12

Climate finance:
Financial and economic
considerations

Aerial view of sewage plant treatment in Wrocław (Poland).

 World Bank | Shanna Edberg and Diego Juan Rodriguez
With contributions from: Francesca Bernardini, Sonja Koeppel and Hanna Plotnykova (UNECE);
Chiara Christina Colombo and Danielle Gaillard-Picher (WWC); Todd Gartner (WRI); Amarnath Giriraj
(IWMI); Merylyn Hedger (ODI); Marianne Kjellén (UNDP); John Matthews and Alex Mauroner (AGWA);
and Lesley Pories (Water.org)

This chapter addresses the current state of water and climate finance, the costs of
inaction versus the benefits of action, and several ways to access climate finance
flows to improve water management as well as water supply and sanitation services,
while synergistically mitigating and/or adapting to climate change.

12.1 Overview
Water resources management is currently underfinanced and in need of greater attention from
governments. Climate change, as described in earlier chapters, threatens water resources management,
increases the risk of weather-related events, and affects the availability and quality of water and sanitation
services around the world. However, it also presents an opportunity: to leverage climate finance
mechanisms to provide additional funding to improve water management, and by doing so improve safe
water and sanitation access through actions that also mitigate and/or increase resilience to climate
change, often providing other co-benefits at the same time.

The growing amount of global attention being paid to climate change offers
Water resources an unprecedented opportunity to put water in the spotlight of sustainable
management is currently development financing efforts. Connecting water to climate change could allow
underfinanced and in need the international community to leverage additional resources to address the wide
of greater attention from overlap between climate and water challenges, and thus improve the outlook
of meeting the overall water management goals as outlined in Sustainable
governments
Development Goal (SDG) 6.

12.2 Why connect water and climate finance

12.2.1 The state of water financing
Current levels of financing are inadequate to reach the international community’s goal of universal
availability and sustainable management of water and sanitation, as embodied in SDG 6. In order to meet
the first two targets of SDG 6 – access to safe water, sanitation and hygiene (WASH) services for all
by 2030 – capital investments must reach US$114 billion per year. This is about three times the current
annual capital investment levels in WASH. In addition to the initial capital inflows, significant resources
are required to operate and maintain water and sanitation infrastructure and sustain universal coverage.
These costs are recurrent and will outweigh the capital costs by 1.4 to 1.6 times by 2029 (Hutton and
Varughese, 2016).

The above expenditures do not include the costlier Targets 6.3 through 6.6 of SDG 6, which include
improving water quality, increasing the proportion of treated wastewater, increasing water efficiency,
implementing integrated water resources management, and protecting and restoring water-related
ecosystems. It also does not explicitly include climate-resilient technologies. Thus, without significantly
increasing the levels of investment in water, it will be “nearly impossible” to reach SDG 6 (Fonseca and
Pories, 2017, p. 8).

Climate finance: Financial and economic considerations 161

 12.2.2 Preventive action saves
Maintaining business as usual – that is, ignoring climate risks and failing to increase water investments –
would clearly threaten the chances of meeting SDG 6, and would have wider reverberations as well. Since
water is a critical factor of production in many sectors, increasing scarcity and vulnerability of water
supplies would threaten livelihoods around the globe. Water-related losses could send some regions “into
sustained negative growth,” with growth rates in some regions at risk of declining by 6% of gross domestic
product by 2050 (World Bank, 2016a, p. vi). These changes will burden poor households the most.

Thus, when considering the cost of financing water infrastructure, it is also necessary to evaluate “the
counterfactual risk of not financing infrastructure” (WWC, 2018, p. 15). Preventive action therefore could
have a positive return on investments in the form of avoided future losses (Box 12.1) while also improving
current water management practices. But for this to happen, water managers will need to properly
incorporate planning and investment design in the analytical methods that allow for the proper
identification of climatic and non-climatic risks and uncertainties. It is therefore essential to prioritize
adaptation strategies and investments that can manage those risks and uncertainties.

