Talking water in the climate change discourse

Climate change is already having a profound effect on the water cycle. Droughts, floods and extreme weather events affect the availability and quality of water supply and sanitation (WSS) services, and compromise access to these services. Already 2.3 billion people live in water-stressed countries [1], and those at the base of the economic pyramid—those who rely on unstable WSS and lack the capital to get something better—feel the consequences first and hardest. Causality runs in the other direction too. Water infrastructure is itself accountable for 1.8% of global carbon and 4.7% of methane emissions [2], so improving it is a mitigation imperative and key to decarbonizing the world’s growing cities [3].

Despite this interdependence, making water relevant and prominent in the climate discussion is an ongoing challenge. One reason is that practical solutions may seem elusive. Climate discourse tends to favor cure over diagnosis, a call to action over analysis. Yet one effective solution to climate-induced water stress is available through the power of the capital markets. We have proven its capacity to deliver real change.

The sector has worked on the demand side of the water equation for decades by enabling microfinance for households to invest in WSS solutions. At the same time, we recognize that focusing on the demand side and the “last mile” of water and sanitation access will only take us so far. We need to mobilize capital toward the supply side and build an investment pipeline that could allow us to reach hundreds of millions of people in emerging markets. The investments could span not only household-level WSS but also direct much-needed private capital towards the building of low-carbon, climate-resilient potable water, and wastewater infrastructure.

Catalytic credit

In our own work, we discovered that WSS microfinance is catalytic: the microlenders develop self-sustaining portfolios and business models that allow more households to be reached with domestic sources of capital than we alone could reach. In Bangladesh, for example, six microlenders between 2018 and 2022 provided more than 800,000 WSS loans, which supported improvements that should be more resilient to floods and other hazards [4]. In the endline evaluation, 98% of surveyed loan recipients had access to improved sanitation versus 2% of a control group. There were corresponding differences in household savings, with loan recipients saving up $13.25 per month and the control group averaging $1.25. The evaluation could not control for other differences between groups, however, so causality is not proven. But reassuringly, other studies have found the same linkage. For example, three studies of Indian WSS microfinance lending programs found that they increased toilet ownership by 2.64% [5], 9% [6] and 12.4% [7] respectively.

The last of these studies also emphasized how microfinance can complement public subsidies for sanitation improvements: microloans support households that are ineligible for subsidies, and for the eligible they act as bridge funding or enable larger investments than would otherwise be possible [7, 8]. As we open a flow of capital to WSS microlending, public funding can bring climate resilience to those who need most help while other households invest in their own solutions.

The climate stakes

Household access to finance is itself a climate resilience tool. In a 2021 survey of Water.org microfinance partners, 62% anticipated rising demand for WSS loans due to droughts or other climate-related events. Meanwhile, 33% of households taking out water supply loans and 18% taking out sanitation loans reported that their choices of improvements were influenced by climate change impacts they had experienced [9].

Many used water loans to upgrade from unprotected wells, open lakes and streams, or hand-dug wells with hand pumps, all water sources associated with low climate resilience [10, 11]. They used sanitation loans to shift away from open defecation and shared facilities, chiefly toward toilets with septic tanks and pit latrines. These choices are less likely to spread contamination during heavy rainfall—indeed in both floods and dry spells, they can even be less vulnerable to failure than sewer-connected toilets [11], especially where sewer systems are not built or maintained to high standards.

Of course, people’s options to connect to climate resilient systems are often constrained by the pipes that run beneath them. Our own experience [12] and that of others [13] highlights the importance of having good quality infrastructure to connect to. The IPCC predicts that climate vulnerability will persist in places where governments and the private sector fall short in providing infrastructure, basic services, and an enabling environment for financial inclusion [14]. It is for this reason that our next major initiative is in the infrastructure space. Water.org and WaterEquity will together funnel capital towards infrastructure investments that balance physical climate risks with potential resilience benefits to vulnerable households, and that at the same time can deliver reduced emissions by fixing leaks, improving efficiency, and recovering resources.

How can we ensure that these actions not only expand water and sanitation access but also add up to effective climate finance? It is a three-part agenda, each part supporting the others. We have to create an enabling environment in nascent markets that catalyzes public investment and unlocks private investment; we have to channel finance to WSS at the household and infrastructure levels; and we have to keep gathering evidence on the results. Financial institutions need to speak the language of climate change and report how WSS investments are being tailored to address climate issues. Enabling, trying, and documenting is what will lead us to solutions that increase WSS access and resilience at a lower carbon cost.