Water-related investments are instrumental in advancing long-term development, not only by enhancing water security but also by supporting other economic sectors, including agriculture, industry, energy, health and education. Underinvestment in water security is expected to result in economic losses equivalent to an average of 8% of global GDP by 2050, according to the Global Commission on the Economics of Water. In low-income countries, losses could reach 10% to 15% of GDP. Each dollar invested in water and sanitation can generate approximately USD 4 in benefits through improved health, education, food security and environmental outcomes, as estimated by the United Nations.
Assessing the durability and effectiveness of water-related investments is challenging, as methodologies and appropriate metrics vary across water sub-sectors and many associated benefits cannot be readily quantified. Relevant indicators differ by investment type, ranging from operational efficiency metrics for piped water systems, to flood exposure and inundation reduction measures for flood protection projects, and hydrological performance metrics for nature-based solutions, among others.
The long-term viability of water-related investments remains an area of concern across both OECD and non-OECD countries. A persistent undervaluation of water-related benefits by public and private actors constrains the sector’s revenue base. Combined with the tendency to maintain tariffs artificially low, this often prevents water operators to fully cover operational and maintenance costs and lead to operational inefficiencies. Where the renewal rates of water assets are known, they often reflect a significant backlog of investment in operation and maintenance for existing assets.
Furthermore, financial and institutional incentives frequently prioritise project size and bankability rather than long-term impact, resulting in investments that may be technically viable but are not always well adapted to future water stress or local needs. Investment decisions are commonly based on narrow economic indicators, with limited attention to distributional effects and long-term vulnerabilities.
Debates on mobilising finance for water-related investments have generally focused on the volume of capital needed to close the financing gap. Yet, the quality, structure, and purpose of the financing deployed is as critical as the volume of resources mobilised. This underscores the need for an examination of water financing models and their potential to facilitate long-term, impactful investment outcomes.
This report aims to help policymakers, financial institutions, and investors understand how the structure and design of financing models impact the durability of investments, and how underutilised financing sources, characterised by growing demand for impact-driven assets, can be mobilised more effectively.
Without purporting to be exhaustive, the authors have selected four models or approaches that can meaningfully advance the research agenda on mobilising finance for water and enhancing the viability of financing and investment practices in the sector, specifically through:
Mobilisation of underutilised funding and financing pools that are increasingly seeking impact-driven investment opportunities, with particular emphasis on bond finance instruments (Chapter 2) and Islamic finance mechanisms and modalities (Chapter 3).
Allocation and structuring of financial resources to ensure the delivery of long-term impactful outcomes, with a focus on results-based financing mechanisms (Chapter 4) and public–private partnership models (Chapter 5)
Bond finance offers significant potential to support water-related investments. Green, social and sustainability (GSS) bonds have gained momentum, but their application to freshwater investments remains limited, requiring targeted efforts to increase visibility and impact. Blue bonds, while growing, are primarily directed towards ocean-related projects, underscoring the need to deploy such instruments for freshwater investments. While bonds labelled blue or water have seen notable growth, they still represent less than 1% of the global GSS bond market, according to data from the Climate Bonds Initiative. Chapter 2 explores how to harness this untapped potential and leverage impactful investment for water at scale.
Islamic finance (IF) offers considerable yet underutilised opportunities for financing water investments. IF has undergone substantial and sustained growth over the past two decades, with an average annual growth often surpassing 10%, emerging as a resilient and expanding component of the global financial system. Despite this steady growth, water investments remain a marginal share of IF. Building on recent evidence, and acknowledging challenges and practical limits, Chapter 3 highlights IF’s strong potential for water investment, driven by growing impact-oriented capital and the fact that its underlying principles, particularly risk- and profit-sharing and asset-backed finance, are particularly well-suited to the specific characteristics of water projects, making it a valuable model for structuring investments, including public-private partnership and innovative financing models.
Results-based finance is gaining traction as a promising approach to help improve the quality of water investments, by linking finance more directly to outcomes and performance. Unlike traditional models that focus on inputs or upfront disbursements, RBF links disbursements to independently verified outcomes, promoting accountability and aligning funding with measurable improvements in service delivery, performance or policy. RBF has been deployed for results across the water sector, from rural sanitation to stormwater management, with successful outcomes but limited scale. Whilst initial RBF models focused on rewarding output-level results, such as the number of new water supply connections, there has been a gradual integration of outcome-level results relating to long-term viability of services in the definition of results. Chapter 4 examines the use of RBF contracts in the sector and their potential to improve the lasting impact of water investments.
Finally, there is significant potential to enhance the durability and effectiveness of investments structured through public-private partnership (PPP) models. Failure to adequately structure PPP contracts can lead to widespread environmental and social damage and financial loss for the public sector. Chapter 5 examines models, innovative instruments, and policy incentives designed to mitigate potential adverse outcomes in PPPs, ensure balanced allocation of risks and benefits between public and private actors, and support the achievement of policy outcomes, including long-term network resilience, environmental outcomes, as well as equitable and affordable access.