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Three lessons from the water sector for financing adaptation

Written by Nathaniel Mason

Providing clean water in Pakistan, 2010. Photo: DFID/Vicki Francis CC BY 2.0

There is still nowhere near enough finance available for climate adaptation, even as the impacts of climate change are already with us. Our recent work with WaterAid found that water receives nearly half (43%) of the adaptation finance available, globally. What does this mean for the wider challenge of financing climate change adaptation? Here are three lessons from the water sector.

1. Refocus on the most vulnerable

From 2000-2018, just 18% of international public climate finance for water went to low-income countries (LICs). Even less – 14% – was provided as grants, while around 40% of the finance was offered as market rate loans, reflecting wider patterns in how rich countries are providing climate finance. The types of water services which many poor rural and slum communities rely on – e.g. handpumps, community-scale networks and non-sewered sanitation – received a tenth of the total.

LICs do get a slightly higher share of adaptation finance, both in grant form and for water. Middle-income countries (MICs) and big water infrastructure, such as irrigation schemes and urban sewerage networks, also remain legitimate priorities. But with the availability of international public finance squeezed by the global recession, it is even more crucial to target it as efficiently as possible.

We need to further amplify and free up scarce public international adaptation finance in grant form for use in the poorest countries, which are often the most vulnerable to both climate change and debt distress. Private finance will increasingly need to play a role, but private investment in water, as in many sectors, is usually more viable in MICs. If grants for adaptation finance go to MICs, they should demonstrate how they are either attracting private finance or targeting the poorest and most vulnerable communities. Otherwise, the grants should go to LICs, including for climate-resilient water and sanitation for people living in poverty.

2. Help governments to sharpen their ask and listen to their priorities

Many countries have identified water as a vulnerable sector or a priority for adaptation in their main climate strategy. And yet, those that do so have generally received less money for water-related adaptation.

Each sector needs to contribute to national-level efforts to strengthen Nationally Determined Contributions (NDCs) and dedicated National Adaptation Plans. Experience from the water sector suggests that resilience depends on getting the basics right. This includes sound sector governance, fair but predictable cost recovery, an appropriate selection of technology and good construction. Sophisticated climate-risk analysis may be necessary for larger and more long-lived water infrastructure like flood defences and water treatment plants, but it is important to be sensible about the range of risks and the timeframes over which they play out. Donors can support the risk analysis, but need to also stump up for implementation.

3. Broaden the thinking: finance for climate, not climate finance

Our review shows that the focus to date has been on a limited subset of ‘labelled climate finance’. The water sector, like other sectors, tends to seize on this as a ‘new’ stream that could plug existing funding gaps. The Paris Agreement, however, calls for bigger thinking. Climate change adaptation requires a much larger set of funding flows to be made compatible with a climate-resilient development pathway. Here are two key opportunities for the water sector.

Use public subsidies

The World Bank estimates around $320 billion goes to subsidising water and sanitation every year. Those subsidies are generally allocated with little consideration of what they could do for resilience, yet they amount to nearly 30 times the volume of labelled climate adaptation finance for water in 2018. On the mitigation side, thinking on how to redirect public subsidies away from fossil fuels is already advanced. On the adaptation side, water and sanitation subsidies could be used to incentivise sustainable water use and encourage service providers to be climate smart.

Harness private finance, looking beyond bonds

Water-related and other physical climate risks already have a huge effect on corporate operations and financial institutions. Frameworks to take these risks into account are emerging, with the bond market further ahead than other forms of debt and equity. This week the UK announced that it will mandate company disclosures on climate risks. But we need to join up the conversations about private finance for climate adaptation and private finance for water. The latter depends on stronger investment pipelines, making utilities creditworthy, and reducing political and policy risks.

Now is the time to build on these lessons from water, with less than a year to go until COP26. Covid-19 has also confirmed that safe and reliable water is crucial for building resilience in a wider sense. The UK COP Presidency and newly-appointed International Champion for Adaptation and Resilience, Anne Marie Trevelyan, can take a lead.