12.2.3 Connecting water to climate finance

If current water financing is inadequate, and increasing water financing offers
considerable potential benefits, then what can be done to increase access to
Proponents of water
financing and realize those benefits? While water management requires more
projects could aim
attention from traditional sources such as government and development finance,
to increase the water the answer may also lie in adding climate finance. The Climate Policy Initiative (CPI)
sector’s share of reports that climate finance has been increasing in recent years, from US$360 billion
climate finance and in 2012 to an estimated US$510–530 billion in 2017. Out of the US$455 billion
emphasize water’s invested in 2016, US$11 billion went to water and wastewater management in
ties to other climate- climate adaptation, and US$0.7 billion to water and wastewater management in
climate mitigation. This means only 2.6% of 2016’s climate finance went directly to
related sectors in
water management, even if this may mask water-related projects in other sectors,
order to ensure greater such as disaster risk management; agriculture, forestry, land use, and natural
funding for water resource management; coastal protection; and other sectors (CPI, 2018). Proponents
management of water projects could aim to increase the water sector’s share of climate finance
and emphasize water’s ties to other climate-related sectors in order to ensure greater
funding for water management.

12.2.4 Mitigation versus adaptation financing

Two promising trends will increasingly help water projects access climate finance. The first is the
increasing recognition of the mitigation potential within water and sanitation projects. This trend could
be particularly advantageous, as mitigation made up 93.8% of climate financing in 2016, but water

Box 12.1 Avoided flood losses in Mexico

An example of the losses that can be avoided by preventive action comes from the Mexican state of Tabasco. In a large
flood event in 2007, the State suffered significant damages and losses amounting to US$2.9 billion. This flood event
led the Federal and State Governments to design an Integrated Hydraulic Plan. The aim of the Plan was to implement
a set of solutions that guaranteed the safety of the population, the non-interruption of economic activities, and the
stability of ecosystems in the occurrence of flood events. The structural investments (embankments, reinforcements)
and non-structural investments (development of early warning systems, risk maps, capacity building) amounted to
approximately US$750 million, and the Plan was implemented between 2008 and 2010. Three years after the 2007
floods, Tabasco was flooded at an even greater magnitude than before. But this time, the measures taken by the
Integrated Hydraulic Plan drastically reduced the level of damages and losses of the State. The 2010 damages and
losses were in the order of US$585 million, 80% less than in 2007. The benefit of the disaster risk reduction measures
implemented in 2010 was three times higher than their cost.

Source: World Bank (2017d).

162 The United Nations World Water Development Report 2020 Water and Climate Change
 projects consisted of a fraction of 1% of that sum (CPI, 2018). There may be a large untapped potential
in intentionally linking water and mitigation, attracting increased financing to water management goals.
Increasingly, however, the mitigation potential of water management options is being recognized.

Water and wastewater utilities can have large energy footprints, so there is significant mitigation potential
in increasing both water and energy efficiency, as well as in recovering energy, water and nutrients from
wastewater streams (Box 12.2; see also Chapters 3 and 9). Other solutions with benefits in both water and
climate include regenerative agriculture, green infrastructure, ecosystem restoration and other innovative
initiatives such as ‘floatovoltaics’ – solar panels that float on reservoirs and provide clean energy while
preventing water loss through evaporation.

The second trend is an increasing emphasis on financing climate adaptation. Climate finance is typically
heavily weighted toward mitigation rather than adaptation, but recently this has begun to change
(Figure 12.1). The Green Climate Fund (see section 12.5.1) has a target of financing 50% mitigation and
50% adaptation, the World Bank has dedicated US$50 billion to adaptation over the next five years, and the
criteria for certifying climate bonds include resilience investments (Tall and Brandon, 2019). With these
developments, water practitioners who integrate climate change analysis into their project planning will
increase their chances of accessing climate finance, be it for mitigation or adaptation.

Disaster risk management made up a little less than 14% of 2016’s climate financing for adaptation, about
US$3 billion (CPI, 2018).

