The world has entered an era of global water bankruptcy, making water risk in infrastructure finance increasingly difficult to ignore.
Many river basins and aquifers can no longer return to historical baselines. Infrastructure projects are increasingly being exposed to water conditions that differ from those they were designed to withstand, creating growing operational and financial risks for developers and investors. Supplies that were once reliable are becoming less so. Floods and droughts are more frequent, and the natural systems that store and clean water are under strain.
NatureFinance and the Private Infrastructure Development Group explore these challenges in their latest report, Investing in water-related and dependent infrastructure: Risks, considerations and opportunities. The report examines how water risks affect infrastructure performance, resilience and investment outcomes, and sets out a practical framework for integrating ecosystems into how those risks are assessed, priced and managed.
Its central argument is that while financial markets are increasingly recognising water risk, infrastructure finance still struggles to value and invest in the ecosystems that underpin project resilience.
Why water risk is not reaching infrastructure finance decisions
Water risk is becoming financially material. Credit rating agencies are beginning to incorporate water stress into assessments of exposed sectors and sovereigns. Large institutional investors are allocating capital based on exposure to water-related risks and moving it away from the most exposed assets.
A growing body of evidence also shows that these risks are already affecting asset values and contributing to stranded assets.
Central banks are reaching similar conclusions about the wider economic significance of water risk. Research by the European Central Bank and the University of Oxford found that, among all nature-related risks facing the euro area economy, water scarcity and declining water quality are the most financially material.
Yet this growing recognition of water risk in infrastructure finance is not consistently shaping project-level decisions.
Many investors and financial institutions screen for water risk using tools such as the WWF Water Risk Filter and WRI Aqueduct. But these tools are designed to identify and disclose risks and dependencies, not to translate them into financial pricing. As a result, the way water risk informs investment decisions varies from one institution to the next. Even where a material dependency is identified, it often goes no further. It rarely shapes pricing, contracts or how a project is financed.
Cape Town: treating nature as infrastructure
Cape Town offers a rare example of a city assessing nature-based infrastructure in its own right. Following the 2015–2018 drought, which brought the city to the brink of “Day Zero”, authorities faced pressure to expand water supply through traditional grey infrastructure, including desalination plants and dam expansion.
But a more cost-effective option lay upstream. Water-thirsty invasive alien trees had colonised more than two-thirds of the catchments feeding the city’s dams. Removing them and restoring the catchment delivers water at a lifecycle unit cost of R1.2/m³, compared with R14.9/m³ for desalination.
The problem is that comparisons like this are rarely made. Grey infrastructure, such as plants, dams and pipes, and green infrastructure, such as watersheds, wetlands and forests, are seldom evaluated and financed as one system. When they are assessed separately, the green option appears as an additional cost rather than a lower-cost alternative. Integrated solutions are therefore systematically undervalued, even when, as in Cape Town, they offer the better deal.
The Panama Canal: carrying an unpriced dependency
The Panama Canal shows what happens when this evaluation does not take place. Its operation depends on rainfall into a single watershed. The locks run on freshwater from Gatun Lake and every transit draws tens of millions of gallons from it.
Yet this dependence appears not to have been reflected in the canal’s financial model. Treating a natural system as a fixed externality does not remove the risk. It simply leaves the project to carry it by default.
This risk materialised between 2023 and 2024, when drought pushed Gatun Lake to near-record lows and forced the canal to cut transits by close to a third over the 2024 financial year. Ships queued for days or were rerouted thousands of miles around South America or through the Suez Canal, increasing freight costs and delivery times. Because canal fees are a major source of government revenue, the disruption also affected Panama’s public finances.
The natural system underpinning the canal was never funded as infrastructure. Panama is now spending roughly $1.6 billion on a new reservoir and dam: a built response to a natural system it did not invest in sustaining.
From recognising water risk to financing resilience
The report’s wider analysis, illustrated by the Cape Town and Panama Canal case studies, identifies four key barriers to financing water resilience:
1. Grey and green infrastructure are rarely evaluated as a single system
2. When natural systems are treated as fixed externalities, projects carry the risk by default and that risk remains unpriced
3. The ecosystems that infrastructure depends on are rarely funded for the services they provide
4. Accessible insurance for large-scale water risks, including drought, remains limited.
Together, these findings point to a deeper financing challenge. Protecting a water system usually prevents future losses rather than generating immediate income. Its value may be reflected in more reliable water supplies, lower operating costs or reduced disruption, but it does not automatically produce the cash needed to repay a loan or deliver a return to investors.
Nor is there always a safety net when a shock occurs. No off-the-shelf insurance product currently exists to transfer a drought shock of this scale. Parametric instruments, which pay out automatically when predefined conditions such as rainfall deficits are met, exist in principle. But cover at this scale remains bespoke, thinly traded and can fail to match actual losses, leaving projects exposed even when insurance is in place. Uninsured losses are therefore common, particularly in emerging and developing economies, leaving the exposure on project and public balance sheets.
Bridging this gap requires infrastructure appraisal to recognise the full value of ecosystem protection and financing models that convert some of those benefits into investable revenue streams. These could include payments for ecosystem services, results-based returns and mechanisms that place a financial value on avoided costs.
Many of the necessary building blocks already exist. Cities and utilities use water funds to finance upstream conservation. Catalytic capital can make marginal projects viable. Investors already participate in results-linked instruments, including the World Bank’s outcome bonds, where returns depend on environmental outcomes being delivered.
What is missing is wider deployment. These approaches need to move beyond isolated transactions and become part of routine project appraisal, pricing and financing decisions.
Water risk should not become visible only when infrastructure begins to fail. Investors, financiers and project developers can act earlier by treating ecosystem condition as a financial variable, evaluating grey and green infrastructure together and financing not only the asset itself, but the natural systems that keep it performing. The next step is to make this standard investment practice.
