Water sector in transi­tion: What May’s results reveal

Against this backdrop, the Tareno Global Water Solutions Fund recorded a perfor­mance of ‑1.75% (W‑EUR tranche) in the month under review. Water stocks, which have their own rhythm shaped by regula­tion, renewal cycles and the invest­ment behavior of utili­ties, only parti­ci­pated to a limited extent in the month’s risk-on recovery.

Incre­a­sing invest­ment needs shape the future of water infras­truc­ture

May kicked off the debate across the water sector with a funda­mental question: who will bear the costs, and how much? The American Water Works Associa­tion (AWWA) published its ground­brea­king report Beyond the Repla­ce­ment Era – the most compre­hen­sive inven­tory to date of invest­ment needs in the US drinking water infras­truc­ture. The results are sobering: for the next 25 years, a total invest­ment requi­re­ment of the equiva­lent of USD 2.1 to 2.4 trillion is identi­fied, an amount that far exceeds previous estimates because it goes beyond the mere repla­ce­ment of old pipelines. Utility compa­nies are faced with a mutually reinfor­cing set of requi­re­ments: Compli­ance with regula­tory requi­re­ments, climate resili­ence, cyber security and the treat­ment of incre­a­singly complex water sources. The public sector covers only 3.9% of invest­ments in the water sector, far less than other infras­truc­ture sectors receive. The remai­ning gap falls on local suppliers and ultim­ately on the end customer.

In mid-May, the EPA presented proposed amend­ments to its PFAS limit regula­tions, the class of persi­stent chemical pollut­ants for which federal drinking water limits now apply. One proposal would maintain the existing limits for the two best-studied compounds, but give utili­ties a two-year exten­sion until 2031. A second proposal would comple­tely remove the regula­tions for several less well-resear­ched PFAS variants. This creates new uncer­tainty for suppliers who have already planned retrofit invest­ments. For suppliers of filter and treat­ment techno­lo­gies, the longer time horizon delays the invest­ment cycle, but does not cancel it out.

Reporting season confirms robust funda­mental data in the water sector

The reporting season was a useful stress test. The opera­ting businesses of most portfolio stocks continued to perform solidly. The discrepancy between opera­ting results and share price perfor­mance was prono­unced and revealing in some cases.

Takuma (+21%), a Japanese group of compa­nies in the environ­mental and energy infras­truc­ture sector, impressed with record order intake and a record result driven by strong domestic demand. The announce­ment of further profit growth and a record dividend attracted investor interest. Andritz (+8%) recorded a strong order intake and a growing order backlog. Halma (+8%) grew organi­cally and improved its margins, with parti­cular strength in water analysis and environ­mental monito­ring. Aalberts (+21%) recovered thanks to improved free cash flow and a good order situa­tion in the most important end markets.

United Utili­ties signi­fi­cantly exceeded expec­ta­tions with its annual finan­cial state­ments and strategic outlook. The UK regulated water company increased its invest­ment program for the current AMP8 regula­tory period, the five-year invest­ment cycle in England and Wales, by GBP 2.5 billion to a total of GBP 11.5 billion, partly financed by a capital increase of GBP 800 million. These figures reflect both the considerable need for renewal of the UK water networks and an incre­a­singly invest­ment-friendly frame­work from the regulator Ofwat.

Veolia reported sales of EUR 11.4 billion for the first quarter, organic growth of just over 2%, with an EBITDA margin of 15.5%. The Water Techno­lo­gies division grew by 4.3%, adjusted for delays due to the tensions in the Middle East. The planned acqui­si­tion of Clean Eartha US hazar­dous waste and PFAS treat­ment specia­list, has received antitrust clear­ance and is expected to close in mid-2026. The transac­tion streng­thens Veolia’s position in the fast-growing US conta­mi­na­tion removal sector.

The enginee­ring and consul­ting compa­nies presented a diffe­rent picture. Stantec reported a 9% increase in net sales in the first quarter, a record order backlog of CAD 9 billion and organic growth of 14% in the water segment. WSP Global raised its forecast for the year follo­wing net sales growth of almost 11% in the first quarter and a record order backlog of CAD 19.7 billion. Tetra Tech also raised its guidance: Sales in the water infras­truc­ture segment rose by 16% and opera­ting cash flow reached an all-time high. Nevert­heless, all three stocks lost between 14% and 16% of their share price. The trigger was not the results themselves, but a broader reassess­ment of the sector: investors began to price in the long-term impact of agentic artifi­cial intel­li­gence on the business models of enginee­ring and consul­ting compa­nies. The reassess­ment happened quickly and without diffe­ren­tia­tion. WSP announced invest­ments of USD 100 to 200 million in AI and digital capabi­li­ties over the cycle to proac­tively address this change. It remains to be seen whether the market reaction is far-sighted or prema­ture. In any case, the funda­mental key figures – order backlog, margins and growth in the water segment – have remained intact.

SABESP was convin­cing in opera­tional terms with adjusted EBITDA growth of 26% and a net profit increase of 32%. Nevert­heless, the share price lost 17%, weighed down by the company’s decision to discon­tinue the acqui­si­tion of Copasathe state water utility of the federal state of Minas Gerais. The market had priced in conso­li­da­tion options; their elimi­na­tion triggered a revalua­tion, which was reinforced by political and regula­tory uncer­tainty surroun­ding the transac­tion.

Sustaina­bi­lity: more trans­pa­rency for water risks

The investor commu­ni­ty’s approach to water as a finan­ci­ally material risk factor became more coherent in May. “Respon­sible Investor” reported on a new initia­tive to standar­dize water risk guide­lines for insti­tu­tional investors. This is an overdue step, as the lack of a common frame­work has so far made it diffi­cult to compare water-related risks across portfo­lios or to address compa­nies consist­ently. During the same period, the focus shifted to blue bonds, bonds with earmarked use for water and marine projects in emerging markets. This points to growth poten­tial, but also to a gap in sustainable water finan­cing in industria­lized count­ries. For investors in listed water compa­nies, better harmo­nized risk guide­lines should contri­bute to a more accurate assess­ment of water-related factors in equity and bond markets in the medium term. The direc­tion of develo­p­ment remains construc­tive.

Portfolio positio­ning: diver­si­fi­ca­tion remains crucial

The emerging agree­ment between the US and Iran and the expected reope­ning of the Strait of Hormuz mark a noticeable easing of the geopo­li­tical environ­ment. A norma­lization of the situa­tion would be funda­men­tally supportive for both equities and bonds – even though the equity markets remained remar­kably resilient during the crisis and may have already parti­ally antici­pated a favourable develo­p­ment. We are keeping a close eye on the risks surroun­ding afforda­bility: rising prices are incre­a­singly impac­ting the real economy and the segments of the water universe linked to residen­tial construc­tion are parti­cu­larly sensi­tive to interest rates. Short-term volati­lity could increase with the onset of the summer months, when liqui­dity is scarce. In this environ­ment, geogra­phic and business model diver­si­fi­ca­tion remains our guiding principle – with quality of earnings and stabi­lity of cash flows as the charac­te­ri­stics we priori­tize most.