top end and at the back end, but also on the water moving through the process because all of the pipes and fittings also need to be of a very high specification so that chemicals don’t leach into the water. It’s a highly technically challenging process, but we’re seeing more and more need for that because of the increasing demand for microchips and less water to go around.

DM: Another megatrend is the increasing electrification of transportation. Are there any impacts from higher EV sales on water demand?

JW: Yes, definitely. The link between energy and water has been talked about for a long time. Even if you go back to most electricity being formed in coal-fired generation plants, water is a big part of that and that continues. Basically, water is used for making everything we see around us. That includes energy, but it also is important in mining.

In a previous life, I studied engineering and was working in consulting, looking at water supply modelling for mines in Queensland. It’s absolutely a mission-critical part of mining that you need water for processing and many other things.

If we think about the decarbonisation of transportation, lithium is a key part of that and making or refining lithium and extracting it from its natural state is very water intensive. It takes about 1.5 million litres of water to make about a tonne of lithium. In a Tesla car, for example, there’s about 60 kilograms of lithium, so one tonne equates to about 16-17 cars. If we look forward into the early 2020s, 2030s, to decarbonise passenger transportation will mean about 50 million cars – that’s 3.3 million tonnes of lithium. It’s a lot of water.

Lithium comes in two different forms – hard rock lithium from mines in places like Western Australia, and in brine form, very salty water from a very dry part of Chile. So, you need a lot of water in a place where there isn’t much of it – that’s extremely important when addressing climate change. You can see how the challenges are linked. The solutions include, for instance, desalination in remote areas like those where there’s chronic water shortage.

DM: We’re reading a lot more about ‘forever chemicals’. Can you tell us whether there have been any developments in that area and what it means for water re-use and investment?

JW: ‘Forever chemicals’, as the name suggests, are a group of human created chemicals developed in the 1940s. They have great chemical properties that for instance make them highly water resistant –great for waterproofing clothing or furniture, great for cosmetics, great for making sure fibre-based food packaging doesn’t get soggy, great for making Teflon and semiconductors. They’re the most commonly used synthetic chemicals we’ve created so far. That’s the good news.

The bad news is that they don’t break down in the environment. They’re very resilient, which means they end up accumulating inside us with really negative health impacts that have been proven over time.

The massive challenge in dealing with that raises the question of how much [of it] to tolerate in, say, drinking water as opposed to getting rid of all of it, which is frankly not really feasible because [forever chemicals] are literally everywhere – 99% of Americans have some in their blood.

In the US, there are different state-level regulations, and a federal level regulation has been proposed for a maximum contaminant level is working through being approved. This is a multi-decade challenge to solve.

And what’s the best way to deal with it? This is something that I’ve been working on recently and meeting with companies about. One way is to provide water treatment solutions in drinking water treatment plants. So, you would have utilities companies that put in the water treatment facilities and then we pay for it basically through our bills. You also have the companies that make the particular type of membrane solutions to they use in that facility.

There are other ways, too. In the US, about 15% or 15 million households don’t get their drinking water from a municipal source or from a drinking water treatment plan. They draw groundwater and have their own water treatment systems on site at the point of entry. That’s an established market of some 15 million households in the US.

If you think about the amount of water that comes into our homes and how much of that we actually end up drinking, it’s really small, about 1%. The other 99% doesn’t enter our bodies – we use it for washing machines, dishwashers or showering, etc. Only 1% would need to be treated to stop it entering our bodies, which allows for an alternative solution of having the water treatment site at the point of entry or at the point of use – basically where the water comes out of the tap.

There are precedents for this. In South Korea, a water contamination scandal (related to something else) in the early nineties basically drove an almost universal adoption of point-of-use water [treatment] systems, which continues today.

Many people around the world voluntarily have point-of-use systems already, like the water cooler containers in most offices. So, there’s an existing market.

But if there’s an issue, regulation can play a key role. At the moment, regulation normally requires water testing to take place at the treatment plant. If it doesn’t meet the levels set by the EPA (Environmental Protection Agency), it needs to be resolved there.

It could be that we end up with a combination of some treatment at the plant and some in our houses, where we can say we have a lower tolerance for how much of these forever chemicals comes into the home, so we’ll have another system there.

I am not sure how that will play out, but within the opportunity set of companies, all those options are covered. There are going to be a lot of different solutions, and when you’re looking at these things in terms of valuing a business in this area, it can be difficult to look forward.

It’s something that we know is coming but it’s a long way away and trying to work out how big it’s going to be is basically our job: To understand the [possible] scale and then factor that into how it might impact these businesses given that [it’s a challenge that’s going] to be around for many decades.

DM: Justin, thank you very much for joining me.

JW: Thanks, Daniel. I really enjoyed it.