Figure 12.1 Ratio of mitigation to adaptation financing, by source

International Development Finance Club (2017)

Multilateral from OECD countries (2017)

Bilateral from OECD countries (2017)

World Bank (target for 2021–2025)

Green Climate Fund (committed as of July 2019)

Green Climate Fund (target)

0 10 20 30 40 50 60 70 80 90 100

Mitigation financing Cross-cutting activities Adaptation financing

Source: Authors, based on data from World Bank (2018b), IDFC (2018), OECD (2018) and Green Climate Fund (n.d.).

12.3 Economic considerations of water and climate projects

12.3.1 The value of water
Water is immensely valuable. The value of access to safe water and to sanitation and hygiene services
goes well beyond the price paid at the tap, and is a vital input to thriving economies, stable communities
and healthy populations. Water is essential to human survival, a necessary component of food and energy
production, and both an input to and a recipient of the ecosystem services that sustain all life on Earth.
For these reasons, “water is the common currency which links nearly every SDG” (World Bank, 2016a, p. vi).
Given the increased scarcity and variability caused by climate change, “water management will be crucial
in determining whether the world achieves the Sustainable Development Goals” (World Bank, 2016a, p. vi).
Water also has intangible social, cultural and religious worth, and it is invaluable for human dignity. It is an
entitlement of all people.

Climate finance: Financial and economic considerations 163

 Box 12.2 Mitigation in water and wastewater

The project Water and Wastewater Companies for Climate Mitigation (WaCCliM), financed by the German Government
and implemented by The German Agency for International Cooperation GmbH (GIZ) and the International Water
Association (IWA), introduces greenhouse gas (GHG) reduction technologies at utilities in Jordan, Mexico, Peru and
Thailand. These measures include energy consumption reduction, energy and nutrient recovery, water reuse, and water
loss reduction. The project also developed the Energy Performance and Carbon Emissions Assessment and Monitoring
(ECAM) tool to help water and wastewater utilities assess GHG emissions and mitigation opportunities, and aids
countries in improving the regulatory, institutional and financial framework for integrating emissions reductions into the
water supply and sanitation sector. These measures have allowed the affected utilities to reduce thousands of tonnes
of CO2e emissions while also producing financial savings and improving the quality of service.

Figure Estimated greenhouse gas reductions in WaCCliM pilots by 2018

Jordan:
2% GHG reduction
fromwater and
wastewater systems

Mexico:
23% GHG reduction
from water and
wastewater systems

Thailand:
32% GHG reduction from
wastewater systems
Peru:
34% GHG reduction
fromwater and
wastewater systems

Sources: WaCCliM (2017a; 2017b).

There are ongoing efforts to measure the value of water. The High-Level Panel on Water released
Principles on Valuing Water with guidance for allocating, managing and pricing water services considering
the many different dimensions of value that water holds (HLPW, 2018b). Valuation of water, along with
strengthening governance and institutional capacity, is one of the most critical steps toward sustainable
development of water resources (Garrick et al., 2017).

There is no single value of water, nor even one single way to measure its value. But several projects and
modelling efforts illustrate the substantial benefits of improving water management in the context of
climate change. For example, the World Bank estimates that improving water resource management could
accelerate growth in some regions of the world by 6% (World Bank, 2016a). Various water-related climate
adaptation policies can also provide co-benefits such as job creation, improved public health, promotion of
gender equality, reduced household expenses and carbon sequestration, among others.

12.3.2 Water project bankability

Although climate finance is increasing, demand for it is also increasing, and current levels are not yet
adequate to meet the need. Accessing climate finance can be competitive and difficult, especially for
complex water projects that may transcend national boundaries. Practitioners must ensure that a project
is ‘bankable’, or likely to receive funding based on the project’s design, objectives, risk profile, enabling

164 The United Nations World Water Development Report 2020 Water and Climate Change
 environment and other factors. Bankable climate projects are those that have a “clearly articulated link
to climate change impacts, familiarity and strict compliance with funding procedures,” and sometimes
additional funding sources (World Bank, 2019, p. 11).

