Investors can play a key role in funding solutions to water problems but a lack of global standards to measure water impact remains a barrier.
In brief
- Policymakers and investors are not paying as much attention to water as they do to energy transition
- Better policies and more investment are needed to tackle water-related problems, from water access to clean water to sanitation
- Lack of global standards to measure water impact remains a barrier to investors but some progress is being made
Water did not get enough attention at the climate change conference in Glasgow, experts argue. The way that climate change affects human beings is almost entirely through water – either too much or too little. The kind of action on water needed is comparable to what is already happening on the energy transition, they say.
Genevieve Edens, director of impact and ESG at asset manager WaterEquity, is amongst those calling for more action. “There is a lot of urgency,” she says. “According to the actual projections we are far from achieving SDG 6 – clean water and sanitation for all – in time.”
Part of the solution is better policies. “Every nation should consider water-related issues as part of their climate change resilience framework. This is going to be a bigger and bigger issue, not smaller. So getting more attention focused here is really important.”
More investment needed
Another essential part of the solution is much more investment, both public and private. WaterEquity is focusing on that latter. Five years ago, the company emerged out of Water.org, the most well-known water non-profit in the world that built the case for microfinance for water and sanitation.
Edens comments: “They found that one of the main barriers was that the financial institutions they were working with didn’t have the capital to scale up their product. It was seen as risky by institutional investors because it’s not an income-generating investment. But there is so much demand from the population that it is actually quite a credit-worthy product.”
The firm started with microfinance at the household level, but soon concluded that water infrastructure is another huge investment area. Now, it looks at both levels to identify private lending opportunities that offer attractive returns, (low to moderate credit risk), verifiable social impact, and true ESG investments.
WaterEquity’s funds have so far deployed more than $135 million in capital towards solving the water and sanitation crisis, with a global repayment rate of 99% percent. Funds are raised from a range of investors, individuals as well as foundations and corporations, including Bank of America.
“Now we are also looking at mainstream investors,” says Eden. “That’s our challenge: to demonstrate that water is a smart investment. There are enough attractive investing opportunities, and there is a huge need for investments. Luckily there is much more recognition nowadays that water is a big part of climate.”
Lack of global standards
So how does WaterEquity measure the impact of its investments? “We are quite lucky compared to other impact investors because we are so focused on one theme. A hundred percent of our capital is dedicated to water and sanitation. We integrate impact measurement into every stage of our investment cycles, to assess its fit with our impact objectives,” Edens adds.
The company follows industry best practice for measuring impact, including IRIS+ and the IFC Operating Principles for Impact Management.
However, Edens says, a big problem with these general impact measurements is that they do not take into account the specific problems of the water sector, like the lack of data.
“General impact measurements do not take into account the specific problems of the water sector, like the lack of data.”
“Compared to the carbon market, it is really behind. At the carbon market the calculations are straightforward, and there is a science-based accounting system in place. Water is nowhere close to that.”
It’s hard to quantify these social impacts, especially at the local level: What exactly is the impact of agricultural drip irrigation on water resources in a specific area? Or the impact of a wastewater treatment plant on the health of a downstream community in that river basin?
Edens explains: “A litre of water in Washington DC, where I live, is not the same as a litre of water in Pune, India. The lack of local data is a real barrier. That kind of baseline data is hard to get, which means that it’s hard to assess real impact.”
A measurable opportunity?
A recently published report by London-based Impax Asset Management, in partnership with Swedish public pension fund Sjunde AP-fonden (AP7), investigates how best to assess, measure and report on water impact. The report, ‘Water: from a systemic and unpriced risk to a measurable opportunity with positive impact’, provides an investment practitioner’s perspective on water as a sustainability and impact topic.
Water is one of three strategic focus areas for AP7. According to Lisa Beauvilain, head of sustainability and ESG at Impax, it’s a big concern for the Swedish pension fund that water is in many ways overshadowed by climate and carbon.
“By effectively measuring and reporting water impact, investors would gain useful information on water risks and understand better the positive impact of water solution providers. As our report uncovered, water data is not widely available, particularly information on local hydrological conditions and on the impact of water quality.
“By effectively measuring and reporting water impact, investors would gain useful information on water risks and understand better the positive impact of water solution providers.”
“This needs to change rapidly, as chemical water pollution in particular is becoming better understood, the magnitude of the challenges is becoming clearer and regulators’ focus on this area increases,” Beauvilian explains.
The report recommends moving to common water impact indicators so that water impacts can be compared and aggregated across different investments and assessed at portfolio level. For this, Impax and AP7 have developed a water impact metric dashboard, which provides a closer assessment of the most relevant water impact metrics.
“We heard from companies that are active in the water business and water-dependent industries that this could be a quite useful instrument for them,” Beauvilain says. “It got attention, and we will certainly keep that momentum going.”
Positive as she is about this report, Genevieve Edens of WaterEquity has one critical remark: “I do think they underestimate the progress that is being made through the SDGs. A lot of work is being done to get these missing data, on issues like water quality, scarcity, inclusion, efficiency and access. The SDG framework is really about these issues. There are still a lot of gaps, but the amount of data is growing. We are actually moving forward.”
