The world has entered an era of global water bankruptcy, in which many river basins and aquifers can no longer return to historical baselines. As the hydrology that projects were designed around begins to shift, water related risks are becoming operationally and financially material for infrastructure developers and investors worldwide. Supplies that were once reliable are less so, floods and droughts are more frequent, and the natural systems that store and clean water are under strain.
To explore the implications for the development and financing of water-related and water-dependent infrastructure, we have produced a new report examining how water risks influence infrastructure performance, resilience, and investment outcomes. The report also makes the case for, and provides a practical framework to support, the integration of ecosystems into the assessment, pricing, and mitigation of water-related risks, highlighting the critical role of nature in enhancing infrastructure resilience, performance, and long-term value.
Markets are starting to price water risk.
Financial markets are responding. Credit rating agencies are beginning to incorporate water stress considerations into credit assessments for 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.
Alongside this, a growing body of evidence shows water-related challenges are driving the stranding of assets. Even central banks have taken notice, with the European Central Bank, working with the University of Oxford, finding that among all nature-related risks to the euro area economy, water scarcity and declining water quality are the most financially material.
Regulators, rating agencies, and institutional investors are now all starting to price water risk.
Many investors and finance institutions screen for water risk, using widely available tools like the WWF Water Risk Filter and WRI Aqueduct. But these tools are built to assess and disclose a dependency, not to price it. As a result, the way water risk informs investment decisions varies from one institution to the next, and even where a dependency is identified, it often goes no further. It rarely shapes pricing, contracts, or how a project is financed. Identifying a risk and pricing it are two different things, and that is exactly where the gap persists.
Cape Town is a rare example of a city treating a nature-based solution as infrastructure in its own right. Following the 2015-2018 drought, which brought the city to the brink of “Day Zero”, city authorities faced pressure to expand water supply capacity through traditional grey infrastructure solutions such as desalination plants and dam expansion. However, a more cost-effective alternative lay upstream. Water-thirsty invasive alien trees had colonised more than two-thirds of the catchments feeding the city’s dams. Removing these trees and restoring the catchment delivers water at a lifecycle unit cost of R1.2/m³ vs desalination at R14.9/m³ – a fraction of the cost.
The catch is that this kind of comparison is rarely made in evaluations. Grey infrastructure (plants, dams, pipes) and green infrastructure (watersheds, wetlands, forests) are almost never costed and financed as one system. When they are evaluated separately, the green option shows up as an added cost rather than a cheaper alternative to the grey one, so integrated solutions get systematically undervalued, even when, as in Cape Town’s case, they are the better deal.
The Panama Canal shows what happens when this evaluation never takes place. The canal’s entire operation depends on rainfall into a single watershed: its locks run on freshwater from Gatun Lake, and every transit draws tens of millions of gallons from it. This dependency appears to have gone unpriced in the canal’s financial model. Treating a natural system as a fixed externality doesn’t make the underlying risk disappear. It just goes unpriced, and the project carries it anyway by default.
This happened in 2023 to 2024 when drought pushed Gatun Lake to near-record lows, forcing the canal to cut transits by close to a third over the 2024 financial year. Ships queued for days or rerouted thousands of miles around South America or through the Suez Canal, pushing up freight costs and delivery times globally. Canal fees are a major source of Panama’s government revenue, so the disruption hit public finances too.
The upkeep of the natural system that made the canal possible was never funded as infrastructure. Panama is paying for that now: it is spending roughly $1.6 billion on a new reservoir and dam, a built fix for a natural system it never invested in sustaining.
And there was no safety net to fall back on. No off-the-shelf insurance product existed to transfer a drought shock of this scale. Parametric instruments, policies that pay out automatically against rainfall deficits, exist in principle, but at this scale, cover remains bespoke, thinly traded and exposed to basis risk. Uninsured losses are therefore the norm, especially in emerging and developing economies, and the exposure simply sits on project and public balance sheets.
Four findings emerge from these two case studies:
Underneath all four findings sits one key problem and it is what this report sets out to change. Protecting a water system mostly prevents losses rather than earning money, so the value it creates does not arrive as cash to pay dividends or repay a loan.
The task facing the industry is to bring the full value of ecosystem protection into investment appraisal, and to build revenue models that turn avoided losses into revenue streams. This could be a payment for the service, a results-based return, or a price put on the avoided cost, helping channel private capital toward ecosystem protection and restoration at scale.
The building blocks for these revenue models already exist. Cities and utilities fund upstream protection through water funds and similar mechanisms. Catalytic capital providers make marginal deals bankable. Investors already buy results-linked instruments, such as the World Bank’s outcome bonds, where returns depend on an environmental result being delivered.
The instruments already exist. What is missing is deployment: moving them from one-off deals into standard practice and building them into mainstream pricing decisions. This way, the risks the wider market has begun to price are reflected in, and responded to by, the assets that actually depend on them.
Closing that gap is what our report Investing in Water-Related and Dependent Infrastructure: Risks, Considerations, and Opportunities sets out to do: moving the value of ecosystems from the niche to the mainstream and taking financing structures and investment solutions from isolated case studies to widespread practice.
