Unlocking the enormous impact potentialof battling the water crisis
Many countries struggle with water pollution and deficient
access to clean water. Governments and companies areworking on solutions through innovation, renewable energy,
and recycling. “By providing much-needed capital, investors
can unlock significant positive environmental and socialchange,” claims Samy Muaddi, head of emerging markets
fixed income, and Matt Lawton, portfolio manager of a global
impact credit strategy at T. Rowe Price.
Emerging markets are disproportionately affected by pressing
issues such as water scarcity, water pollution, overfishing, andinadequate sanitation infrastructure. Billions of people globallylack clean and safe water, and sanitation. The water situation
is particularly acute in emerging markets due to a combinationof rapid urbanization, weak governance, and insufficientinvestment in water infrastructure.
This water crisis is widely recognized as one of the mostsignificant challenges of our time. Two of the seventeen
Sustainable Development Goals of the United Nations are
directly related to water: SDG6 – clean water and sanitation –and SDG14, which aims to protect life below water. However,both are among the most underfunded of all SDGs.
Muaddi: “To reach the targets of SDG14 by 2030, an estimated
175 billion US dollars of investments would be needed everyyear. We are far away from that number. Only 10 billion has been
invested, not per year but over the last five years! This leaves animmense investment gap. The situation around clean water andsanitation is not much better.”
Recognizing the scale of the challenge, several governments inemerging markets have started to prioritize water infrastructurein their development agendas, thereby creating substantial
opportunities for private investment.

Blue bonds: dedicated funding for
positive change
Investors can funnel capital through equity and bonds. Bluebonds, an emerging class of fixed-income securities, specificallytarget initiatives that seek to improve ocean health, battle
habitat destruction, and provide sustainable water resources.
Unlike green bonds, which broadly focus on environmental
projects, blue bonds only address aquatic challenges, making
them distinct within the spectrum of sustainable bonds.

Water-related projects often serve both developmental andsustainability goals, according to impact investor Lawton.
“Investors help solve critical problems, but they also tap into a
range of emerging opportunities in the blue economy. Of course,
economic development must be sustainable.”
The vibrant blue economy represents a diverse and growing
investment opportunity, spanning multiple industries fromtourism to marine transport. Ocean-linked sectors alone
contribute 2.5 trillion USD to the global economy and support
over 30 million jobs worldwide, according to the United Nations
Environment Programme Finance Initiative.
Financing solutions and ‘blue’ development is expected togenerate financial returns for investors, but more importantly,
create a significant positive impact, such as improved
biodiversity, enhanced climate resilience, and stronger
economic growth in coastal communities, which often areamong the poorest populations in emerging markets.

A multitude of projects to invest inBlue bonds in emerging markets are predominantly issued bygovernments. The first emerging market blue bond was issued
by the Seychelles in 2018 to expand marine protected areas andsustainable fisheries. More recently (2023), a sovereign blue
bond was issued by Fiji to fund 18 blue projects that promotesustainable use of ocean-based resources to support economicand social development. According to the Fiji government, thebond was oversubscribed by three times the issuance amount.
https://www.fijitimes.com.fj/fijis-sovereign-blue-bondoversubscribed/
Many water-related projects are traditionally thought of as
public-oriented investments, but governments can’t solve thewater crisis alone. Muaddi: “I have been investing in developingcountries for almost 20 years now, and it has become clear
to me that we are currently experiencing the most significant
period of sovereign distress, probably since the 1980s. The
private sector must step in and be a part of the solution. Thewater crisis doesn’t wait for our debt issues to get resolved.”

For investment professionals only. Not for further distribution.

One of the most pressing social problems today is the scarcity
of freshwater. Demand in emerging markets has seen a sharp
increase due to population growth. Muaddi: “The current waterinfrastructures cannot handle as many people as we have today
versus 40 years ago when these infrastructures were built.
Investments are needed for infrastructure projects, but also forsmart initiatives in water-intensive industries and agriculture.
Agriculture accounts for 70% of freshwater usage.”
Another major issue: good sanitation is lacking in many places.
Muaddi: “I visited favela communities in Brazil – the communities
built on hills – and I can tell from first-hand experience that it’s
tough to get clean water uphill and resolve the huge problem
of dirty water coming downhill. This impacts people every day.
We have the technology to fix this, it just needs to get funded bywater utilities.”

The blue economy offers strong investment
cases
The specific class of blue bonds will allow investors to help
impact water sustainability, offering investors a clear path tocontributing to two underfunded UN Sustainable Development
Goals. As such, blue bonds may also provide a dedicated asset
class for diversification in an impact portfolio. Because waterprojects are chronically underfunded, impact investors can makea real tangible contribution from day one, explains Lawton. In
this sense, investors can achieve a high degree of additionality,
an important criterion in impact investing.”
Because so much capital is needed and most governments andmany companies are feeling the urgency of finding solutions,blue bonds aim to deliver a good financial return to investors.
As with green bonds, the interest rates are currently competitive
compared to traditional bonds.
Lawton: “Early investors in this relatively new market also
have the first-mover advantage to shape the market andhelp influence the development of a blue bond infrastructure
and monitoring framework. In addition, investors will gain
recognition as pioneers in a worldwide blue mission, creating
meaningful progress and positive impact.”
All investments are subject to market risk, including thepossible loss of principal. Blue bonds carry investment
risks, which include credit risk and interest rate risk.
Emerging markets are less established than developed
markets and therefore involve higher risks.

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