The Candriam Sustainable Equity Water Fund will invest in listed companies providing solutions to treat, transport, distribute and capture the value of water, as well as those reducing water intensity in high water use sectors.
Candriam, the sustainability-focused multi-asset manager, has launched the Candriam Sustainable Equity Water Fund, an Article 9 fund which will invest in listed companies seeking to reduce pressures on water resources caused by human activity through cleaner and more efficient solutions.
Impact Investor spoke to co-manager Bastien Dublanc who explained the fund was an extension of a water-focused investment strategy Candriam has managed for Belfius, the Belgian state-owned bank, since last September. He said the strategy would be converted into a feeder fund for the new vehicle providing a total initial investment of just under €200m.
“Candriam has a strong partnership with Belfius whereby they distribute funds managed by Candriam within their retail and wealth management agencies. Together we have agreed to expand the water strategy with the launch of a new fund that will be open to a broader range of investors,” said Dublanc, adding that the fund was just starting to raise money.
“We expect to attract a wide variety of institutional investors and have had expressions of interest but no commitments in anchoring investments just yet,” he confirmed.
Liquidity and ESG considerations
Dublanc said he and co-manager David Czupryna did not have a specific fundraising target in mind but was explicit in saying that the aim was not to raise a fund equivalent in size to the largest water funds in Europe, which run to several billions of euros. He said this was a conscious decision to avoid diluting the fund’s exposure to water-related assets while striking a balance with liquidity constraints and ESG considerations.
“Our objective is to bring our clients a differentiated offering whereby we stay very strict on the theme definition and very selective on ESG criteria. Fundraising will be the outcome of client appetite for our offering [and] not a hard target in itself,” he said.
A minimum of 80% of the fund will be invested in ‘water solutions enablers’, companies that provide solutions to treat, transport, distribute and capture the value of water and up to 20% in ‘water efficiency leaders’, companies which through their own processes in high water use sectors, are leading the reduction in water intensity.
The fund will target a portfolio of 35-45 investments, including industrial companies, utilities, tech companies, chemical and pharmaceutical companies. Candriam said it was not at liberty to disclose existing investments in its water strategy.
The fund is part of Candriam’s thematic global equity offering, which has €12.2bn in assets under management.
Growing water scarcity
The US Geological Survey estimates that 2.5% of the Earth’s water is fresh water and only a fraction of that (1.2%) is surface water, which serves most of life’s needs. But the global water cycle has been destabilised and access to fresh water curtailed by decades of mismanagement. Fresh water shortages are also being exacerbated by the dual crises of biodiversity loss and climate change.
A recent landmark report has revealed that without meaningful remedial action, the world faces the prospect of a 40% shortfall in freshwater supply by 2030, with severe shortages in water-constrained regions.
Candriam said there was a dire need for financial investment to address this challenge with an estimated $6.7trn by 2030 to a much larger $22.6trn by 2050 needed in global investment for essential infrastructure.
Dublanc explained that if water was a traded commodity, its price would be much higher than it is today, that it had been systemically undervalued by businesses and consumers alike leading to gross mismanagement of water resources.
“We have not witnessed any meaningful change in the way water is consumed, which has created this enormous supply demand gap. Investing in listed equities that are improving the efficiency of water use is where the investment opportunity lies.”
Dublanc said that short of tremendous advancements in technology and a reversal of climate change, the world would not be able to increase its water supply dramatically in the near future.
“We have to work on improving the demand side,” he said.
Bespoke water taxonomy
The fund’s investment approach is underpinned by a bespoke water taxonomy, which Candriam has developed through the integration of multifaceted data sources and artificial intelligence.
Dublanc explained: “We have used AI language functionality to develop our bespoke water taxonomy, which works by processing a dictionary of water-related words we have built to generate a list of water-related companies for portfolio consideration.”
As part of the process, Candriam disaggregates the revenue of these companies into three categories, including, treatment of water, supply of water and protection of water.
“This gives us a relatively accurate view of their exposure to the water theme. We then double check the results against company literature before making a decision to invest,” he said.
The fund management team also conducts risk analysis to identify companies exposed to water stress, such as drought or regulatory pressures.
“We look at whether these companies are able to move to circular models of water use, putting in place closed loop systems that allow for significantly reducing fresh water withdrawals,” he added.
Impact
The fund follows Candriam’s philosophy of double impact. This means that 10% of the net management fees will be donated to NGOs working to improve access to water such as Join for Water.
In addition, every company considered for the portfolio also has to generate a high social and environmental score based on Candriam’s proprietary ESG scoring card.
“As of today we also have a bit more than 50% of the weighted average of the fund directly exposed to water, which screens favourably to similar water funds on the market,” he added.