A project's bankability for climate finance differs slightly from its bankability for development finance in
general. Projects hoping to use climate finance must explicitly address the causes and/or consequences
of climate change to be considered bankable. Adaptation and resilience projects must also demonstrate
how the project will respond to and address expected climate impacts in the project’s area. These links
must be backed with scientific evidence, such as climate data. Climate financers such as the Green
Climate Fund also require all projects to address the gender dimensions of climate change and to
mainstream gender equality considerations into the project cycle. As with development financing, all
projects must respect human rights, including the right to participation.

Furthermore, to increase chances of accessing climate financing, project proponents should search for the
most compatible financing sources and match their project plan to the financer’s criteria and objectives.
Project proposals should align with related policies and plans already in place, such as national
development strategies, National Adaptation Plans, or river basin investment and management plans.
Projects that communicate and address risks, and projects that capture co-benefits in other areas such as
health, are also considered more bankable.

Basin organizations have an important role to play in transboundary basins as

Project developers they can bring added benefits while implementing multi-country projects. However,
many basins organizations struggle in accessing funds for climate change
must take the time to
adaptation from different sources (UNECE/INBO, 2015). Understanding and
form relationships, gain managing the special risks and complexities of transboundary river basin projects
insight into the climate are critical to preparing bankable project proposals that will attract public and
financing landscape and private financing partners. The example of the Niger basin (Box 12.3) demonstrates
advocate for the benefits that pooling projects, a rigorous scientific and planning process, and early
of their approach involvement of stakeholders and donors have enabled river basin organizations to
raise significant funds for climate change adaptation (World Bank, 2019).

Thinking about water projects in terms of their bankability to climate financers can help align climate and
water goals and ameliorate project funding gaps. It is important to note, however, that a bankable project
will not necessarily attract climate financing simply because it is a good project. Project developers must
take the time to form relationships, gain insight into the climate financing landscape and advocate for the
benefits of their approach.

Box 12.3 Pooling projects in African transboundary basins

The Niger basin counts nine riparian countries and is home to 112 million people who rely heavily on the natural
resources it provides. Those nine countries and the Niger Basin Authority will prepare and implement the
Investment Plan for the Strengthening of Resilience to Climate Change, which includes investments “targeting
vulnerability to water stress, variability, soil, land, and ecosystem degradation, and strengthening resilience.” These
measures were taken from the Niger Basin Authority’s Operational Plan, countries’ National Adaptation Plans and
National Adaptation Programmes of Action, and country proposals. The Plan is expected to cost US$3.11 billion
and will be financed by the Niger Basin Authority member countries, the World Bank, the African Development Bank
and private sources.

Pooling projects is a way to avoid maladaptation and the negative consequences that could result from
considering only one fragment of an interconnected basin ecosystem. It can also promote resource efficiency and
cost-effectiveness. For example, reforestation efforts upstream can improve water quality and reduce erosion and
flood risk downstream.

Source: World Bank (2019, p. 25).

Climate finance: Financial and economic considerations 165

 12.3.3 Pro-poor climate–water finance strategies
People living in poverty are the most vulnerable to the impacts of climate change and water insecurity.
Therefore, differentiated strategies that specifically consider the resilience needs of marginalized
groups must be built into larger water–climate plans and projects. People who live below the poverty
line and have low financial reserves are the least prepared to adapt to intense climate events such as
flash floods or prolonged droughts. Comprehensive climate plans, particularly those discussed later in
this chapter, that incorporate national mitigation and adaptation efforts alongside more specific water
management projects need to incorporate financing structures that can assist at-risk populations to
recover from these intense climate events. In addition, access to finance can be a critical component
of mitigation and adaptation strategies, allowing low-income people to invest in climate-resilient
technologies like rainwater harvesting.

12.4 Types of climate investments for water projects

12.4.1 No-regret and low-regret investments
Climate impacts are not always certain, especially at the micro-level. Scientific knowledge and
predictive climate modelling continue to improve, but decisions must be made in the meantime to
help communities prepare and adapt. No-regret and low-regret investments are a response to this
uncertainty.

