In the dynamic realm of global climate finance, a notable surge to USD 1.3 trillion annually in 2021/2022 signals a transformative shift, particularly in water-related investments. This surge, more than double the figures from 2019/2020, is propelled by a significant increase in mitigation finance, with a keen focus on renewable energy and transport sectors. However, challenges persist in adaptation finance, particularly in the context of water resilience.
Mitigation Finance's Impact on Water Sectors
As the renewable energy and transport sectors experience substantial growth, the influence of mitigation finance on water-related projects is undeniable. Green bonds have played a vital role, amplifying the coverage in sectors crucial to water management, including agriculture, forestry, and other land use (AFOLU), buildings, and waste management.
Adaptation Finance and the Water Challenge
Despite reaching an all-time high of USD 63 billion, adaptation finance is grappling with a significant shortfall compared to estimated needs. However the water and wastewater sector claims a substantial share of the adaptation finance landscape receiving almost half of the tracked funds (USD 31 billion). This is attributed not only to the capital-intensive nature of large water and wastewater treatment plants but also underscores their relevance in building resilience against climate-induced water challenges.
National Development Finance still a Big Contributors
National DFIs, primarily in China, were the largest source of market-rate debt for adaptation (63%), mainly funding domestic projects for water treatment plants, and water supply and sanitation systems (92%). Multilateral DFIs were the second- largest providers of market-rate debt for adaptation, mostly in the ‘other and cross-sectoral projects’ category (60%), as well as AFOLU (30%), and water and wastewater (15%). Only approximately 1%, or USD 500 million, of adaptation finance was in the form of (project- level) equity.
Private Finance in Water Investments
As with mobilizing domestic sources of finance, developed economies are much more successful at mobilizing private finance than EMDEs. The largest private sector growth came from household spending, which reached 31% of all private finance. Market-rate debt dominates adaptation finance, amounting to USD 37.5 billion or 60% of the total in 2021/2022.
Synergies Between Water Investments and Climate Action
The nexus between climate change and water investments presents a unique opportunity to deliver multiple co-benefits. By strategically evaluating projects, investors can incorporate social, economic, and environmental goals, thereby fostering climate-resilient water systems that address challenges such as floods, droughts, and water scarcity.
Mainstreaming Water Adaptation Activities
In addition to targeted interventions, mainstreaming adaptation activities across financial systems is crucial for water resilience. Private actors operating in water-sensitive sectors, including multinational corporations in agricultural supply chains, real estate developers in coastal zones, and infrastructure investors in water systems, need to conduct thorough climate risk assessments and incorporate adaptive measures.
As global climate finance surges, a focused lens on water investments unveils both opportunities and challenges. The substantial growth in mitigation finance offers a promising avenue for bolstering water resilience. However, the shortfall in adaptation finance emphasizes the urgency to address water-related challenges. By strategically harnessing synergies and mainstreaming water adaptation activities, the global community can pave the way for a more resilient and sustainable future in the face of evolving climate dynamics.
This Blog draws on data and findings from the Climate Policy Initiative's Global Landscape of Climate Finance report 2023