The current drought in Brazil illustrates why water projects will increasingly need climate adaptation components: The Climate Bonds Water Standard will provide definitions for such green water investments

Water scarcity represents the most significant risk imaginable — to businesses, whole economies, and the ecosystems that provide the natural capital for those economies.

Let’s take Brazil for example. Just last month, the country - with a population of 200 million people - experienced severe blackouts after a large hydroelectric power plant in the state of Rio de Janeiro switched off when water levels dropped below the operational limits – a worrying sign when 70% of the country’s power supply is produced by dams.

‘How does a country that produces an estimated 12% of the world's fresh water end up with a chronic shortage of this most essential resource?’ An almost rhetorical question posed by a BBC journalist last November continues to resonate after several months of the worst draught Brazil has seen in 80 years.

The stifling temperatures that show little signs of abating raise fears of energy rationing – a serious concern for investors. Already anxious that a recession is on the horizon, last month’s blackouts led to investors selling their utility stocks causing a significant dip in Brazil’s indices. Meanwhile, across the border, Chile's northern regions are facing water deficits, with demand up to 20 times greater than supply.

The reliance of water for energy as well as agricultural production and direct use has led to an insatiable demand for water in Sao Paulo, Brazil’s biggest city. Coupled with this dramatic fall in supply, the water shortage Brazil is currently experiencing exemplifies a problem that is increasing with climate change: Rainfall will become less predictable, and droughts more common.  Water infrastructure investments must be made to make cities like Sao Paolo more resilient in the face of increasingly variable supply.

Investors are waking up and looking for solutions

There is tremendous interest among global investors to invest in climate smart infrastructure projects, particularly for water. But what’s missing is a way to bring the interests of investors and water managers together, and to secure more cost-effective investments in resilient, low-carbon, and natural infrastructure solutions.

Over the next 20 years, businesses and governments worldwide will need to invest at least US$10 trillion in water infrastructure to alleviate growth constraints and manage urbanization pressures. In the United States alone there will be an estimated $300 billion to $1 trillion invested in clean water infrastructure by 2030.

Green bonds can tap into the $100 trillion bond market to finance these necessary adaptation and mitigation investments in water infrastructure that will help protect existing supply, expand future supply, and limit demand.

But for investors to make informed decisions about how to allocate money to support more sustainable water projects, they need a framework that maps out the different types of eligible projects. This framework should enable them to understand which interventions are genuinely low carbon, which are exposed to high levels of water risk and which are resilient to risks.

This will require both an understanding of the science in the region and of the types of interventions required.

Defining climate adaptation and resilience for water investments

Last November, the Climate Bonds Initiative along with Ceres, the World Resource Institute, and CDP came together to embark on the development of a Green Bond Standard that sets out to define what water assets in the bond markets qualify as climate resilient and low carbon.

They pulled together an impressive group of renowned water experts from around the globe representing organisations like the OECD, Stockholm International Water Institute (SIWI), Asian Development Bank, Alliance for Global Water Adaptation (AGWA), Water Environment Federation, Imperial College London, IUCN, Chinese Academy of Sciences and many more.

The Technical Experts are busy at work identifying key issues the Standard should address. John Matthews, the lead specialist on the Technical Working Group and Director at AGWA says: "To date, we have seen little transparency, consistency, or efficacy in how we manage water in a way that can anticipate ongoing climate impacts. San Paolo's problems are a clear sign that we need to hold decision makers accountable for how they sustain water resources. I believe that the development of a set of green bonds standards for robust water management can help investors determine if infrastructure projects have been carefully evaluated for a range of options and developed -- in advance -- strategies to maintain and share water services for both economic development and ecosystems."

Let’s look back at the case in Brazil. Imagine the government or a private issuer decides to issue a green bond to finance a new hydropower plant in Brazil. After all, it’s a water investment - doesn’t water imply ‘clean energy’?

Not according to our Experts. Matt Ries Chief Technical Officer at the Water Environment Federation says: “Applying a ‘green’ label to a water investment isn’t necessarily as clear cut as it seems.  What may seem like a good investment to address an immediate, acute need may not be a sustainable project in the long term. Furthermore, most water infrastructure projects are complex, multi-faceted developments that may demonstrate significant benefits in some areas but may have drawbacks in others. Regions that have over-allocated water resources like Brazil or the American southwest could benefit from a better understanding of which investments are truly green from a climate perspective."

That’s where the Technical Working Group under the Climate Bonds Standard comes in.  It is tasked with defining a set of criteria that can be used to evaluate the quality of water-related green bonds.

A challenging task, but critical if we are to maintain credibility in the market. “Investors may not have the time or in-depth knowledge to assess whether a water-related investment is ‘green’ or not," says Ries. "Having an agreed-to set of criteria developed by global experts in the water sector provides assurance that investments will be applied to sustainable solutions. Clearly-labeled green water bonds can help drive smart investment towards cities or regions where water projects have been under-capitalized or poor investments have created vulnerabilities in those regions.”

A clear understanding of what sorts of investments are consistent with improving the climate resilience of water assets will help bond investors and governments quickly determine the environmental credentials of water-related green bonds and climate bonds.

Until then, we run the risk of seeing more cases like Brazil where the lack of appropriate investment and poor water management compounded by an invariable climate can lead to acute water crisis that can be difficult to alleviate.

The Water Infrastructure Technical Working Group Lead coordinators:

  • Sean Kidney, Justine Leigh-Bell, Climate Bonds Initiative
  • Sharlene Leurig, Sustainable Water Infrastructure Program, Ceres
  • Betsy Otto, Water Program, World Resource Institute
  • Cate Lamb, Water Program, CDP

The Water Infrastructure Technical Working Group members:

  • Dr. John Matthews, Alliance for Global Water Adaptation (AGWA)
  • Dr. Xavier Leflaive, OECD
  • Torgny Holmgren, Stockholm International Water Institute
  • Dr. Christine Chan, Alliance for Global Water Adaptation (AGWA)
  • Dr. Cedo Maksimovic, Urban Water Research Group, Imperial College London
  • Bob Zimmerman, Charles River Watershed Association
  • Dr. LeRoy Poff, Colorado State University, Stream Ecology Lab
  • Dr. Casey Brown, University of Massachusetts, Hydrology
  • Tim Young Institute of World Development (IWD), China
  • Dr. Mark Smith, IUCN
  • Bill Stannard, AWWA
  • Cynthia Lane, AWWA
  • Will Sarni, Deloitte
  • Thomas Panella, Asia Development Bank
  • Dr. Guy Pegram, Pegasys, South Africa
  • Matt Ries, Water Environment Federation
  • Dr. Junguo Liu, IIASA, Chinese Academy of Sciences

The Water Infrastructure Industry Working Group Members:

  • Mark Kim, DC Water, Washington DC
  • Dr. Manisha Singh, WiseLion LLC
  • Jessica Robinson, Asria
  • Mike Brown, San Francisco Public Utilities Commission
  • Piet Klop, PGGM
  • Paul Fleming, Seattle Public Utilities
  • Arturo Buenaventura Pouyfaucon, Abengoa Water S.A.
  • Hannah Leckie, OECD
  • Paul Wood, Water Fund LLC

The Climate Bond Standard Board:

  • The California State Teachers Retirement System (CalSTRS)
  • The Nature Resources Defense Council
  • The Carbon Disclosure Project
  • The Ceres Investor Network on Climate Risk
  • The (EU) Institutional Investor Group on Climate Change
  • The (Australian) Investor Group on Climate Change
  • The State Treasurer of California, Bill Lockyer