Institutional push: Water embedded in new natural capital agreements

We take a moment to reflect following last week’s World Water Day, considering why water is increasingly emerging on the agenda for corporates, banks, investors, and regulators, and whether enough is being done to embed water in natural capital agreements.

A key reason why these issues have come to the top of the agenda for regulators, investors, businesses and other stakeholders, is that over the past year in particular, there have been specific developments related to commitments to both report on and protect water.

Most recently, the new UN 2021 high seas treaty, officially known as the “Treaty on the Conservation and Sustainable Use of Marine Biological Diversity of Areas Beyond National Jurisdiction”, aims to protect marine life and ecosystems in the high seas, which are the areas of the ocean beyond the jurisdiction of any country. The treaty establishes a framework for the conservation and sustainable use of marine biodiversity including the establishment of marine protected areas, the sharing of benefits from the use of marine genetic resources, and measures to address illegal, unreported, and unregulated fishing.

The treaty followed the Kunming-Montreal Global Biodiversity Framework, from December’s Biodiversity COP, and includes global goals and targets aimed at protecting and restoring nature for current and future generations; signed by 195 countries. The deal agrees to protect at least 30% of coastal and marine areas by 2030 (known as “30-by-30”), thereby seeking to reverse natural ecosystem decline, through initiatives such as:

  • Maintaining, enhancing and restoring ecosystems, including halting species extinction and maintaining genetic diversity on land and in water
  • Sustainable use” of biodiversity: ensuring that species and habitats can provide the services they provide for humanity, such as food and clean water

Separate from these government and non-governmental organisation (NGO) focused developments, the beta framework from the Taskforce on Nature-related Financial Disclosures (TNFD) includes water as the key driver and ‘realm’ for its disclosure framework. The (currently) voluntary guidelines are intended to support companies to report on their positive and negative impacts on land / ocean / freshwater resulting from their operations, supply chains and portfolios. 

Investments: $23 trillion required by 2050

In a recent paper by the Organisation for Economic Co-operation and Development (OECD) [1], it was estimated that for the world to achieve ‘universal and equitable access to safe and affordable drinking water for all’ by 2030, the present value of additional investments would need to be $1.7 trillion by 2030. This is of course only a small part of the broader water agenda with estimated financing needs of water infrastructure ranging from $6.7 trillion by 2030 and $22.6 trillion by 2050 [2]. Figure 1 shows current levels of financing going into water infrastructure projects and whilst there was a notable increase in 2021 ($50 billion), the fall back in 2022, as a result of investors re-prioritising financing to alternate infrastructure projects (namely around energy security), highlights the challenges of consistently directing capital to these projects.

Figure.1: Global Infrastructure Financing for Water Sub-Sector (USD Billion)

Source: Infralogic

Blue Bonds: part of the solution

Sustainable debt has a role to play in supplementing private capital financing of water-oriented CAPEX as well as incentivising behavioral change in the real-world economy. Investors can invest in companies that are supporting water infrastructure and other related projects via use-of-proceeds instruments or sustainability-linked instruments with water-related key performance indicators (KPIs) and targets. There have been very few blue bonds (bonds whose proceeds fund environmentally friendly water projects). In the past two years only 12 issuances have been made with a value of $2.856 billion, according to Santander [3]. While the Seychelles, the first country to issue blue bonds (10-year bonds in 2018, raised $15 million), the supply of blue bonds has since come from both public administrations and private companies. We expect that with these new institutional foundations in place, water-related financings will come to market. There are specific sectors where either use-of-proceeds would make sense: for example, water and waste management, energy production, and maritime transport all potentially have activities that require CAPEX that align to the EU Taxonomy.

Blue KPI-linked bonds

Besides use-of-proceeds, there is also potential to issue debt linked to water-related targets. NatWest’s analysis shows that only 17 sustainability-linked bonds raising over €7.7 billion since 2021, have included at least one such target. For the sustainability-linked approach, sectors that use water in production such as mining, semiconductors, and building materials can develop and utilise targets around both water efficiency in production and quality metrics is water disposal. The KPIs included have focused on water withdrawal and water use, with targets focusing on reducing water consumption. Most of the measurements are intensity-based for issuers in the consumer food and beverage sector (e.g., water consumption per unit produced at distilleries), but industrial issuers usually use absolute reduction targets. For example, recent issuances from companies like Pernod Ricard, which issued a sustainability-linked bond focused on water consumption alongside greenhouse gas (GHG) emissions Scope 1 and 2. With sustainability-linked financings in particular, water can be a challenge due to the ‘local’ nature of the measurements and the difficulty in comparing issuer targets and metrics. 

Sufficient momentum building?

Currently, investors who focus on water as a theme are looking ‘issuer-sector’, rather than specific use-of-proceeds, targets, or other specific financing considerations. Asset managers such as Fidelity and Pictet have set up equity funds targeting water companies. However, with the potential increased adoption of TNFD as well as increased awareness of water-related issues (raised by COP27 and other UN initiatives) investors, lenders and other stakeholders will be able to effectively support and evaluate these types of financings. To truly kickstart the blue asset class, all of these stakeholders will need to jump into the (proverbial) pool.


[1] “Financing Water: Investing in Sustainable Growth”, OECD

[2] For a compilation of estimates of investment needs, see: Winpenny J. (2015), Water: Fit to Finance, World Water Council, OECD

[3] Santander: Blue bonds: the value of conserving marine ecosystems

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