Long Read: do asset owners have a duty to fill the world’s $114bn water financing gap?

Sustainable Development Goals 6.1 and 6.2, which stipulate that universal access to safely managed water and sanitation services should be achieved by 2030, are rarely reported on and far from a priority for most investors.

Therefore it should not come as a surprise that this objective is linked to a major finance gap. 

An often-cited World Bank study from 2016 estimates the required investment in the water sector to be $114 billion per year to achieve universal service coverage.

This figure is three times the actual annual global investment in the water services sector, and since this is a global estimate, it obscures regional differences. For example, there is general consensus that greater capital spending is needed in Sub-Saharan Africa.

This funding gap is mostly addressed by organisations like the World Bank and OECD, and less so by private sector players.

A major challenge in generating private investment in the water sector of developing countries is that investors tend to view the water sector as "not creditworthy" - according to a recent Leigland report.

While demand for water is rising, many investors are outright reluctant to dive into the water investment space.

This lack of interest from the private sector in the water investment space was one of the key topics discussed earlier this year at the UN's annual Water Conference in New York City. One of the main speakers invited by the UN was Poul Due Jensen, the CEO of Denmark-based infrastructure giant Grundfos. 

Catching up with Net Zero Investor, the industry veteran said "asset owners have a critical role to play in driving investment towards the water space." 

Due Jensen argued that "by strategically allocating resources, considering long-term perspectives, mitigating risks, advocating for change, and integrating water-related factors into investment practices, asset owners can contribute significantly to addressing water challenges and fostering sustainable water management practices." 

When asked to elaborate, Due Jensen said it is simply a case of strategic investment decisions, singling out investing in water infrastructure, technology, conservation efforts, and sustainable water management solutions.

Taking the long view, water-related challenges require long-term solutions, Due Jensen continued. 

"Asset owners have the advantage of taking a holistic and forward-looking approach to investments. By considering the long-term implications of water scarcity, pollution, and access issues, they can make informed decisions that support sustainable water practices and contribute to the resilience of communities and businesses."

Moreover, it is in investors' own interest to actively mitigate water-related risks, such as water scarcity, regulatory changes, and reputational risks, simply because they can impact the financial performance and sustainability of assets, he argued.

"Asset owners have the opportunity to identify and mitigate these risks through proactive investments. This may involve incorporating water risk assessments into due diligence processes, engaging with companies to improve their water management practices, or supporting innovation in water-efficient technologies."

Finally, Due Jensen stressed collaboration and advocacy are paramount.

"Asset owners can play a crucial role in advocating for the importance of water-related investments and collaborating with stakeholders across sectors."

He stressed that, by engaging with governments, industry associations, NGOs, and other investors, "they can amplify the call for increased investment in the water space."

In fact, "collaborative initiatives can drive systemic change, encourage knowledge sharing, and facilitate the mobilization of capital towards sustainable water projects," he said.

Water-related ESG criteria

Due Jensen thinks companies and regulators should introduce water-related ESG criteria.

"Water-related factors are a vital component of ESG analysis, as they directly impact both the environment and society. By integrating water-related ESG criteria into their investment frameworks, asset owners can help identify opportunities that align with their values and risk-return objectives," he explained.

But would investors not drown in risks and uncertainty when looking at water as an investment proposition?

"Sure, Investors may initially perceive risks and uncertainties when considering water as an investment proposition," Due Jensen acknowledged.

"However, these challenges can be addressed effectively. Water is a critical and finite resource, and acknowledging its importance presents an opportunity for investors to contribute to addressing global challenges."

Due Jensen continued by saying that "although water-related investments often require a longer-term perspective, aligning investment strategies with sustainable development goals and the evolving water landscape can foster resilience and long-term value creation."

Thorough due diligence, technological innovation, and collaborative approaches are key to mitigating risks and uncertainties, Due Jensen said.

"By incorporating water-related ESG criteria and actively engaging with stakeholders, investors can navigate these challenges, seize attractive investment opportunities, and contribute to positive change in the water sector."

Water demand

One think investors can be sure of is that the global demand for water will only increase.

"Yes, due to increasing population, industrialization and changing lifestyles, business has a responsibility to manage its water footprint, decrease water consumption, increase water efficiency, and replenish what it uses," Due Jensen said.

Due Jensen singled out Europe as the best example, pointing out that Europe’s industrial sector is responsible for use of upward of 50% of their water, more than 100 billion cubic metres of water per year.

"That water is exposed to any number of contaminants, so sending it back into the homes of European citizens, even after a thorough treatment process didn’t necessarily make sense," he explained.

"So, they’ve created tailored decentralised water treatments which provide targeted treatment schemes, tailored to respond to the specific contaminants in the discharge water. Once the offensive chemicals, etc have been removed from the water, it is possible to treat and reuse the discharge water from the given industrial process onsite. All in a closed loop."

He thinks partnerships are crucial, form enduring and cross matrix relationships for scaling access to emerging technologies and innovations meant to stave off water scarcity, find new sources or improve on existing situations.

"Reverse the common misconception many people have that water is a free, easily renewable resource that needs no protection. All of this will make it more palatable for politicians to 'go the distance' on water politics, and investors will follow."