Water is a precious, finite resource and essential to life on earth. However, progress on establishing universal access to basic sanitation, and encouraging the protection and responsible use of ocean resources is woefully lagging. Every year, International Water Day is marked on 22 March to draw attention to these issues and agitate for change.

Efforts to ensure universal access to clean drinking water and basic sanitation are faltering. An estimated two billion people across the globe don't have safe drinking water, and a further 3.6 billion lack safely managed sanitation. We are also degrading the world's water ecosystems at an alarming rate. Over the past 300 years, over 85% of the planet's wetlands have been lost. Increasing acidification threatens marine life, while plastic pollution is choking the ocean.

In 2022, we saw multiple extreme weather events across every continent, with severe and devastating storms, droughts and floods. Heavy monsoon rainfall in Pakistan caused flash flooding and landslides, destroying 1.7 million homes, displacing 32 million people, killing 1,700 people and pushing nearly nine million into poverty.

Meanwhile, the Horn of Africa experienced the longest and most severe drought on record. Across Somalia, Kenya and Ethiopia, 21 million people now have food insecurity. This includes over three million people at 'emergency' levels or higher, meaning they will go days without eating and have been forced to sell belongings to buy food.

With a growing global population, solutions that enable more efficient use and management of water, as well as promote better care of our oceans, are essential to help meet the increasing demand and reliance on our water resources.

Within our sustainable funds, but also more broadly in core funds, we look for companies with strong runways for growth. Given the unmet need, companies whose products and services improve access to clean water and sanitation, and improve efficiencies in existing infrastructure, are tapping into significant revenue opportunities. There are also opportunities in companies showing water leadership by minimising water use, or reusing water as much as possible, which should also lower costs.

Companies whose products and services improve access to clean water and sanitation are tapping into significant revenue opportunities.

So where do we think there are opportunities?

One example of a business improving water usage is Tetra Tech, a leading resource management consultant specialising in water services. It helps clients across a range of water-related projects, from water reuse work in Mongolia and addressing water loss in Jordan, to groundwater replenishment and reuse in California.

Tetra Tech supports 70,000 projects across 100 countries around water reuse and conservation. These include flood prevention projects, stormwater management, wastewater treatment and managing water supplies. Where possible, the company uses natural solutions, such as the creation of a 'living breakwater' to stabilise the marsh shoreline and support biodiversity in Alabama. It also uses green stormwater infrastructure to transform the way stormwater is managed in Raleigh, North Carolina.

Last year, Tetra Tech helped treat, save or reuse 328,000 megalitres of water, while protecting, managing or restoring 178 million hectares of land and water. The company's projects also avoided 20.6 million metric tonnes of CO2e.

Another company is DSM, a Dutch business specialising in health and nutritional products. These include food supplements and ingredients containing plant-based fish alternatives. The company offers vegan fish flavouring, as well as algae omega-3 alternatives and natural algal oil for fish feed. Just one tonne of DSM's Veramaris natural algal oil saves catching 60 tonnes of wild fish to produce salmon feed, protecting marine biodiversity in our oceans.  

Companies whose main business is not water-related can still improve their water management and consumption. Azure Power is just one example. A leading solar power company in India, Azure Power builds and operates some of the largest solar power projects in the country. However, India is a water-stressed nation and solar panels, which attract dirt and dust, require regular washing to work effectively. The company has introduced robotic solar panel brushes to keep water use to a minimum and it also recycles 50% of the groundwater it uses. The company is aiming for net water neutrality this year.

Final thoughts…

These are just a few examples of businesses taking action. As we see increasing demand and need for solutions, we believe corporates can offer innovative ways to tackle our water needs. In the years ahead, this will be increasingly essential as we work to ensure that life on earth can access clean, safe and plentiful supplies of water and that life in the oceans is protected.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.

