Investing in Water: Five Key Drivers to Monitor in 2023

From major infrastructure projects to extreme weather events, we examine what we expect to matter to the water industry this year.

In an uncertain macro environment, we expect both private and public water spending to be resilient.


After several years of outperforming the MSCI World Index, water strategies reversed that trend and underperformed global equities by 3% on average in 2022.1 The underperformance happened mostly in the first two months of the year, driven by a wider reversal in ESG-related stocks. This negative trend was, however, short-lived as water-related stocks outperformed again when the war in Ukraine broke out. The subsequent rise in inflation was relatively favourable for the water industry, due to its resiliency, ability to pass on higher prices, and high exposure to the industrial sector when compared with tech-heavy indices.

In our view, the fundamentals of the water industry remain very promising for the years to come. In an uncertain macro environment, we expect both private and public water spending to be resilient, growing at around mid-single digits. In this article, we discuss how the acceleration of some factors – major infrastructure projects, the reshoring of some water-heavy industrial activities triggered by geopolitical instability, and extreme weather events – is likely to support investments in water-resiliency plans.

Driver 1: 2023 – The Year Infrastructure Plans Kick Off

Governments across the world are stepping up their funding commitments to tackle rising environmental challenges. These developments have the potential to support the growth of water companies for several years, either directly (such as water infrastructure funding) or indirectly (through a healthy construction market increasing demand for pipes, drainage, and waste management). Even in the event of a sharp recession, these stimulus plans could also provide funding to municipalities and partly offset the risk of budget shortfalls.

In the US, three significant pieces of legislation that we expect to boost water spending are the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act of 2022. Each is analysed in greater detail below, along with the European Green Deal.

Although it is difficult to quantify the precise impact on water companies, several management teams (including Watts Water, Xylem, and Evoqua among others2) have already mentioned that the combination of those plans will have a significant impact on their activity levels. Up to now, labour has been the main constraint on their businesses but – if a recessionary environment emerges – this should free up capacity for those projects. Interestingly, none of these funding plans have been distributed yet and we expect the bulk of the impact to become visible in the second half of 2023 and the first half of 2024.

By our calculations, more than half of our preferred companies within the broader universe of water and circular-economy stocks we have identified have significant exposure to these plans.

The Infrastructure Investment and Jobs Act (‘IIJA’) ($1.2 trillion total spending3)

Out of the $1.2 trillion, the IIJA allocates $100 billion of water, wastewater, and stormwater spending over the next five years, some $63 billion of which is directly appropriated in the bill. Figure 1 breaks down the water-related spending in the IIJA.

Figure 1. Water-Related Spending in the IIJA

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Source: Man GLG; as of 31 December 2022. The $4.9 billion for Other EPA Water/Wastewater is authorised rather than appropriated. Both Clean Water SRF and Drinking Water SRF include $11.7 billion appropriated and $14.7 billion authorised.

The semiconductor industry is a significant user of water, especially ultrapure water. Each new plant thus incorporates a large amount of water-related equipment.

The CHIPS and Science Act ($280 billion over 10 years4)

In July 2022, the US Congress passed the CHIPS Act to strengthen domestic semiconductor manufacturing, design and research. The act includes some 52.7 billion for semiconductor manufacturing, R&D, and workforce development, with another $24 billion worth of tax credits for chip production. The US Department of Commerce announced that it will oversee $50 billion in investments in domestic chip manufacturing capacity. While not necessarily widely known, the semiconductor industry is a significant user of water, especially ultrapure water. Each new plant thus incorporates a large amount of water-related equipment. Separately, the EU is also moving ahead with a plan to increase its share of global semiconductor production to 20% by 2030.5

Inflation Reduction Act of 2022 ($430 billion6)

In August 2022, US President Joe Biden signed into law a $430 billion bill that is seen as the biggest climate package in US history. Although water is not at the centre of the plan, $4 billion was included to address the ongoing drought in the west of the US, along with $20 billion in climate-smart agricultural practices. In addition, $60 billion was allocated to clean up pollution and take steps to reducing environmental injustice. A further $550 million will be made available over the next nine years to cover up to 100% of the cost of domestic water-supply projects to serve disadvantaged communities in US Bureau of Reclamation states.