No-regret investments are investments that are beneficial regardless of the climate impacts – they
would provide benefits even in the absence of climate change, as well as across a range of potential
climate hazards. Low-regret investments “may incur an additional cost to offset climate change risks, but
these costs are small in comparison to the benefits of avoiding future costs” (GWP-Caribbean/CCCCC,
2014, p. 1). Such projects increase resilience. They also tend to bring co-benefits to multiple sectors and
stakeholders, have built-in flexibility for future adjustments, and minimize trade-offs.

No-regret interventions for water and climate change could include rainwater harvesting, sustainable
groundwater management, micro-irrigation technologies, wastewater reuse and improved water storage
(Vermeulen et al., 2013). Any intervention that improves efficiency and conservation, by reducing leaks
for example, is also generally considered a low- or no-regret choice. These interventions also tie into
both mitigation and adaptation, since efficiency and conservation both reduce energy use and increase
water availability.

12.4.2 Results-based climate financing

Results-based climate financing is a type of investment in which “funds are disbursed by an investor or
donor to a recipient upon the achievement of a pre-agreed set of [mitigation or adaptation] results, with
achievement of these results being subject to independent verification” (World Bank, 2017d, p. 1). It can
be used on its own or together with upfront financing, and it can be deployed at different scales and with
different project entities.

There are several different ways to approach results-based climate financing, but as a modality it has
the potential to improve monitoring, reporting and verification capacity, strengthen domestic institutions,
mobilize the private sector, and create or strengthen markets to produce climate results. Most results-
based investments thus far have been made in climate mitigation projects, since carbon emissions are a
well-defined and measurable indicator, but this type of financing can also be used for climate adaptation
goals. In this regard, new results-based climate mechanisms can target nature-based solutions (NBS),
where the funding gap is expected to be the greatest (WWC/GWP, 2018). Projects that find synergies
between water management goals and climate mitigation or adaptation can take advantage of this
promising financing modality.

166 The United Nations World Water Development Report 2020 Water and Climate Change
 12.5 Using multilateral climate finance for water
Three multilateral funding institutions exist specifically for financing climate and environmental
projects: The Green Climate Fund, the Global Environment Facility and the Adaptation Fund. In addition,
development banks have begun to prioritize climate change and integrate it into their development
activities, and some have climate-specific funds. Water managers could look to these funds, which in 2016
provided US$51 billion, or 11% of all climate financing (CPI, 2018).

12.5.1 The Green Climate Fund

The Green Climate Fund was established as a financing mechanism of the Paris Agreement, to help
developing countries mitigate and adapt to climate change. As of 2019, it has received US$10.3 billion in
pledges, out of the goal of US$100 billion per year, and the Fund has committed about US$5 billion of that
to approved climate projects (Box 12.4). Though most if not all their results areas and investment priorities
involve water management, the clearest result area for water is health, food and water security, which falls
under adaptation (Green Climate Fund, n.d.).

12.5.2 The Global Environment Facility

The Global Environment Facility provides grants for several types of environmental projects, including
climate change mitigation and adaptation. It also serves as the financial mechanism for the United
Nations Framework Convention on Climate Change (UNFCCC). Since its founding in 1992, it has funded
almost 1,000 climate mitigation projects and 330 adaptation projects. A recent project with both climate
and water benefits “helped generate tools to assess the effects of glacier retreat and integrate climate
change considerations into strategic planning”, and “addressed pressing development issues related to
water supply or irrigation in Bolivia, Ecuador and Peru” (GEF, n.d.).

12.5.3 The Adaptation Fund

The Adaptation Fund was originally set up under the Kyoto Protocol and finances projects that help
developing countries adapt to climate change. It has supported over 80 adaptation projects since 2010
and has committed US$564 million to climate adaptation and resilience activities (Adaptation Fund, 2019).
During the 24th United Nations Climate Change Conference (COP24) in December 2018, country Parties
decided that the Adaptation Fund would serve the Paris Agreement starting in 2019. Water management is
one of the Adaptation Fund’s project sectors, and it accepts transboundary project proposals.