Author: Sarah Norris, Investment Director

The recently passed Inflation Reduction Act (IRA) is poised to have a significant impact on the US economy, especially in the renewable energy sector. The Act includes provisions that incentivise the growth of the renewables sector, creating a "supercycle" of investment and development. Australia is well placed given our close relationship with the US and our resources of critical minerals vital for decarbonisation.

So, what is the Inflation Reduction Act?

The Inflation Reduction Act of 2022 (IRA), was enacted into law in August of the same year. It is one of three pieces of legislation that has been passed since 2021 with the goal of enhancing economic competitiveness, innovation, and industrial productivity. The IRA aligns with the priorities of the Bipartisan Infrastructure Law (BIL) and the CHIPS and Science Act, resulting in the introduction of US$2 trillion in new federal spending over the next decade.

The IRA encourages investment in renewable energy, enhances energy efficiencies, and helps companies tackle climate change via tax credits, incentives, and various additional provisions. The pathway to decarbonisation is expected to be enhanced since the IRA will increase demand for electric vehicles (EVs), clean technologies, and low carbon materials/construction.

The IRA allocates approximately US$394 billion in federal funding towards clean energy, with the primary objective of reducing the nation's carbon emissions by the end of the decade. This is primarily accomplished through a combination of tax incentives, grants, and loan guarantees (see Figure 1).

Figure 1: Funding the Inflation Reduction Act (US$b)

Source: McKinsey & Company

The majority of the $394b in energy and climate funding is dispensed in the form of tax credits. Corporations are the largest beneficiary, receiving an estimated $216b worth of tax credits. This funding mechanism is aimed at increasing investment in clean energy, transport, and manufacturing in the US. 

Consumers can take advantage of roughly $43b of these tax credits by investing in EVs, energy-efficient appliances, rooftop solar panels, geothermal heating, and home batteries (see Figure 2).

Figure 2: Selected tax credit modifications in the IRA

Source: McKinsey & Company

Many of the tax incentives offered by the IRA come with conditions related to domestic production or procurement. For instance, to receive the full EV consumer credit, a certain percentage of the critical minerals in the vehicle's battery must either be recycled in the US or sourced from a country with a free-trade agreement with the US. The battery must also have been manufactured or assembled in the US.

Europe powers up in response to IRA clean energy push

The European Green Deal established in December 2019 was set up to make Europe the first climate-neutral continent by 2050. The goal of reducing net greenhouse emissions by at least 55% by 2030, compared to 1990 levels, is a bold target. The REPowerEU Plan was launched in response to the Russian invasion of Ukraine, with the purpose of hastening the transition away from fossil fuels and mitigating the economic effects of rising natural gas and electricity prices.

As anticipated, the European Union (EU) has raised concerns that the US IRA will lure investment in crucial green economy manufacturing away from EU-based companies. In response, the European Commission (EC) has introduced a new "Green Deal Industrial Plan" aimed at fostering an environment that attracts net-zero investments by supporting EU manufacturing of green technologies and products. This plan explicitly mentions photovoltaic cells, heat pumps, wind turbines, hydrogen electrolysers, batteries, and carbon capture.

Despite its grand ambitions, the Green Deal Industrial Plan has yet to be fully fleshed out, as very limited additional funding has been proposed at this stage and the plan has not yet been discussed by the member states. The plan is built around four key elements: (i) a simplified regulatory framework, (ii) better access to funding, (iii) upskilling, and (iv) open trade to strengthen supply chains. At present, the EC's primary proposal is to loosen its stringent state aid constraints until 2025, allowing member states to match incentives from other countries (eg. USA). The expectation is that further incentives and improvements to the plan will emerge with negotiations and discussions with the member states.

Supply chains will shift

Car makers in the US will need to eventually eliminate China from their supply chains. POSCO Chemicals and Samsung SDI recently signed a 10-year cathode supply deal, showcasing the shift towards supply chain re-organisation. Value chains will migrate toward the US or nations with trade agreements in place (e.g. Australia and South Korea).

