Water has moved to the center of the global development and climate agenda this year. The launch of the Water Forward initiative in April and the upcoming UN Water Conference in December signal a generational shift in political ambition, one focused on securing safe, reliable, and affordable WASH services for all while building water systems resilient to a changing climate. 

Yet ambition alone does not move capital, and the financial tools needed to mobilize investment at the scale the sector requires are not yet fully defined. This gap represents a significant opportunity to replicate what has worked and advance innovative financial solutions. 

Climate Policy Initiative (CPI) has spent more than a decade supporting the design, launch, and scaling of innovative financial solutions that drive capital into climate-critical sectors, including water, across emerging markets and developing economies (EMDEs). That work has produced its share of successes alongside initiatives that faced considerable obstacles and have not yet taken off. Both have been instructive. Below, I distill five key insights essential to designing financial solutions that are responsive to the unique complexities of the water sector. 

The Challenge 

The water sector is in pressing need of additional financing to meet SDG 6 and address the worsening climate crisis. 2.1 billion people lack access to safely managed drinking water, and 3.4 billion live without safely managed sanitation. The urgency is clear. Yet funding remains woefully insufficient, with the World Bank estimating that an additional USD 140.8 billion in annual investment is needed just to meet SDGs 6.1 and 6.2 by 2030. 

Traditional water funding modalities – tariffs, taxes, and transfers – are under strain, jeopardizing sustained investment and threatening to widen the gap further. Constrained public budgets (taxes), declining ODA (transfers), and growing household affordability challenges (tariffs) are eroding the three pillars that have historically underpinned water funding across the globe. 

Innovative financing solutions have an important role to play in this evolving landscape, though they are not a substitute for addressing the fundamental issues of cost recovery and governance that constrain the sector. When deployed in contexts suited to repayable finance or on the tailwinds of meaningful reform, however, innovative financing becomes a powerful tool for crowding in the capital needed to close the water finance gap. 

Accelerating Innovative Water Finance Models  

CPI, through the Global Innovation Lab for Climate Finance and the Catalytic Climate Finance Facility, has supported the development, launch, and scaling of 12 innovative financial solutions[i] with a direct focus or impact on the water sector. Collectively, these solutions have mobilized more than USD 1.2 billion as of December 2025. 

The solutions have taken a variety of forms, including debt facilities, outcome-based instruments, and venture capital funds, and have targeted different segments of the water sector, from WASH provision and freshwater ecosystem services to the blue economy, across Latin America, Sub-Saharan Africa, and Southeast Asia. Not all have moved from design to implementation. Many earlier instruments encountered substantial challenges, and those experiences have been as informative as the breakthroughs. 

CPI has leveraged those learnings to refine its approach and offers five key lessons that cut across much of that experience. 

1. Building a bankable project pipeline is critical, and early-stage patient capital is a key enabler 

Solutions that provide dedicated project development or technical assistance funding ahead of commercial investment are better positioned to identify and prepare pipelines that align with investor risk profiles. WASH service delivery and ecosystem service projects in particular require early-stage capital to strengthen bankability given persistent regulatory and cost recovery hurdles. 

Climate Investor Two illustrates this well: a dedicated development fund provides technical assistance to improve financial viability and cover project planning costs, allowing commercial capital to enter at the appropriate construction and operational stages and ensuring a bankable pipeline for investors. 

2. Equity capital at the construction stage is often more suitable than debt 

The high risk and long timelines associated with WASH infrastructure make debt financing costly and frequently unaffordable for developers at early stages. Equity is typically better suited to early and construction-stage needs, with debt becoming appropriate once projects are bankable and cash flows are secured. 

The Water Resilience Debt Platform reflects this reality: despite debt being central to its structure, it requires that the initial construction phase be financed with at least 30% equity from project developers or corporate off-takers to account for early cash flow constraints, with capital market refinancing occurring once commercial operation is achieved. 

3. Diversification beyond WASH infrastructure strengthens fund viability and enables scaling 

Broad, multisector pipelines spanning areas such as green shipping, renewable energy, ecosystem services, and waste-to-energy improve diversification and expand opportunities by spreading the risk of WASH investments across a portfolio while still delivering essential water sector outcomes. Funds focused exclusively on WASH service delivery have struggled to attract commercial investors, even where de-risking mechanisms are in place. 

Catalyst Fund demonstrates an alternative approach: by targeting fintech for climate resilience, sustainable livelihoods, and climate-smart essential services, including water, it maintains sufficient diversification to be suitable for private capital while still investing meaningfully in water service providers. 

4. Engaging non-traditional off-takers and owners strengthens financial solution viability

Weak financial capacity and poor creditworthiness mean that many public utilities across emerging economies cannot act as owners, developers, or off-takers in commercial finance structures without significant technical assistance and de-risking support. Creditworthy utilities are few and tend to already have access to financing through local capital markets or public-private partnerships. Financial solutions should therefore engage creditworthy non-traditional infrastructure owners and off-takers, including investor-developers, industrial players, and corporates, while not neglecting efforts to improve utility bankability over time. 

Water Financing Facility illustrates why this matters: its struggle to identify a bankable utility pipeline, a direct consequence of weak financial and governance capacity among potential borrowers, inhibited implementation. Working with non-traditional off-takers or on the heels of meaningful utility reform could be central to the instrument’s path forward. 

5. Designing around policy realities and in partnership with governments reduces implementation risk

Regulatory barriers and dependence on government project pipelines have created significant obstacles to implementation across several instruments. Financial solutions must be designed with the policy and legal status quo in mind, or developed in close partnership with governments. 

Climate Adaptation Notes serves as a cautionary example: the instrument’s dependence on a South African government pipeline that did not materialize was a key factor in its limited success, even as its core financial structure has since been adapted and adopted by the Water Resilience Debt Platform, demonstrating that lessons from failure can still generate lasting value. 

The Opportunity Ahead 

The convergence of political momentum, institutional commitment, and pressing need makes this a pivotal moment for water finance. What has historically made the sector difficult, fragmented pipelines, weak off-takers, and policy uncertainty, are challenges that innovative financial structuring is increasingly equipped to address. 

The Water Forward initiative represents a particularly significant inflection point. By mobilizing political will through country compacts, it creates the kind of government alignment that financial solutions have historically depended on but rarely had. Designing and structuring financing solutions using the lessons outlined above offers a credible path to deploying capital at scale and helping secure a water-resilient future for all. 

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[i] The 12 financial instruments are Climate Investor Two, Catalyst Fund Resilience I, Good Fashion Fund 2.0, Blue Alliance Blended Finance Vehicle, the Southeast Asia Blue Innovation Facility, Páramo Wildfire Resilience Facility, Acre Export Finance Fund I, Resilient Municipal Market Fund (ReMark), Blue Energy Mechanism, Monetizing Water Savings, Water Financing Facility, Climate Adaptation Notes / Water Resilience Debt Platform.