Financing Water Security

6. Summary of key findings and policy recommendations

Abstract

This chapter summarises the key findings and policy recommendations arising from the analyses conducted within the framework of this report. This includes key findings and recommendations on: i) leveraging bond finance for water investments; ii) mobilising Islamic finance for water investments; iii) deploying results-based finance in the water sector: use, rationale and conditions for success; and iv) revisiting public-private partnerships for water and sanitation: balancing risks and focusing on results.

6.1. Leveraging bond finance for water investments

Key findings

• Bond finance holds significant potential for mobilising capital to support water-related investments. The mobilisation of capital from a broad investor base, combined with medium- to long-term repayment terms, makes it in principle well-aligned with the specificities of water-related investments. Additionally, bond finance is gaining prominence globally, which represents a timely opportunity for water investments.

• Investments in water through bonds is rising but it still represents a marginal share of GSSS bonds, which itself represent a marginal share of the global bond market. Water- and blue-labelled GSSS bond issuance rose from USD 1 billion in 2022 to USD 6.4 billion in 2023, before reaching USD 4.7 billion in 2024. Despite this recent increase, water- and blue-labelled bonds account for less than 1% of total GSSS bond issuance, which reached USD 1.1 trillion in 2024. In parallel, bonds with at least one mention to “water” or “blue” in their use of proceeds reached USD 290 billion in 2024, which means that a large proportion of water-related investments financed through bonds do not carry a “water” or “blue” label.

• The expansion of bond finance for water is being driven by various enabling factors, such as growing investor demand, increasingly stringent Environment, Social, Governance (ESG) criteria, the growth of the GSSS bond market and supportive policies. Similarly, several types of bonds (including corporate, sovereign and municipal bonds) are gaining traction and are likely to continue to grow in the coming years.

• However, several challenges persist, such as difficulties in clearly tracking the allocation of proceeds in multi-labelled bonds, consequent limited visibility into investments supporting water and related sub-sectors, investor concerns about revenue stability, complex regulatory environments and underdeveloped local capital markets in many developing countries.

• Unlocking greater investment in water security and freshwater through bonds can be supported by the development of guidelines and standards for the issuance such bonds, the development of water finance taxonomies and the strengthening of impact reporting. Improving risk-return profiles through credit enhancement mechanisms, innovative financing mechanisms (such as revolving funds) or economic incentives (such as tax exemptions in the United States) can also help attract investors.

6.1.1. Policy recommendations

• Support the structuring of bond instruments that meet investors’ demands, notably by:

  • Strengthening the capacity of issuers, particularly public utilities and municipalities, and backing them to enhance their credit rating. Issuers with strong credit ratings are generally more attractive to investors, as such ratings indicate lower default risk and enable access to capital on more favourable terms.

  • Supporting the aggregation of diversified portfolios of water-related projects to facilitate the provision of large, market-standard issuances with long tenors and high-grade credit profiles. Scale is a determining factor for investor interest and bond market viability. Project consolidation and pipeline development is key in meeting investor expectations and facilitating access to capital markets.

  • Deploying sovereign or sub-sovereign credit-enhancement instruments, such as guarantees, insurance mechanisms and first-loss tranches, to improve the creditworthiness of water-sector investments.

  • Positioning water bonds within the context of adaptation, resilience and biodiversity to strengthen their appeal to investors.

• Ensure that taxonomies defining “sustainable activities” are comprehensive and inclusive of all water-related investments that support environmental and social objectives, including freshwater-related investments. While taxonomies can effectively guide finance toward durable projects, their impact depends on how criteria and thresholds are set. Narrow definitions risk excluding critical investments, such as expanding water access to underserved communities, water conservation, wastewater treatment, irrigation and ecosystem restoration that may not meet strict technical criteria but are essential for long-term viability. Broadening the scope to reflect multiple environmental goals, including water resource protection and equitable access, will enhance their effectiveness and alignment with real-world needs. These enhanced taxonomies will improve the precision of activity classification and improve clarity and consistency in reporting. By doing so, they will promote greater transparency, comparability and investor confidence, ultimately mobilising more effective capital flows toward long-term water investments.