12.5.4 Development banks

Several multilateral Climate change is a threat to development and anti-poverty goals, while acting on
development banks climate can bring development and equity co-benefits. For those reasons, at COP24
have formulated the World Bank committed to doubling its climate investments to US$200 billion from
guidelines to 2021–2025 to support countries taking ambitious climate action (World Bank, 2018b).
mainstream Of that sum, US$50 billion will be dedicated to adaptation finance. The World Bank
aligns its internal processes and metrics to consider climate risks and opportunities,
climate analysis
and evaluates its operations for climate impacts and co-benefits. So, it is worthwhile
into planning and for water managers hoping to access World Bank funds to mainstream climate
investment design mitigation and/or adaptation into their plans (World Bank/IFC/MIGA, 2016).

Box 12.4 The Green Climate Fund and water management in Sri Lanka

A Green Climate Fund project in Sri Lanka will upgrade village irrigation systems in vulnerable communities and
promote climate-smart farming practices in three river basins. It will also enhance climate-resilient water supply
management and strengthen climate and hydrological forecasting to enhance water management and adaptive
capacity. The climate-smart agriculture component provides both climate adaptation and mitigation benefits, while also
conserving water and protecting drinking water sources.

Source: Green Climate Fund (2018).

Climate finance: Financial and economic considerations 167

 Several multilateral development banks have formulated guidelines to mainstream climate analysis into
planning and investment design. Furthermore, over the past few years, multilateral development banks
have also formulated guidance notes to help operational teams move towards climate-smart portfolios of
investments and to maximize the climate adaptation and mitigation results of each investment.

Regional development banks also have climate change initiatives that water practitioners could tap
into. The members of the International Development Finance Club, a global network of 23 national and
regional development banks, committed US$196 billion to climate finance in 2017, primarily for climate
mitigation. Of the US$10 billion allocated to climate adaptation, 58% went to water ‘preservation’, which
includes catchment management, rainwater harvesting, and rehabbing water distribution networks. The
International Development Club’s provided 72% of its green finance commitments (including climate
and other environmental financing) to the East Asia and Pacific region, while the European Union (EU)
received 14% of green finance, and Latin America and the Caribbean received 6%. Green financing
commitments to Eastern Europe and Central Asia, the Middle East and North Africa, South Asia, and
Sub-Saharan Africa were smaller, at 1–3% per region (IDFC, 2018).

12.6 Using national climate finance for water

12.6.1 Bilateral climate finance
Climate financing initiatives or development agencies with climate objectives exist in many countries
and regions, including the EU, Germany (Box 12.5), Japan, the Nordic countries, Switzerland, the United
Kingdom, The United Arab Emirates, the United States of America and others. There are also regional
and national climate funds in developing countries, such as the Amazon Fund, the Bangladesh Climate
Change Trust Fund, the Green Fund in South Africa, and the Southern Africa Trust (ACT Alliance, 2018).

Bilateral public climate finance from developed to developing countries grew overall from US$22.5 billion
in 2013 to US$27 billion in 2017 (OECD, 2018). As is the trend with most climate financers, bilateral
sources primarily financed mitigation (66% of bilateral finance in 2017) over adaptation (21%), with
cross-cutting activities more common among bilateral sources (14% in 2017) than multilateral ones (4%)
(OECD, 2018).

12.6.2 National and subnational climate finance

As each country’s nationally determined contribution (NDC) to the Paris Agreement becomes
mainstreamed into government spending plans, domestic expenditures by national governments may
be a growing source of climate finance. The UNFCCC estimates that US$232 billion of domestic public
finance was spent per year in 2015 and 2016, with US$157 billion per year in developing countries and
US$75 billion in developed countries. However, “comprehensive data on domestic climate expenditures are
not readily available, nor are such data collected regularly or using a consistent methodology” (UNFCCC,
2018, p. 62). If water managers can align their projects to their country’s NDCs, they may be able to
access these domestic sources of climate financing. But without comprehensive data, it is difficult to
draw conclusions that could guide water and sanitation financing efforts.

