Water covers more than 70% of the Earth’s surface (U.S. Geological Survey), yet, fresh water accessible to humans comprises a meagre 1.0% or less. This scarcity of fresh water poses significant challenges, especially with climate change being one of the key factors exacerbating the problem. Nowhere is this more evident than in the state of California, where recurring droughts have led to alarming public health and safety concerns, including drinking water shortages and catastrophic wildfires. To add to the predicament, the existing water infrastructure in California, such as canals, reservoirs, pipes, and treatment plants, is aging and urgently needs upgrading.
Water-related challenges are not limited to California alone; they persist across other regions in North America, the developed world, and are potentially even more extreme in other global areas. Government agencies and independent experts have estimated that updating the water infrastructure in the US alone could cost upwards of US$750 million over the next decade. While this may seem like a staggering amount, it is a step towards acknowledging the importance of addressing the issue of clean water access.
Public concern about the scarcity of clean water, coupled with industries' push towards sustainable water usage, has led to significant opportunities for businesses involved in designing, manufacturing, and implementing water solutions. Prominent companies like Amazon, Tesla, Walmart, BP, Unilever, among others, have made "water-positive" pledges, indicating a strong commitment to sustainable water practices.
In November 2021, President Biden signed the US$1.2 trillion Infrastructure Investment and Jobs Act (IIJA), allocating US$60 billion for water projects. While this amount might not fully meet experts' recommendations, it signifies that the issue of clean water access is being heard and addressed.
Investment Opportunities in Water Solutions
In light of the pressing need for water solutions, the Nicola Canadian Equity Income Fund) has strategically invested in two companies: Stantec (STN) and H2O Innovation (HEO).
Stantec (STN)
Stantec is a global design firm that engages in engineering, architecture, and environmental consulting. The company has earned the prestigious distinction of being ranked as the #1 most sustainable engineering firm in the world by Corporate Knights in 2022. In 2016, Stantec made a significant foray into the water industry through an acquisition, and today, its Water business unit contributes 20% of its total revenues. By focusing on water solutions, Stantec plays a pivotal role in addressing the water crisis while offering a promising investment opportunity.
H2O Innovation (HEO)
H2O Innovation provides integrated water technologies and services to a diverse range of customers in both public and private sectors, including municipalities and businesses in mining, manufacturing, agriculture, and technology. Given the increasing water requirements, even technology-based industries such as data centers (with their intense cooling needs) are seeking sustainable water solutions. H2O Innovation's wide array of products and capabilities, including desalination projects and water reuse and recycling, positions it as a leader in promoting water efficiency and quality. Investing in HEO reflects a commitment to making a positive impact on the environment while achieving strong investment potential.
Both STN and HEO exhibit high-quality investment attributes, such as capital-light business models, positive cash flow generation, conservative debt ratios, and robust organic and inorganic (M&A) growth pipelines. Additionally, their dedication to good ESG stewardship and reasonable valuations further bolsters their potential for long-term compounding.
The global water crisis presents both challenges and investment opportunities. As concerns about water scarcity grow, businesses that focus on designing and implementing water solutions are poised to play an essential role in safeguarding our planet's most precious resource. By strategically investing in companies like Stantec and H2O Innovation, the Nicola Canadian Equity Income Fund aims to help address the water crisis while seeking strong returns for its investors.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.