The European Green Deal: Very Ambitious, But Delayed Implementation Puts Targets at Risk

The European Green Deal is an ambitious plan with an aim of achieving carbon neutrality by 2050. It encompasses several environmental targets addressing pollution, renewable energies, the circular economy and renovation. Several measures will have a positive impact on the water industry, in our view; these include policies on resource management, environmental protection and the renovation wave (Figure 2).

Although signed in 2020, the Green Deal’s impact is likely to be spread over many years because of the complexity of implementing it at the EU level. This is supported by the latest Think2030 European Green Deal Barometer, in which a majority of sustainability experts now express scepticism that the Green Deal will be implemented by 2024 – up from 30% in the 2021 survey.7 Nevertheless, we expect this to be supportive for the water industry as a large part of the funding is still to be allocated in the years to come.

Figure 2. Europe’s Green Deal: €470 Billion of Additional Funding Is Needed Every Year to Achieve Europe’s Green Deal by 2030

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Source: European Commission; Morgan Stanley, European Green Deal: The Opportunity (2020).

Driver 2: Deglobalisation and Reshoring Supporting the Industrial Water Sector

The question of whether the 2020s will bring the start of ‘deglobalisation’ has been strongly debated in recent years. This trend is not only a reaction to recent supply-chain issues; it arguably started in 2018 with US protectionism, but was then magnified by Covid and geopolitical tensions. The reshoring of strategic manufacturing capacities has duly become a major topic for equity investors, not only in the US but also in Europe. The aforementioned US CHIPS Act and Inflation Reduction Act are also political reflections of this trend, and indeed we believe they are accelerating it. UBS tracks the number of reshoring announcements in the US and has seen a significant surge since mid-2021 (Figure 3).

Figure 3. US Corporate Reshoring Announcements (Trailing 12-Month Sum)

Source: US Reshoring Monitor, UBS Evidence Lab – UBS Neo © 2023 UBS. All rights reserved. Reproduced with permission. May not be forwarded or otherwise distributed.

A direct consequence of reshoring is a boom in the construction of manufacturing facilities. Between January and October 2022, the value of US construction put in place increased by a third to an annualised level of $1.4 trillion, the highest-growing segment within construction in the US (Figure 4).8 Given the level of intention to relocate activities to the US evident in Figure 3, we would expect this trend to continue into 2023 at least.

Figure 4. US Manufacturing Value Put in Place Rose by 34% in 2022

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Source: US Census Bureau; as of 31 October 2022.

Several sectors which intensively use water equipment are likely to benefit from reshoring, notably semiconductors, construction, pharma and biotechnology, and materials and chemicals.

Driver 3: Droughts and Extreme Weather Events – Tough Comparison or Structural Trend?

We believe global water issues are deeply interrelated with global warming. Higher temperatures lead to more extreme weather events, including flooding and water scarcity, in our view.

2022 was another exceptional year for the climate. The summer reminded most of us – whether we live in Europe, the US or Asia – that water is a precious commodity and that it can take only a few weeks until it dries up. The drought in Europe – which sparked wildfires, withered crops and impacted transportation and power markets – was the worst in 500 years.9 This will have implications for many water-related companies, notably in terms of capex opportunity and future regulation.

Moreover, the exceptionally dry summer was followed by the highest temperatures on record in October 2022 and then again in December 2022 for most of Europe.10 This was not anomalous. According to the UK’s Meteorological Office, all of Britain’s 10 warmest years since 1884 have occurred within the past two decades (Figure 5).

Figure 5. Annual Mean Air Temperatures Recorded in the UK Since 1884

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Source: Met Office; as of 5 January 2023.

While this had positive implications in terms of reducing energy costs for heating, it is also a reminder that climate change is affecting many investment classes. In the case of water, sustained periods of hot and dry weather tend to drive higher demand for water (up to a point when restrictions are put in place). According to the Combined Drought Indicator for 1-10 August 2022, 47% of European territory was in ‘Warning’ conditions and 17% in ‘Alert’ conditions (Figure 6).

Figure 6. Combined Drought Indicator for Europe

Source: European Drought Observatory, January 2023.

A report from GHD projects that water risk could wipe $5.6 trillion from GDP by 2050 (Figure 7).11 The report also shows that no sector is protected against operational disruption in the face of droughts, floods and storms, highlighting the impact of water risk on five critical sectors within the global economy, including agriculture, banking and insurance, and energy and utilities.

Figure 7. Projected Cumulative Global GDP Losses Due to Water Risk

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Source: GHD, Aquanomics: New research from GHD reveals huge water risk to the global economy by 2050; August 2022.