• Develop clear regional and national standards and frameworks dedicated to water bonds, to structure and scale the market, aligning with recognised international standards and taxonomies (e.g. EU Green Bond Standard) and supported by independent second-party opinions (e.g. Shades of Green by Cicero and now Standards & Poor). Although most issuers align their bonds with the principles developed by the ICMA, several local standards are emerging at regional or national levels. Country experiences show how national finance frameworks can provide clarity for issuers by rigorously classifying water-related sectors and investments, helping to ensure transparency, reducing greenwashing risks and building investor confidence, thereby attracting more capital toward investments in water security.

• Mandate robust impact reporting for all water-related bonds (e.g. detailed annual reporting on environmental impacts such as reduced flood risks or improved water quality) and independent verification with quantitative metrics to build investor confidence and facilitates comparability across issuances. Drawing on best practices from disclosure regulations and certification standards, issuers should disclose reliable, consistent and comparable information. In parallel, promote methodological consistency to improve market transparency. While labelled issuance remains limited, broader estimates that include any mention of water in use-of-proceeds suggest much larger volumes, creating confusion about actual market size. Consistent and transparent reporting of both labelled and water-referenced bonds is essential to provide a balanced market view. Aligning and explaining methodologies is essential to ensure reliable data, support informed decision-making and avoid misleading signals on capital flows.

• Recognise the complementary roles of labelled blue bonds and water-referenced bonds in mobilising capital for the sector. The choice of the bond category is context-specific and critical in securing investor interest. In certain regions, bond instruments are more commonly classified as green rather than blue, primarily due to higher levels of standardisation; however, in other contexts, categorising them as blue may appeal to thematic investors. The emergence of blue bonds presents an opportunity to direct capital more explicitly towards water-related outcomes, provided consistent standards and robust taxonomies for investments in water security are developed.

• Strengthen the engagement of public development banks, including MDBs, DFIs, and regional or national development banks, in the water and blue bond markets. These institutions are well-positioned to derisk water investments and catalyse private capital by providing credit guarantees, co-investment structures, direct bond purchases and concessional finance. However, their involvement in water-focused bond issuances remains comparatively limited relative to sectors such as energy and transport infrastructure. Strengthening their engagement in water and blue bond markets could involve:

  • deploying targeted credit-enhancement instruments

  • acting as issuers to leverage capital or anchor investors to strengthen market confidence

  • establishing dedicated facilities to support water and blue bond issuance

  • supporting governments in designing and implementing regulatory and policy frameworks conducive to the issuance of water-related bonds

• Support the development of subnational bond markets: Subnational governments are often responsible for service delivery but face obstacles in accessing capital markets, including difficulties in achieving the critical mass required for benchmark-sized issuance. Developing subnational bond markets would entail:

  • supporting municipal bonds by establishing clear legal and regulatory frameworks that enable local authorities to issue debt efficiently and transparently and that enhance investor appeal (including tax incentives)

  • issuing bonds in local currency to enable municipalities and utilities to tap into domestic investor bases, such as pension funds and insurance companies and to reduce exposure to exchange rate risk, thereby improving predictability for both issuers and investors and supporting the development of domestic capital markets

  • strengthening the capacity of issuers, particularly public utilities and municipalities

  • developing platforms to aggregate small/medium-scale investments and develop pipelines to meet investor expectations and facilitate access to capital markets

• To address SLBs bottlenecks, support technical assistance, develop local sustainability guidelines, select ambitious KPIs and targets, strengthen data capacities, improve bond design and scale market transactions in developing countries (OECD, 2024[1]).

