Image credit: World Bank Photo Collection

Water: Still waiting for the money to flow

23/04/2018

Despite being one of the most mentioned adaptation needs in the Paris NDCs, water has been one of the ‘poor relations’ of green/climate finance, rarely mentioned compared to energy and transport.  So it was good to see a thoughtful and expertly-panelled conference devoted to it in London last week, organised by Environmental Finance.

Water: Risk, Opportunity and Sustainability was held against the backdrop of stark warnings in a recently published report by the World Water Council that reveals a big gap between needs and finance flows into water. “There is some consensus that the overall ‘infrastructure gap’ approximates $ 1 trillion per annum, of which water accounts for 15%-30% (compared to a historic investment share of just 6%),” the report says.  “As things stand, the infrastructure that is necessary to make the [water] SDGs achievable will not be financed; and what is more, changes to the status quo do not appear to be imminent.”  Especially in water, for “SDGs” read “NDCs”.  Certainly the gap seems to be reflected in the use of proceeds for green bonds, where sustainable water management projects were the target for less than 10% of issuance in 2017.

Margaret Kuhlow of WWF had a striking analogy for water and climate change

Yet, as several speakers at the conference noted, water is central to all aspects of the climate debate.  Introducing one panel, Margaret Kuhlow of WWF said that if climate change is a shark, then water is its teeth – the sharpest and most destructive of its immediate effects.  John Joyce of the Stockholm Institute Water Initiative said that water is “complicated, because it has a financial value but also an intrinsic value in terms of human life itself.”  Faith Ward of the Brunel Pension Partnership said that when trying to get attention from trustees, “water is a good way in because it’s quite personal to people.  Water touches every asset class that investors are bought into, whether its adaptation risks like flooding, or scarcity or pollution effects in industry, agriculture and forestry.”

Investors

That said, though, it was clear from the investor panels that most institutions are only just beginning the journey into evaluating water issues, whether as a risk to companies they invested in or an opportunity for investment.  Monika Freyman of Ceres said that only one of thirty-six firms they had surveyed said they felt they fully understood the topic. “Carbon is still way ahead of water in terms of risks companies evaluate,” she said.  Ceres has created an Investor Water Toolkit to help institutional investors assess water risks in companies, and Freyman urged investors to push for transparency over water from their investees, both as to the risks facing their businesses and supply chains, and over how they are addressing the water SDGs. “We’ve found,” Freeman said, “that because water is so interwoven in so many ways, understanding it leads to understanding many other factors, for example how regional governance works, because of the way water crosses boundaries.”

CDP’s Rick Stathers said that water disclosure has been moving up the corporate agenda since CDP added it to their disclosure ‘suite’ in 2009, but they still only get a 50% response rate from companies. “Some major companies are now, in turn, asking suppliers to disclose,” he said, noting that “this may be more effective in terms of creating change because there’s immediate cash in involved if these companies don’t get the answers they want.”  He reckoned that about 40% of CDP companies are engaging with their supply chains in this way, “but only 20% do a full assessment of their water risk”.  He also noted that “there is embedded water in every product, but very few companies are using a shadow water price, so rapid increases in the price of water as a result of scarcity could create shocks.”

There’s no excuse for companies not doing water risk assessments, the tools are there

There’s no excuse for companies not doing such assessments, said Rick Hogeboom, a water researcher at Twente University. “The tools have developed in the past decade for measuring water footprint, there are now methodologies to account for this properly. Investors need to understand water risk at the company level, and no one should hide behind saying there’s no data – investors should press investees to report.” There are also established technologies to reduce water usage in both industry and agriculture, even for “nil blue water” use in industry.  In agriculture, he said, “just move from sprinkler to drip irrigation and you’ll have huge impact.”

Banks

Turning to how commercial and development banks are looking at water risks and opportunities, Ase Bergstedt of Scandinavian banking group Nordea said that, as to their own exposures, “we are much more risk-aware on climate, but it takes time to integrate that awareness across a bank’s whole risk system”. As to helping their borrowers pursue opportunities, for example in developing new technologies, she said that “though we want to help bank customers innovate, regulation is heavy in the banking industry.”

