700 million low income people on this world, for whom social distancing is virtually impossible cannot afford to miss a day at work or do not have access to abundant (clean) water or soap to limit the spread of the COVID-19 virus.
WASH: the core of human capital and a crystal-clear business
2.2 billion people still lack access to safely managed drinking water services and 4.2 billion people lack safely managed sanitation services (UNWater.org). It is therefore not without reason that water crises hit the Economic Forum top 5 global risks in terms of impact year-on-year.
Safe water, sanitation and hygiene (collectively known as WASH) are crucial for human health and well-being. WASH, declared a human right in 2010, is reflected in four out of seventeen Sustainable Development Goals (SDGs).
The business opportunities in WASH are very diverse due to the locality of the availability, affordability and quality of water and on the level of access to products and services. The business case is straightforward.
The World Bank (2016) says promoting good hygiene is one of the most cost-effective health interventions that exists. A study by the World Health Organisation (WHO, 2018) found that the global economic return on sanitation spending is US$5.5 per US Dollar invested. And from another WHO (2018) study we found that WASH is the most effective investment strategy in health (based on available data sources per category in this study) with six lives saved per US$100 invested. Besides the direct effects, water related companies play an important role in providing solutions that will contribute to both mitigating and adapting to the climate crisis by providing clean water and addressing resource scarcity.
As impact investing continues to grow, WASH is one of the fastest growing sectors with 43% per annum. Additionally, nearly one in five respondents in the GIIN survey plan to begin to assess WASH.
Planned sector allocation changes for 2019
Innovative partnerships to maximise financial and social return
The global water market is projected to reach a total value of US $914.9 billion in 2023, according to the latest 2018-2023 forecasts published by Global Water Intelligence (GWI, 2018). A 2016 analysis by the World Bank estimates that US $114 billion per year of capital investments will be required to meet universal access to safely managed water and sanitation services by 2030. The capital required can be deployed by companies working in various solution areas to tackle the water crises and guarantee future availability, quality and affordability.
Such companies have the ability to provide significant financial returns as well sustainable impact through a variety of financing instruments and can be scaled with the right form of additional supporting mechanisms. In essence, investments in WASH comprise a very heterogeneous range of activities, therefore, the WASH sector financing needs can be structured in variety of financial instruments ranging from project finance, fixed income to equity related.
For WASH, the impact and economic reasoning is crystal clear, although the WASH sector has a challenging risk-return profile, due to the (too low) prices of WASH products and services, the size and they are too country specific. The risk sensitivity due to the link with basic human needs, a low track record and the structure makes this difficult for professional investors to invest.
The sector’s status quo in terms of mobilizing private equity and debt investment can be compared to the financial inclusion sector over a decade ago. A theme that with the right support has made giant leaps in terms of professionalization and is now generally accepted in the investment portfolio of various types of investors.
Example from Practice: Safe sanitation through microfinance investments
Finish Mondial developed The Sanitation Impact Bond (SIB) in 2019. The scheme is now piloted through a US$3 million loan provided by partner ACTIAM, to Cashpor Microcredit in India, a microfinance institution (MFI). The pilot aims to test the working of the bond structure, the capacity development measures, the measurement of the impact linked to loan conversion and toilet use.
The SIB pilot programme with Cashpor is being implemented in four states of India, with an objective to add 35,000 toilets, and set out and test the contractual arrangements. Similar partnerships with other MFIs and impact investors are underway and the full SIB will aim to mobilize €100 million from institutional investors and high net worth individuals. The intended impact is an additional 500,000 safe household sanitation systems built in 2 years, benefitting approximately 2.5 million more people.
Today, the world’s water crises remain an even more existential threat due to the economic fallout from the Covid-19 pandemic. Oxfam estimates that more than half a billion more people could be pushed into poverty unless urgent action is taken to bail out poor countries. Companies can take a close look at their own impact on the quality and availability of local water sources. In this phase of market building, the role of a qualified asset manager is crucial to connect investee needs and investor needs by creating awareness, sharing knowledge and develop and market investable solutions. The financial and societal evidence of WASH investments are present, will investment flows follow suit?
Nikkie Pelzer – Senior Impact Investing Analyst
Romée van Wachem – Relationship Manager Impact Investing