6.2. Mobilising Islamic Finance for water investments

Key findings

• The Islamic Finance (IF) market has grown substantially over the years. The IF industry was valued at USD 3.4 trillion as of 2023 (IFSB, 2024[2]), while it was representing USD 200 billion in 2000. This growth has been observed in both Muslim-majority countries, such as Saudi Arabia, Malaysia and the UAE, and other jurisdictions including the UK, Luxembourg and Hong Kong.

• Despite this steady growth, water investments still represent a marginal share of IF. For instance, water represents 0.2% of Islamic Banking investments according to the Prudential and Structural Islamic Financial Indicators (PSIFI) dataset of the Islamic Financial Services Board (IFSB). Similarly, the share of water in Islamic development finance is around 2.3%, including hydro-electric powerplants and agricultural water resources (classified under the energy and agriculture sectors, respectively) according to the Total Official Support for Sustainable Development (TOSSD) dataset.

• This is due to some obstacles to the expansion of IF in the water sector, which include relatively limited market size, depth and liquidity in some countries, regulatory fragmentation across jurisdictions, limited awareness and understanding of IF mechanisms, and lack of reporting and data for its use in sustainable and water investments.

• Opportunities to leverage IF for water investments include strengthening policy frameworks, international coordination and standardisation, leveraging promising Islamic finance instruments, mobilising private investment, strengthening data systems and reporting.

• IF principles and instruments have synergies with the specific needs of water investments. Harnessing the potential of Islamic finance for water is promising, not only due to the substantial volume of capital available, but also because of the underlying principles and specificities of financing models which can – to some extent – be source of inspiration of viable water financing models, including PPPs and innovative financing structures, most specifically with regards to transparency and accountability, financial resilience, asset-backed mechanisms and risk sharing.

6.2.1. Policy recommendations

• Leverage the untapped potential of Islamic finance instruments and models to mobilise additional capital for water investments, in particular:

  • Green sukuk, which can attract both Shariah-sensitive and impact-focused investors to finance large-scale water infrastructure.

  • PPP models integrating IF, including through parallel financing which blends Islamic and conventional financial instruments to expand capital availability for large-scale water projects.

  • Shariah-compliant commercial finance and Islamic blended finance. International banks with Islamic windows could act as catalysts for integrating responsible investment practices into commercial IF, building on the experience of conventional financing windows.

  • Islamic social financial instruments, at national level but also at regional or international level, including zakat (mandatory almsgiving), waqf (endowments), sadaqah (voluntary charitable giving) and qard hasan (benevolent zero-interest loans), which primarily provide funding to underserved populations.

• Commission in-depth studies on the specific features of asset-backed and asset-based financing mechanisms and how it can inform and strengthen conventional financing models to improve the long-term viability of water-related investments, particularly with respect to transparency, accountability, financial resilience and balanced risk sharing.

• Guide the development of IF for water investments through targeted legal, regulatory and economic policy measures. This includes the creation of dedicated supervisory units within financial authorities, the adoption of international Shariah-compliant standards (e.g. AAOIFI,1 IFSB2) and the development of guidelines for green Islamic finance products. Measures such as economic incentives, risk mitigation tools, reasonable offtake agreements and partial asset ownership can support private sector engagement. Governments can also encourage IF institutions to align operations with socio-economic and environmental considerations by strengthening impact assessments, improving transparency and promoting financial instruments that deliver measurable impact.

• Advocate for the creation, by international standard-setting bodies, of harmonised standards for IF products that incorporate water investment criteria, among other objectives. These standards should define both ESG and Shariah compliance requirements for water projects, specify the eligible types of infrastructure and require transparent impact reporting. Clear, sector-specific provisions can lower transaction costs, improve market comparability and strengthen investor confidence in water-focused IF instruments, including green sukuk.

• Support the setting, by central banks, of sector-specific standards to scale IF for water investments. Building on initiatives such as the CIBAFI3’s 2022 Sustainability Guide, central banks, exemplified by Jordan’s Green Finance Strategy (2023-2028), should integrate sector-specific guidance aligned with these principles to expand green IF instruments. Additionally, central banks developing such frameworks, like Bangladesh’s 2020 Sustainable Finance Policy, should explicitly incorporate water-focused IF to leverage its growing market share and enhance environment and water-related investment outcomes.