Ambika Jindal of Dutch commercial bank ING was asked whether, by insisting on climate risk disclosures from borrowers, it was losing business.  “Maybe,” was her response, “because we often say ‘No’ because of environmental factors. But this differentiates us in the market, so the way we see it we end up getting more of the ‘right kind’ of clients. She noted that ING had recently been given the role of ‘sustainability co-ordinator’ by Dutch giant Phillips, “which uses three banks for its business and had never given one a specific role before.”

Ashok Chapagrain, an academic who has worked extensively with the Dutch development bank FMO, said that “tools for understanding water risks are better, but we aren’t seeing the uptake of them by companies or investors.  So there is an opportunity there to improve, but we need to make these tools, like flood and drought maps, more accessible and usable by small businesses.” On the portfolio management side, he cited an internal scoring tool developed by FMO that allows the bank to measure risk in four levels, and thus see how investees are progressing. “You don’t need exact scores,” he said, “you can use relative measures and still get a good picture.”

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More with less

Sponsors of the conference included WWF and The Nature Conservancy, and it’s notable that innovation in the water space, as in other climate finance sectors, seems to be being driven by NGOs.  TNC’s Guilio Bocalletti showed how rethinking hydropower developments at a river-system level , rather than project-by-project as typically happens now, can massively reduce social and environmental impacts, while (in the case presented, in Colombia) nearly doubling the overall IRR of the projects once aggregated.

To promote such (literally) joined up thinking and the necessary changes to public procurement, TNC is promoting what it calls “Early Planning Project Preparation Facilities” for hydropower.  These would provide project promoters with the 1-2% of project costs needed to carry out “risk optimised” planning, these costs being repaid to the Facility by auction winners when projects were put out to tender. If this approach to procurement was rolled out, Boccalletti said, “we could save 100,000 km of free-flowing river without any reduction in output, which actually adding financial value.”  He called on financiers to look at ways of aggregating projects via new funding products.  (The ecological prize, by the way, is immense:  freshwater animal species are collapsing much faster than marine or terrestrial.)

But where are the public financiers?

Institutions like the World Bank/IFC  need to be become ‘de-risking machines,’ not primary financiers

Pritha Hairiam of FMO noted that “There’s a huge opportunity in water management in emerging markets.  You can make money out of wastewater, more than drinking water.” But  Sophie Tremolet of the World Bank, opening a session on blended finance, said that while the need is something like $100 billion a year, water funding has never got above $17 billion.    “We recognise,” she went on, that “institutions like the World Bank/IFC  need to be become ‘de-risking machines,’ not primary financiers.  That’s not happening because the incentives are still to get cash ‘out of the door’, to make loans. There needs to be a transformation in the mindset.”

That’s right, said Alex Money of Oxford University (one of the authors of the World Water Council report mentioned above).  “There’s a perception and reality gap with the MDBs.  The perception is that they take tail risk, but they don’t.  In reality, they are as risk averse as the next guy.”  Equally, though, he said, the perception that the private sector is only interested in financial return is wrong:  increasingly they are looking for social and environmental impacts too. “We need to look at this with a fresh lens.  For example, remittance flows are running at $600 billion to emerging and frontier countries, which is three times the level of ODA.  There must be ways of attracting those flows into water and other development projects.”

Certainly water and sanitation needs to get higher up the agenda for blended finance, said Kathleen Dominique of the OECD:  it captured only 2% of these flows between 2012-16. And the projects aren’t getting into our portfolios, said Piet Klop of Dutch pension fund PGGM, “because we like ‘big and boring,’ and either the deals are too small or the aggregation of the deals by DFIs is too expensive for us.” The DFIs need to make he deals cheaper, so pension funds and other institutional investors can take them in packaged form, like green bonds.

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