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Meeting the Demand for Investments in Water and Sanitation

Every person needs about 70 liters of fresh water a day to meet basic needs, according to the World Health Organization. It may not seem like much, especially to residents of developed countries, where consumption ranges from 150–300 liters per day. Yet worldwide, one in 10 people don’t have access to safe water and one in four don’t have access to quality sanitation. This issue is especially dire in emerging markets, where many countries may lack the public funding necessary to provide safe and reliable water to every community.

The UN recognized the importance of clean water and sanitation when they named it one of the 17 Sustainable Development Goals (SDGs) — SDG 6. But the goal of clean water and sanitation is interlinked with many of the other SDGs due to its role in driving economic growth (SDG 1 and 8), supporting healthy communities and ecosystems (SDG 3), building resilience to climate change (SDG 13), and promoting gender equality (SDG 5). This is why many experts believe water and sanitation investments represent a unique force-multiplier for good.

Taking advantage of this force-multiplier will require a significant increase in both public and private funding. But the reality is that philanthropy can’t solve this issue alone. Current development assistance spending for water and sanitation averages $14 billion annually, just 12 percent of the amount that experts estimate it will cost to deliver safe water and sanitation to all by 2030.

Water is precious

Photo Courtesy of WaterEquity and Water.org

This financing gap of $100 billion per year is where the global capital markets can play a pivotal role, helping channel capital towards the investments and companies best-positioned to address the crisis. We have already seen the power of the private sector in super-charging the climate finance space, driving down the price of solar panels and energy storage to the point where they are competitive with fossil fuels. We see the potential for private capital to play a similar role in helping scale solutions in the water and sanitation sector.

Turning water and sanitation into investable opportunities

WaterEquity was founded in 2016 as an independent asset manager by the charity Water.org. We saw an opportunity to combine the power of the capital markets with the expertise that Water.org had built up over 25 years of working in the sector. That work provided a first-hand perspective of how household access to water and sanitation — such as a piped water connection or a private toilet — could transform the lives of individuals and communities.

Water.org’s experience also showed us that there was significant demand for a private sector solution to what was considered a public issue. According to the World Bank, there is a $1 trillion market opportunity to provide global water and sanitation services. Among consumers in emerging markets, WaterEquity’s own analysis suggests there is the potential to reach 600 million people with water and sanitation microloans globally. To address this market demand, we specifically focus on making debt investments in microfinance institutions, increasing the size of their balance sheets so they can provide small loans to low-income individuals and families to finance water and sanitation solutions in their homes.

There is a $1 trillion market opportunity to provide global water and sanitation services.

For example, we recently made a debt investment in Annapurna Finance Ltd., a microfinance institution providing microloans in India. This capital infusion allowed Annapurna to offer water and sanitation microloans to people in the community, including a 20,000-rupee microloan (equivalent to about $266) to a young woman named Nandini to pay for the construction of a toilet in her home. The immediate impact on Nandini’s life is profound. She now has the safety and dignity of a private toilet in her home, something which also brings several secondary impacts, such as a reduction in sanitation-related illnesses, a decrease in medical expenses associated with treating illness, and freed-up time now that Nandini no longer has to search for a safe place to go to the bathroom. Nandini was able to use the extra 12 hours per month made possible by the microloan to keep her shop open longer and increase her business revenue by 12 percent every month.

This is just one example, but it is indicative of how a water and sanitation-focused investment can both make a positive impact and generate an attractive economic return.

The future of water and sanitation investments

Since launching WaterEquity, we have raised more than $200 million in investment capital towards solving SDG 6. Along the way, we have learned valuable lessons about which types of investment strategies are attractive to outside investors and likely to generate real-world, verifiable impacts.

It is indicative of how a water and sanitation-focused investment can both make a positive impact and generate an attractive economic return.

After successfully launching and closing an $11 million proof-of-concept fund in 2016, we closed our second fund in 2019 with $50 million of capital using a blended finance approach, providing greater flexibility for our investors. Our third fund closed with over $150 million in commitments in 2022, allowing us to expand our reach geographically from three to nine low-to-middle income countries.

Men digging well

Photo Courtesy of WaterEquity and Water.org

This model of high-impact investments is catching on with more investors and has allowed us to expand our investor base. The third fund attracted capital from foundations, traditional and sustainable investors, and donor-advised funds.

With the support of these investors, we have now made dozens of debt investments, facilitated more than 587,000 microloans, and reached 3 million low-income people with basic or improved access to water and sanitation. 97% of those reached are women. And 99% of borrowers have repaid their microloans, a powerful statistic for investors who worry about the risks of investing in emerging markets or microfinance.

We have only addressed one side of the water and sanitation market so far — the demand side. We also recognize there is also a need to finance the supply side — specifically the infrastructure necessary to carry safe water into homes and to carry waste away to waste treatment facilities. This need is amplified by the effects of climate change on water and sanitation infrastructure, creating compelling investment opportunities to improve climate resilience in many locations.

To fully address the water and sanitation crisis, it is imperative that more investors — whether impact-focused or pure return-focused — turn their taps on and let the capital flow to where it is needed most. Each new investment is another building block in creating and nurturing a market that can draw in capital from a wide range of investors and businesses. We hope our experience will inspire other market actors to follow in our footsteps.

Paul O’Connell is President of WaterEquity. He has spent more than 20 years managing currency, debt, and equity portfolios for institutional investors. Paul received a Ph.D. in Economics from Harvard University and has published many articles on global finance alongside a featured TED talk highlighting how the capital markets can ... Read more

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