• Support enhanced data collection, reporting and monitoring to track IF flows into water investments. Governments, along with international organisations, public development banks and standard-setting bodies, can improve consistency in data collection, reporting and analysis. Improved availability and sharing of data on IF flows for water investments would enable a clearer understanding of current financing patterns, support the identification of opportunities for scaling and strengthen the evaluation of the effectiveness and impact of IF allocations, thereby enhancing investor confidence and interest.

• Create a framework and/or a technical assistance facility aimed at developing and implementing innovative Islamic finance instruments for sustainable water investments. It would support the development of tailored Islamic finance instruments to address water challenges (such as scarcity, non-revenue water, rural supply), providing a scalable framework to guide project preparation and financing.

• Consider establishing an international qard hasan (benevolent zero-interest loan) water fund to provide Shariah-compliant concessional financing for water infrastructure projects, which could for instance be predominantly funded by higher-income regions to support lower-income economies. This mechanism would promote financial inclusion and ensure the viability and affordability of essential water services, while enabling high-income countries to advance their international financing commitments.

• Promote the integration of water security at the heart of international debates and action plans on leveraging IF for economic development, as it is currently often overlooked. For instance:

  • Enhance collaboration between Arab and OECD Development Assistance Committee (DAC) donors to support the use of IF instruments for development. Both Arab and DAC donors have an opportunity to demonstrate leadership in this area, leveraging their expertise to promote effective implementation.

6.3. Deploying results-based finance in the water sector: use, rationale and conditions for success

Key findings

• Results-based finance (RBF) links financial rewards or penalties to a set of pre-agreed results. It can be appealing to funders looking to maximize impact and value for money.

• RBF has been deployed for results across the water sector, from rural sanitation to stormwater management, with successful outcomes.

• RBF can be embedded in grant and repayable finance mechanisms and has been used in contracts with private service providers as well as public sector organisations.

• Whilst initial RBF models focused on rewarding output-level results, such as the number of water supply connections, there has been a gradual integration of outcome-level results relating to services’ viability.

• RBF seeks to achieve results by disrupting “business-as-usual”, whether by incentivising organisations to increase service levels (increasing coverage rates in hard-to-reach areas or improving quality of services) or to adopt innovative environmentally responsive technologies and operational processes. RBF can also be used to incentivise institutional reforms, which requires strong organisational buy-in.

• The introduction of RBF models should be carefully assessed against potential limitations and challenges, which include: (i) design and implementation costs (particularly for setting commonly agreed performance metrics and for the verification agent); (ii): the capacity of funding recipients, which may require providing them with technical assistance to mitigate the risks of failure; (iii) the risk of service providers’ relying on results-based grants rather than identifying opportunities for efficiencies and more stable sources of funds; (iv) replicability at scale: few large-scale development finance organisations have adopted results-based contracting, limiting the adoption of this funding modality at scale.

• Dedicated funding facilities that have adopted results-based payment structures offer the opportunity to pool funding from different sources and could help overcome funders’ internal barriers to RBF. Indeed, most of the institutions that have implemented RBF mechanisms have set up pilots within specific projects, without adopting RBF as institutionalised financing instruments (as procedures differ from standard processes). Dedicated financing facilities with established, standardised procedures could facilitate broader adoption of RBF mechanisms.

6.3.1. Policy recommendations

• Develop guidance to funders on where, when and how to apply RBF and for what policy outcomes to facilitate the adoption of the instrument. Many funders (and implementers) are unfamiliar with RBF or require additional guidance to embed RBF in their projects and programmes. A guidance document would consolidate knowledge on the multiple instruments (grants, loans, bonds) that can be designed and deployed using an RBF approach for water-related investments, including flood protection, water conservation as well as water supply and sanitation. Such guidance document would also consolidate knowledge on the type of metrics that can be used to measure infrastructure development and environmental and social outcomes. The guidance would include insights on the pros and cons of RBF and the conditions required to introduce RBF successfully.

