Published on: 02/09/2024
The One For All alliance curates a small informal group that explores selected topics on finance in water and sanitation. This blog is the result of the latest discussion. We don’t have a lot of answers, but we do raise many questions. While we keep seeking solutions, we’d love to hear your thoughts.
Climate finance is finance that is aimed at reducing greenhouse gas (GHG) emissions, reducing vulnerability and increasing the resilience of human and ecological systems to cope with and rebound from the negative impacts of climate change. But the details of how climate finance is defined is a hot topic. Climate funds are a smaller subset of climate finance. We will come back to the importance of this distinction later in the blog.
The financial resources provided through climate finance are used to fund actions that mitigate and adapt to the impacts of climate change. Climate mitigation relates to activities that contribute to reducing or avoiding GHG emissions, while climate adaptation covers activities that aim at maintaining or increasing the adaptive capacity and resilience of societies and ecosystems in response to climate-related risks.
In the case of water and sanitation, we are interested in both the resilience of the services themselves to withstand climate impacts, as well as the ability of these services to contribute to the overall resilience of communities.
The World Bank has recently updated its estimate of the global finance gap for water and sanitation. To achieve the Sustainable Development Goal targets for universal access to safely managed water supply and sanitation by 2030, countries will need to spend around $140 billion more per year. That’s almost three times the current levels of annual spending.
And the costs of providing water and sanitation services are only going to rise due to climate change, also inherently linked to water. However the costs of inaction are far worse. Expected losses from water-related climate events alone are estimated by Global Water Intelligence at $180 billion a year. Most of the damage being caused by increased frequency and severity of storms, floods and droughts.
An easy way to frame the discussion is to think about four major areas where the changes in climate negatively impact drinking water and sanitation:
As the World Bank’s Funding a Water-Secure Future report highlights, there is a critical need for greater capital investment, or capital expenditure (CapEx) to tackle all these threats. But that’s not all. Climate finance needs to have a far more holistic approach. For instance: most risk management measures need more data on water use, hydrology and tidal changes. We also need more targeted regulations on the reuse and safe disposal of wastewater along with broader initiatives to promotes a circular economy in water management.
Climate finance needs to pay for the costs of developing regulations, including the meetings and studies needed to establish them, for providing the incentives to reuse waste, for instance. Some of these discussions are already taking place at the European level, but still lacking in most nations.
There are other areas where there is a need for climate finance and, to date, insufficient progress. The most critical seem to be:
When colleagues in the sector talk about climate finance, they tend to point to climate funds. However, there are many sources of climate finance: public and corporate instruments and households’ own investments. At present, the largest sources of water-related climate finance are in fact bonds and household investments, followed by concessional and commercial finance from finance institutions.
For low and middle-incomes countries, it’s important that loans for climate action should be concessional, cheap, untied and easy to access.
A Reuters special report examining climate financing, explains how loans are offered to low- and middle-income countries at market rates and often with conditions that require indebted countries to purchase materials and technical assistance from high-income lending countries like Japan and the European Union. While this can be spun as part of a $100 billion per year commitment from wealthy nations to supporting poorer country’s climate adaptation, the report concludes that debt payments limit the ability of poor and middle-income countries “to invest in climate solutions, while extreme weather causes severe economic losses, often leading them to borrow more.”
If countries borrow more, and don’t have other sources of revenue, then their small public budgets for the water sector don’t have much chance to increase. It won’t help countries to sustainably triple their water and sanitation budgets.
“Additionality” is a crucial part of the jargon of climate funds and refers to the estimated additional costs required to make a service climate resilient and/or low carbon. This is the part of an intervention that can be directly attributable to climate change and is the part that is eligible for financing through climate funds.
For water, sanitation and hygiene projects, this means that while the costs of drilling new boreholes to expand coverage are not covered by climate funds, the estimated costs of the additional depth drilled due to lowering water levels and future projections might be eligible. Similarly, the full construction costs of new sanitation facilities would not be funded, except for the aspects that ensure facilities are climate resilient.
The rules and the bureaucracy to access climate funds, which need expensive (often northern) consultants to navigate, can be daunting. They need big investments which might not be rewarded at the end and they can make projects more complicated. Furthermore, communities have little chance at adapting to climate if they are lacking essential services to begin with. With many other sources of climate finance that are larger and more accessible than climate funds, at the moment they can only play a niche role.
Climate finance (including climate funds) needs to be part of the solution and where there are gaps, it needs to fund strengthening water and sanitation systems and not create artificial barriers between what is a development problem and what is a climate problem and then only fund the latter.
Not all sources of climate finance are created equal. We have concerns about tying countries to complicated new financing mechanisms which increase debt loads. We could concentrate our efforts into understanding the constraints of access to existing cheaper climate finance such as national development banks and their local currency instruments.
We have other concerns about climate funds. They may not increase debt being mainly grant based, but their small volume, which does not obviously match the large finance gap of the sector, and the high costs and barriers to access suggest they will only play a limited role in the foreseeable future. They will first need to get simpler and cheaper to play a major role in helping the water and sanitation sector fight climate change.
At the same time, we welcome the trend to increasingly badge a larger amount of the necessary and transformative finance in water, such as investments in changing water and sanitation systems or enabling environments. This needs to continue and grow. After all, water money is nearly always climate money.
The benefits of resilient water and sanitation services as are also a powerful argument for growing climate finance investments in water and sanitation. National development banks could do much more. But they need to hear the arguments, and we need to be better at making them. We all need to become more literate in, and fluent in talking about, the overall climate rationale for the water sector as well as key concepts such as resilience, adaptation, mitigation and above all deconstructing and arguing what should be considered an additionality.
For an introduction to climate finance in the sector see session 7 of the free Advanced Finance Course available on the WASH Systems Academy and UNICEF's Agora. We will also soon be launching Climate-Resilient WASH Services course, sign up to be updated.
At IRC we have strong opinions and we value honest and frank discussion, so you won't be surprised to hear that not all the opinions on this site represent our official policy.