Since the passage of the IRA, several clean ammonia projects have been announced, nearly all located on the US Gulf Coast. The attractive IRA tax credits for hydrogen are driving the growth in ammonia production. For example, Linde has committed US$1.8b to supply clean hydrogen to OCI NV's greenfield blue ammonia project in Texas. This is an example of two non-US companies taking advantage of the IRA by developing projects in the US.

Ford will invest US$3.5b in an EV battery plant in Michigan with technology support from CATL, the world's largest EV battery manufacturer. The factory is due to open in 2026 and will produce enough batteries for 400,000 EV's a year.

Low carbon technology is mineral intensive

Low carbon technologies and enabling infrastructure are significantly more mineral intensive compared to traditional fossil fuel technologies. For instance, an onshore wind plant requires nine times more mineral resources than a gas fired power plant (see Figure 3), while an EV requires six times the mineral inputs of a conventional car (see Figure 4) according to the International Energy Agency (IEA). Both the IEA and World Bank warn that current mineral supplies and investment plans fall far short of what is required for these technologies to reach their full potential.

Figure 3: The mineral intensity of low carbon energy (kg).

Source: IEA, Credit Suisse

Figure 4: The mineral intensity of low carbon transport (kg)

Source: IEA, Credit Suisse

Implications for Australia

The current trend sees nations competing to secure supplies of critical minerals required for global decarbonisation. In many ways, it is starting to resemble a global renewables trade war that will be fought both in technology and supplies of critical minerals.

It is obvious that China will react to the IRA and Europe's Green Deal. China has been strategically acquiring supplies of critical minerals through investments in Australia and Africa, as they are the largest manufacturer of wind, solar, and batteries.

As we mentioned in a recent article, an instance of a nation's efforts to secure the development of critical minerals can be seen in the Australian Federal government granting a non-recourse loan of $1,250m to Iluka Resources to develop the Eneabba Rare Earths Refinery in West Australia. The funding is from the Commonwealth Government's $2b critical minerals facility. Additionally, lithium-boron develop Ioneer has been one of the early beneficiaries of the IRA, with the US Dept of Energy (DOE) offering a conditional US$700m loan for approximately 10 years to develop its Rhyolite Ridge project in Nevada.

Australia is in a pivotal position given it has a free trade agreement with the USA and is also rich in resources of critical minerals. The IRA - and perhaps eventually the new Green Deal in Europe - support our view that we are entering into a renewables supercycle that will keep the prices of critical minerals elevated for many years to come.

Author: Brad Potter, Head of Australian Equities

Equities were broadly weaker in February. In the US, the S&P 500 fell -2.6%, the Nasdaq was down -1.1%, whilst in the UK, the FTSE 100 outperformed, rising +1.4%. In Australia, the ASX All Ordinaries Accumulation Index fell -2.5%. Defensive sectors such as Utilities and Insurance outperformed whilst Mining was the worst performer due to concerns around the state of the Chinese economy and strength in the US dollar, which typically is a headwind for commodity prices. Growth stocks outperformed value stocks in the month.

In bond markets, the US 10 year bond yield increased +43 basis points to close at 3.95%, whilst its Australian counterpart rose +30bp to finish at 3.86%. The driver of higher bond rates was continued data showing inflation around the world remains stubbornly high, which in turn is leading to expectations that central banks will have to continue to further increase interest rates in order to bring inflation back to acceptable levels. During the month, the RBA increased interest rates by 25bp to 3.35%. The RBA has now increased the cash rate by +325bp over the last 12 months. Whilst the timing is uncertain, we remain of the view that at some point this year, we will see the domestic economy begin to cool given the impact of the rate rises, which in turn should see the current pace of rate rises moderate. 

Commodities were generally weaker in February. Thermal coal continued to slide, falling -26%, iron ore -2%, copper -3%, gold -5%, whilst brent crude oil declined -1%. The A$/US$ fell -5% to US$0.67.