• Promote transparency on the costs of designing and implementing RBF. While substantial evidence exists regarding the design and effectiveness of RBF schemes in achieving targeted outcomes, considerably less information is available on the costs associated with managing these schemes, particularly from the funder’s perspective. Because RBF arrangements typically require rigorous performance monitoring and verification processes, they may entail additional administrative and transaction costs for funders. To date, however, few initiatives promote data sharing on the costs of RBF programmes. Improved availability of such data would enable funders to more accurately assess the net benefits and value proposition of RBF models. Enhancing transparency around the full cost profile of RBF schemes will require the development of a commonly agreed cost-accounting methodology (including clear guidance on which cost components should be captured during design and implementation) as well as the establishment of data-sharing mechanisms, such as dedicated platforms and technical working groups.

• Commission studies on the cost-effectiveness of RBF models. Additional research is required to generate robust evidence on the cost-effectiveness of RBF mechanisms, particularly in comparison with traditional input-based funding models. Currently, empirical evidence on the relative cost-effectiveness of RBF versus alternative financing modalities remains limited. Although the initiatives reviewed in this report indicate that RBF schemes can achieve their intended outcomes, data on the full costs associated with the design, implementation and administration of these contracts are scarce, constraining assessments of their overall economic value. A rigorous cost-effectiveness evaluation would necessitate enhanced transparency regarding the total programme costs of RBF schemes. Such studies should be based on sound methodological approaches, including the use of appropriate comparators and the comprehensive identification, measurement and valuation of all relevant costs and outcomes.

• Develop credible methodologies to measure operational long-term viability, effectiveness and impact for complex infrastructure. Operational and financial viability (beyond infrastructure availability) is a type of result that is potentially complex to measure, especially in large-scale infrastructure. In piped water supply projects, such results call for measuring the continuity of supply, non-revenue water or energy efficiency, among others. In flood protection projects, they may imply measuring the reduction in flood-prone areas or, in nature-based solutions, the volume of run-off water diverted from grey infrastructure. Scaling-up the use of RBF in these areas require rigorous methodologies to define the results to be achieved (and measured) and specific indicators of success (or failures), including clearly delineated geographical perimeters, sampling methods and reporting/verification requirements. Whilst each project or programme is unique and there cannot be a one-size-fit all approach, developing commonly agreed results measurement methodologies could contribute to reducing the design costs of RBF schemes and to increasing investors’ confidence.

6.4. Revisiting public-private partnerships for water and sanitation: balancing risks, focusing on results

Key findings

• A key challenge in designing PPP transactions is to balance the risks between private and public actors to ensure they deliver policy outcomes whilst retaining value for money for the public sector.

• Recent Build-Operate-Transfer (BOT) and concession contracts in the water sector demonstrate that PPPs can be deployed to achieve policies related to investment mobilisation as well as viable, inclusive and efficient water services. For instance, in the State of Rio (Brazil), PPPs are deployed to achieve universal water and sanitation services coverage. In Jordan and India, governments are calling on the private sector for improving treatment services beyond the construction phase. In France, environmental vulnerabilities are leading some municipalities (Lille municipality, for example) to embed new performance measures in PPP contracts related to water consumption efficiencies.

• Such partnerships come with risks, but contracts can be structured to mitigate risks for both parties. All contracts can embed clear and measurable results for which contractors are accountable. BOT-type contracts can incentive performance by embedding a results-based funding element (tying payments from the public sector to the achievement of results, at least partially). In some contexts, concession contracts for large service areas that include different population income levels, can benefit from blended finance to balance financial risks and incentivise private sector investments.