Box 12.5 Bilateral climate finance for water management in Nepal, Peru and Uganda

An example of water sector involvement in a bilateral climate project took place in Nepal, Peru and Uganda between 2011
and 2016. The Global Ecosystems Based Adaptation in Mountains Programme was funded by the German Government’s
International Climate Initiative and implemented by the United Nations Environment Programme (UNEP), the United
Nations Development Programme (UNDP) and the International Union for the Conservation of Nature and Natural
Resources (IUCN), with local government partners. The programme’s activities included ecosystem restoration and
management, soil nutrient management, water conservation and management, and irrigation measures. These measures
helped secure water supplies and build resilience to droughts in the three project areas, among other benefits.

Source: UNDP (2015).

168 The United Nations World Water Development Report 2020 Water and Climate Change
 National domestic finance institutions may also offer climate financing. In Latin America and the
Caribbean, national development banks such as the Brazilian Development Bank “are already the single
largest source of public climate finance in domestic markets” (NRDC, 2017, p. 4).

Several countries and subnational jurisdictions have begun establishing green investment banks, also
known as green banks, in recent years. Green banks “are publicly capitalized, domestically focused,
specialist financial institutions specifically established to crowd in private capital” to climate and
environmental investments (NRDC, 2017, p. 1). While green banks were initially established almost
exclusively in OECD countries, current efforts are expanding the model to countries in Africa, Asia and
Latin America (Green Bank Network, 2018). As green banks begin to proliferate, water project managers
may wish to monitor this area for future financing opportunities.

12.7 Alternative finance sources

12.7.1 Private sector finance
Private sector finance accounted for a majority (54%, or US$230 billion) of climate finance flows in 2016,
the bulk of which came from project developers (CPI, 2018). Other sources of private finance could include
carbon markets, foreign direct investment, insurance, or commercial financial institutions. An estimated
US$15.7 billion of private financing was mobilized by multilateral development banks (UNFCCC, 2018). But
the sources and destinations of private financing are not well documented.

One emerging source of private financing that may be useful to water practitioners is the green bond
market. Pioneered in 2007, green bonds and climate bonds offer “significant global opportunities to
mobilize capital at scale for low carbon, climate resilient infrastructure and development efforts” (World
Bank, 2018c). The green bond market has grown rapidly, from US$3.4 billion in 2012 to US$168 billion in
2018. The Climate Bonds Standard, a labelling scheme akin to FairTrade certification, has released Water
Infrastructure Criteria (Box 12.6) to certify water-related bonds for low-carbon and climate-resilient water
management standards (Climate Bonds Initiative, 2018).

In 2018, the Global Green Bond Partnership was launched to accelerate the issuance of green bonds.
The Partnership plans to develop toolkits for companies, subnational entities and other groups that are
interested in issuing green bonds, so water managers can take advantage of those resource as they
come out (World Bank, 2018c). There are also other types of environmental bonds emerging, such as
catastrophe bonds, environmental impact bonds and resilience bonds.

Box 12.6 Water infrastructure criteria for climate bonds

Certification for the water infrastructure criteria under the Climate Bonds Standard is based on two components:
1. Mitigation: Greenhouse gas emissions from water projects do not increase and comply with business-as-usual
baselines or aim at emissions reduction to be delivered over the operational lifetime of the water asset or project.
2. Adaptation and resilience: Water infrastructure and its surrounding ecosystem are resilient to climate change and
have sufficient adaptation to address climate change risks. To demonstrate that, issuers must address the following:
a. Allocation: How water is shared by users within a given basin or aquifer;
b. Governance: How/whether water will be formally negotiated and governed;
c. Technical diagnostics: How/whether changes to the hydrologic system are addressed over time;
d. For nature-based and hybrid infrastructure only: Whether issuers have sufficient understanding of
ecological impacts at/beyond project site with ongoing monitoring and management capacity;
e. Assessment of the Adaptation Plan: Checking the completeness of the coping mechanisms to address
identified climate vulnerabilities.

Source: Excerpt from Climate Bonds Initiative (2017, p. 1).

Climate finance: Financial and economic considerations 169

 Aerial view of the Changi Water Reclamation Plant (Singapore).