In the long run, we believe pressure on water supply/demand dynamics will have a positive effect on investments. We are already seeing some impact with global irrigation sales surging in 2022 as farmers try to offset the impact from water scarcity. We also saw sales of water-efficient products such as smart meters or digitally connected products accelerate in 2022. We believe that this is not a one-off and will continue in the foreseeable future as the challenges of water scarcity remain.

Driver 4: The Ukraine War – ‘What If’ Analysis

Given the exposure of water companies to both European and US industrial sectors, the war between Ukraine and Russia had a significant impact on the performance of these stocks. However, while many names suffered heavy share-price losses in the first few months of the conflict – especially on the European side – we saw significant divergences emerge:

  • The acceleration of inflation, which was not just a consequence of the war but was magnified by it, pressured long-duration stocks, but on average was favourable to the industrial heavy-water sector compared with the wider tech-heavy indices.
  • Water companies proved to be more resilient due to their exposure to stable public spending.
  • Some segments of the water sector attracted greater investor attention due to the conflict, notably agriculture and irrigation.

Since the autumn, we have also observed that many sectors sold off earlier in the war started to outperform because of decreasing energy prices in Europe (amid a mild winter) and government plans to offset higher energy costs. This implies that the initial fears of a dire recession in Europe have been alleviated.

One question raised by some investors is how the water sector would perform in the event of the war’s end. From a general standpoint, we believe that the trend seen since September 2022 would most likely continue, with Europe doing better than the US, especially supporting energy-intensive companies. The reconstruction of Ukraine – even if it is too early to discuss the prospect – will also have an impact on companies that can contribute to infrastructure investments. In that respect, water infrastructure names with manufacturing capacity in Europe would probably gain the most; examples could include Sika, Watts Water, and Geberit.12

We believe that thematic funds with a green or environmental focus have a better chance of complying with Article 9 requirements.

Driver 5: ESG Regulation – Water and Article 9

2022 saw several asset managers downgrade their Article 9 funds to Article 8, given the new requirement by the European Commission for Article 9 portfolios to be 100% sustainable investments, which in practice is challenging for many funds and creates significant sector biases.

As many investors had set objectives in terms of Article 9 exposure, the downgrades have become a recurring concern for the remaining strategies. Although we cannot speak for other managers, we believe that thematic funds with a green or environmental focus have a better chance of complying with Article 9 requirements because of the nature of their holdings’ activities and the fact that they generally don’t need to match a specific benchmark (Figure 8).

Figure 8. Illustration of a Utility’s Alignment with SDG Framework

Source: Man GLG; as of February 2023. For illustrative purposes only. The chart maps a company in the GICS Utilities sector. against Man Group’s Sustainable Development Goals score.

Looking at the broader regulatory environment, we expect further support for water and circular-economy names to come from the EU Taxonomy for sustainable activities, which is a classification system established to clarify which investments are environmentally sustainable, in the context of the European Green Deal. The Taxonomy establishes six environmental objectives; Objective 3 targets the sustainable use and protection of water and marine resources, and Objective 4 targets the transition to a circular economy.


Taken together, we are confident that these five trends will support investments in the water industry:

  1. Major spending on US and European infrastructure;
  2. Deglobalisation and reshoring’s implications for the industrial water sector;
  3. Droughts and other extreme weather conditions;
  4. Recovery after the initial impact of the Ukraine war;
  5. Developments in ESG regulation.

We therefore expect stocks exposed to the water sector to continue to do well in 2023, given the likely acceleration of long-term structural tailwinds and favourable government spending plans. We look forward to monitoring how each of these unfold and interact.


1. Source: Morningstar; as of 31 December 2022. As measured with the Morningstar EAA Fund Sector Equity Water category.
2. The financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.
3. Source: Bloomberg, 6 November 2021.
4. Source: McKinsey, 4 October 2022.
5. Source: European Commission, 9 March 2021.
6. Source: Reuters, 16 August 2022.
7. Source: Think2030, European Green Deal Barometer 2022.
8. Source: US Census Bureau, Construction Spending: as of 31 October 2022.
9. Source: EU Global Drought Observatory, January 2023.
10. Source: Copernicus Climate Change Service, 2022 Global Climate Highlights.
11. Source: GHD, August 2022.
12. The financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.

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