• Enabling conditions for successful PPP transactions include: (i) clear government policies backed by legal provisions, particularly on private sector participation conditions, contract structures, tariffs and service level performance; (ii) strong public sector capacity for contract preparation, negotiation and management (iii); stakeholder engagement, including with citizens; (iv) readiness to deploy blended finance; and (v) a robust private sector, ready to take on technical and financial risks.

6.4.1. Policy recommendations

• Build capacity of public sector institutions for designing and managing balanced PPPs. Designing PPPs that ensure a more equitable balance of risks and rewards requires, first, aligning expectations between the contracting parties. In many contexts, PPPs are still associated with the promise of large private investments with little costs for the public side, creating a mismatch between public sector's expectations and private investors’ perception of water-related investments as high risks and low return potential. Building the capacity of public sector institutions can help bridge this gap. Capacity building should focus on the different types of PPP structures, the risks involved (for both parties) and the mitigation measures as well as the process for a PPP project preparation. In addition, capacity should also be built at the organisational level to mandate and equip institutions on the design and management of PPPs, including contract design and monitoring.

• Develop detailed PPP projects feasibility assessments to identify all potential risks, mitigation measures and trade-offs. Where policy is favourable to PPPs, governments should invest in detailed feasibility studies that combine technical appraisal to assess investment needs as well as institutional and financial assessments. Such feasibility studies are critical to turn policy into practice, as they provide the basis for assessing all potential risks (from environmental to financial risks), related mitigation measures and the need for trade-offs. For example, where feasibility studies indicate that existing tariffs are too low to enable returns on investment for the private sector, specific measures can be introduced to lower investment costs (through measures such as providing land or existing public assets, financing project preparation, offering direct capital contributions or viability gap funding) or borrowing costs (for example, through the provision of concessional finance or guarantees).

• Gradually initiate the regulatory reforms required to enable balanced PPPs. PPPs require enabling regulatory frameworks, from clear environmental and water regulations essential to incentivise performance, to appropriate economic regulation that address the value of water and provide a level playing field for potential investors in the context of increased environmental risks. A reform agenda should be set-up to gradually address any regulation gap.

• Engage with the private sector to create trust and build awareness of water-related investment opportunities. As governments engage in policy and regulatory reforms to enable PPPs for water and sanitation, they should engage with potential private operators and investors to raise their awareness of government policy and understand their perceived risks. This engagement, upstream of the PPP project, will contribute to designing appropriate risk-sharing structures and mitigation measures.

• Engage with local financial structures and channels to enable the deployment of blended finance. Global experience has shown the critical role of local financing institutions in financing PPP projects, including local commercial banks and public development banks. These institutions can provide local currency lending, which can be backed by credit guarantees. Public development banks are particularly well-placed for enabling blended finance through the provision of concessional finance in PPP projects with significant societal and environmental returns.

• Address political risks through citizens' engagement. Governments should ensure citizens' representations in national and local fora on forthcoming and ongoing PPP projects, through water consumer associations and engagement with elected officials. Specific measures should be in place to enable citizens to voice their perceived risks and the government to act upon and set-up adequate mitigation measures.

References

[2] IFSB (2024), Islamic Financial Services Industry Stability Report 2024, https://www.ifsb.org/wp-content/uploads/2024/09/IFSB-Stability-Report-2024-8.pdf.

[1] OECD (2024), “Sustainability-Linked Bonds: How to make them work in developing countries, and how donors can help”, OECD Development Perspectives, No. 44, OECD Publishing, Paris, https://doi.org/10.1787/7ca58c00-en.

Notes

← 1.  Accounting and Auditing Organisation for Islamic Financial Institutions: international not-for-profit organisation primarily responsible for development and issuance of standards for the global Islamic finance industry.

← 2.  Islamic Financial Services Board: an international organisation committed to promoting the soundness and stability of the Islamic financial services industry by developing international standards for the regulation and supervision of the industry.

← 3.  General Council for Islamic Banks and Financial Institutions: provides policy advocacy, capacity building and best practice guidelines to support Islamic banks and financial institutions worldwide.