Perfluoroalkyl and polyfluoroalkyl substances (PFAS) are a group of artificial chemicals that are resistant to heat, water, and oil. These chemicals are often referred to as “forever chemicals” as they do not breakdown easily in the environment or in the human body. This can cause negative environmental and health consequences. PFAS chemicals have been used since the 1950s in various industrial processes and are found in many consumer products. Recently the Environmental Protection Agency (EPA) has taken actions, as shown in Exhibit 1, addressed at cleaning up the amount of PFAS in the environment.

Exhibit 1: EPA PFAS ruling

Source: William Blair

On April 10, 2024, the EPA set the first ever national, legally enforceable drinking water standard for PFAS in the United States. Drinking water must meet Maximum Contaminant Levels (MCL) of just 4 parts per trillion (ppt) for 6 PFAS chemicals. All public water systems will have three years to complete initial monitoring and must implement solutions to reduce contaminant levels within five years if MCLs are exceeded.

On April 19, 2024, the EPA took further action and designated two PFAS compounds, Perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), as hazardous under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). This enables the EPA to remediate contaminated sites and sue responsible parties.

Estimates for the size of the PFAS opportunity are preliminary, but it is expected to be a long-term investment trend. Environmental Business International estimates a cost of $200B over the next 15-20 years to treat drinking water and wastewater systems for PFAS. The EPA estimates that only 6-10% of the 150k+ US water utilities will have to implement remediation plans to comply with MCL’s at a cost of $1.5B per year. While it will take time to determine the final amount, industry panelists at a recent RBC investor conference believe this estimate to be very conservative.

There are some near-term uncertainties that could impact the timing PFAS demand increases. These include the Presidential election, the Chevron deference doctrine ruling, and any legal challenges to the EPA regulation. While the election adds uncertainty, we view it as less of a risk as PFAS is an issue with bipartisan support and growing public awareness will make changes more difficult. We view legal challenges to the EPA as less predictable and thus a larger risk. It is something we continue to monitor around this investment theme.

While the timeline of demand's total size of investment is still uncertain, we expect PFAS to continue to be a thematic investment over the next several years. We expect companies to accelerate spending to both find out their current PFAS exposure or address potential liability associated with known exposure. Demand should increase for advisory services, site assessment, lab testing, and remediation services. Secondary demand drivers for under-sink treatment and whole home filtration systems could also materialize as residents become more aware of what is in the water. We are looking for investment opportunities in companies exposed to these trends for our strategies.