12.7.2 Public-private partnerships

Climate-smart public–private partnerships are another potential way to meet financing needs for
climate-resilient water infrastructure investment. The Public–Private Infrastructure Advisory Facility
(PPIAF) has defined climate change as a strategic priority for fiscal years 2018–2022. The Facility
will focus on climate change initiatives and embed climate activities in its technical assistance
and knowledge work (Suriyagoda, 2017). The PPIAF Climate Change Trust Fund for Infrastructure
will promote climate-smart models and enabling environments for climate-smart public–private
partnerships. Water supply and sanitation is one of the sectors included in the Fund’s planned
programmatic initiatives.

While climate change does not currently play a significant role in public–private partnerships, the
World Bank and PPIAF’s mainstreaming of climate change into their initiatives and knowledge
activities will define future infrastructure trends and is another area for water managers to watch.

12.7.3 Blended finance

Blended finance “incorporates different types of financing into a single project or fund” (World Bank,
2019, p. 24). Blended finance can have a crowding-in effect by using concessional loans (i.e. loans
with below-market rates) or grants to make projects more attractive for traditional sources of
capital, and it can help project proponents better manage risks. Several development banks, climate
funds and bilateral funds have begun using this paradigm to attract commercial finance and support
projects that have a potentially high impact but must overcome barriers to be commercially viable.

The bankability criteria of the Green Climate Fund and other prominent sources of climate financing
tend to screen out smaller-scale, subnational-level projects. To address this financing gap, R20
Regions of Climate Action and BlueOrchard Finance are, as of early 2019, in the process of setting
up a Subnational Climate Fund for Africa. The Fund will leverage blended finance to fund subnational
infrastructure projects with positive climate impacts in emerging markets (R20 for Climate Action,
2018). For water project developers, especially in Africa, this may be a financing source to watch for
future opportunities.

Special attention must be paid to low-income countries, because “countries that have the greatest
need for investment are often perceived as risky and as having governance issues”. Only 3.6% of the
private finance mobilized by using blended finance in 2012–2015 flowed to low-income countries
(Hedger, 2018b, p. 6).

170 The United Nations World Water Development Report 2020 Water and Climate Change
12.8 Conclusion
Growing interest in climate finance, as well as its variety of sources, instruments and destinations, make
it an attractive opportunity for water project proponents and organizations hoping to reach SDG 6. The
challenge lies in their ability to establish the water–climate connection and access this finance.

Since most climate financers primarily fund mitigation activities, finding alignment between water
development goals and climate mitigation may offer more immediate opportunities for future funding than
adaptation activities. Up until now, the connection between water management and adaptation has been
more apparent and more readily developed than mitigation. However, the mitigation potential of various
water management interventions is increasingly being recognized. Policy and technical solutions that
align water management goals and climate mitigation goals should be a growing topic for research and
knowledge sharing, to help both climate and water practitioners take advantage of these connections.

Climate finance architecture is complex and evolving. There are multiple mechanisms, institutions,
programmes and activities at various scales. For this reason, increasing coordination among these actors
would minimize duplication and inefficiencies as well as facilitate access to funding. Potential sources of
growth in climate finance will be national institutions hoping to finance their NDCs and the Green Climate
Fund with its push to reach US$100 billion in financing per year. Green banks, green bonds, subnational
climate funds and public–private partnerships are other emerging areas to watch for future climate
financing opportunities.

It must be stated, however, that water management and climate action are both underfinanced. Although
it is increasing, climate financing is not as abundant as needed to address climate change (CPI, 2018).
Competition for climate financing is high, as there is not enough to go around. Therefore, to meet both
climate and water goals, it may not be enough to encourage water–climate synergies and help water
developers access climate finance. Structural changes may also be needed, such as giving water a higher
priority within climate funds, designing linking mechanisms between the water and climate communities,
and identifying strategies to bring blended finance to the countries with the greatest need. Water
practitioners could become climate advocates as well, encouraging greater funding for addressing climate
change. Since water links all the SDGs and climate change threatens them, it is critical to plan and invest
in sustainable water management that properly incorporates climate resilience and robustness against
multiple futures.

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