As the world grapples with the compound crises of climate change, urbanization, and biodiversity loss I referred to in previous articles, the role of water as a linchpin of resilience becomes indisputable. Yet, even as the importance of water security rises on the global agenda, financial flows into water-related infrastructure, innovation, and ecosystem services remain disproportionately low. Despite water underpinning nearly every Sustainable Development Goal (from health and food security to economic development), access to finance continues to be the one of the most significant barriers to scaling advanced water solutions.
The Financial Paradox of Water
The paradox is stark: water is simultaneously undervalued, underpriced, and underfinanced, as I have often emphasised. According to the World Bank, global investment needs in water infrastructure exceed $1.7 trillion by 2030, yet less than $300 billion is currently invested per year. According to the World Meteorological Organization (WMO), floods and droughts already cause tens of billions of dollars in annual losses, far exceeding the current investment levels in water resilience. UNEP confirms that the cost of inaction is five to ten times greater than the adaptation investments made. Only a fraction of that supports nature-based solutions, decentralized systems, or digital innovation, just to name a few underfunded areas. Furthermore, water represents just 3% of total climate finance tracked by the Climate Policy Initiative, a figure that has barely budged over the past five years, despite growing awareness of water’s role in both climate change mitigation and adaptation.
This underinvestment is not simply due to a lack of capital, but to the misalignment of risk, return, and revenue models. Water projects are often local, fragmented, and long-maturing, with returns that may be social or environmental rather than financial. Investors seek clarity, scalability, and predictability, all qualities that many water-related projects, particularly in emerging markets, struggle to provide.
Institutional Bottlenecks and Market Failures
Multiple institutional bottlenecks impede capital deployment. Utilities in many regions lack the creditworthiness or governance structures to attract private finance. Regulatory uncertainty, inadequate tariff structures, and the absence of bankable project pipelines further constrain investment. According to the OECD, more than 80% of water-related public budgets in low- and middle-income countries are absorbed by operational subsidies, leaving little room for innovation or asset renewal.
Moreover, conventional financing instruments (such as sovereign loans or development grants) are ill-suited for emerging decentralized or circular water solutions, which often fall outside of traditional utility planning processes. This results in an ecosystem where proven, cost-effective technologies, such as wastewater reuse, smart metering, and desalination, fail to scale due to financial neglect rather than technical infeasibility.
A Nascent Turn: Targeted Capital for Water
Encouragingly, the tide is beginning to turn. Over the past two years, water-specific financial instruments and vehicles have gained traction. The launch of the Water Finance Exchange (WFX), a US-based public-private platform, is one example. By aggregating municipal demand and de-risking small-scale projects, WFX has unlocked over $1 billion in new financing for underserved communities in just three years.
Capital markets are beginning to respond as well. Water-focused sustainability-linked bonds are emerging, such as the €1 billion issue by Danone in 2023, with KPIs tied to water circularity and watershed restoration. The World Bank’s “blue bonds” initiative has issued over $2 billion to date, supporting coastal resilience and freshwater infrastructure. However, broader uptake will require more standardized metrics, clearer regulatory signals, and stronger investor education.
Toward Scalability: Aggregation and Standardization
One of the most persistent obstacles to scaling investment is the small ticket size and heterogeneity of water projects, which drives up transaction costs and deters institutional investors. A key pathway forward is aggregation: bundling smaller projects into investment portfolios with standardized risk profiles and common performance metrics.
The European Investment Bank has recently piloted this approach through its Natural Capital Financing Facility, bundling nature-based water projects (e.g., wetland restoration, floodplain reconnection) into aggregated portfolios eligible for green finance under the EU Taxonomy. Similarly, the Inter-American Development Bank’s AquaFund is evolving into a platform that pools decentralized innovations across Latin America.
But these efforts are still incipient. What’s needed is a global standardization effort for water investment models, akin to what was achieved in the renewable energy sector with power purchase agreements. This would reduce friction and improve confidence for institutional investors seeking repeatable, scalable, and outcomes-oriented investment opportunities in the water space.
In the water sector, this is becoming increasingly common in specific cases, particularly in the MENA region with desalination projects. Utilities are developing well-structured projects under Water Purchase Agreements (WPAs), where developers provide financing, construction, and operation under a BOOT (Build-Own-Operate-Transfer) model. Similar approaches are now being applied in specific cases to water transportation projects (such as the Centinela Project in Chile) and wastewater treatment projects (such as the Zuluf project by Saudi Aramco in Saudi Arabia).
Unlocking Innovation: Emerging Financial Mechanisms
Several promising instruments could further unlock water finance at scale:
- Outcome-Based Finance: Development Impact Bonds and Resilience Bonds that tie returns to predefined environmental outcomes are gaining traction. For instance, the Thames Restoration Project in the UK is piloting a performance-based model that compensates upstream actors for reducing pollution loads, funded by downstream beneficiaries.
- Digital-Enabled Microcredit: In Kenya, Grundfos has deployed pay-as-you-go digital water pumps, enabling rural users to build credit histories. These models, once scaled, could be packaged for impact investors or integrated into ESG funds seeking measurable SDG alignment.
- Water Derivatives and Insurance: The launch of water futures contracts on the Chicago Mercantile Exchange and the expansion of drought insurance in South Asia point to the maturation of water-related financial risk management tools, essential in a climate-volatile future.
- Platform Ecosystems: The Global Water Partnership’s Valuing Water Finance Initiative and UNEP FI’s Blue Economy Finance Principles are laying the groundwork for consistent ESG integration, although further alignment with fiduciary responsibilities and taxonomies is urgently required.
MDBs: The Much-needed Catalyst for Private Investment
A critical, and underutilized, lever is the role of Multilateral Development Banks (MDBs) as risk-sharing anchors, not just lenders of last resort. MDBs have the credit strength, credibility, and long-term perspective to crowd in private investment through guarantees, political risk insurance, and blended instruments. Yet to date, fewer than 5% of MDB-backed water investments deploy such tools.
That must change. MDBs should be mandated and resourced to issue partial risk guarantees and portfolio-level first-loss coverage, particularly in the Global South, where private investors are deterred by currency, political, or governance risks. For example, a guarantee mechanism for performance-based urban stormwater or industrial reuse projects could unlock trillions in idle institutional capital, especially when tied to sustainability-linked KPIs and reliable monitoring frameworks.
In parallel, MDBs must work with national development banks and local authorities to build pre-investment pipelines, improve procurement capacity, and co-develop market structures that reflect water’s systemic value across climate, health, and industry.
Investors are unable to assume certain risks that could be easily mitigated by Multilateral Institutions, given their close relationships with countries to address demand, currency, or utility creditworthiness risks. Today, the proper allocation of these risks is more critical than the actual availability of capital, which the market and investors would otherwise be willing to deploy if such risks were adequately covered. We are certain this is not a liquidity problem.
A Call to Action from Paris
As CEOs, investors, regulators, and entrepreneurs gather at the Global Water Summit this upcoming May in Paris for the Global Water Summit, the message is clear: finance is no longer a secondary issue in the water sector: it is the decisive enabler of progress or stagnation.
Scaling water solutions requires shifting from fragmented pilot projects to platform finance. It demands integrating water into every climate investment taxonomy, every resilience bond, every ESG portfolio. And it requires MDBs to take bold action, transforming themselves from cautious lenders into catalytic risk mitigators who unlock billions in co-investment.
Water is not a charity: it is a global investment, a global effort, in planetary stability and human dignity. By building the financial architecture for scale, we can ensure that water finally gets the attention, the capital, and the action it demands.
