The European Investment Bank is a key lender to the water sector, both in the EU and beyond. Keith Hayward looks at its activity, including how it is evolving to support climate, circular economy and nature-based investments.
Water has long been a priority for the European Union. So it is no surprise that it is also a priority for the EU’s investment institution, the European Investment Bank (EIB). Indeed, to date, the bank says it has lent more to the global water sector than any other international financial institution; since its creation in 1958, this amounts to €66 billion across 1400 water projects with a total investment value of €200 billion.
The EIB takes its lead from EU policy. As a result, its outlook can be progressive in banking terms. This is visible in the EIB’s announcement, in November, that it will end financing of unabated fossil fuel projects, including gas, from the end of 2021. The decision followed an extended consultation period, with a senior bank official describing the move as ‘a compromise’. Nonetheless, it makes clear that the bank is in a position to help shape what investments take place.
Water sector priorities
For water, this direction of support is set out in the bank’s water sector lending policy, published in 2008, but revisited since, with the release of a revised water sector lending orientation at the end of 2017.
The overall direction for water stems from the EU’s main legislation in this area – the Water Framework Directive. The EIB notes in the new orientation that much of the core investment needed under the Urban Waste Water Treatment Directive and the Drinking Water Directive is complete. It sees that the challenges have shifted to needs such as maintenance, renovation, emerging pollutants, and the requirements of the Water Framework Directive – with its goal of improving the ecological status of waters – and the Floods Directive. Alongside this, the international community has agreed the Sustainable Development Goals since the original policy was set out, with their target deadline of 2030.
Against this backdrop of shifting priorities, the bank framed its revised lending orientation around a key message: the need to secure and protect water security. “Lack of water security and, more generally, sustainability could translate into loss of growth and jobs, and lead to social and political tensions – and possibly national or international conflict – having an impact on the global value chains of businesses and increasing migration pressures,” states the orientation document.
The EIB raises its funds from investors on the capital markets… and here we can see how it is cultivating and reflecting changes in investor appetite
The document represents guidance on what investments the bank will support. It also highlights some of the main failings in proposals that have not been successful. These include a failure to properly embed projects in long-term integrated water resources management plans, or to adequately present an analysis of options. Climate risks and adaptation measures need to be considered, and cost recovery must be included.
The orientation document also specifically notes that development of new water resources, such as desalinated sea water or water from inter-basin transfers, will only be supported if all alternative demand-side measures have been considered sufficiently and no better alternatives are available. This can mean, for example, that the bank will want to see that network water losses have been addressed before investments are made in new sources. On flooding, it states that all flood risk reduction measures should consider the integration of nature-based solutions (see panel).
Guided by this policy, project proposers make their submissions to the bank to secure loans for the investment funding they require – typically, in the case of water, to meet regulatory or policy requirements.
EIB support to the water sector consists mainly of direct lending to municipalities and publicly owned utilities. Loans for water and sanitation projects total €3-4 billion annually, of which 90% are for projects in the EU. On average, EIB financing accounts for around 30% of the project cost, thereby supporting overall water and sanitation investment of €9-13 billion annually. The average project size in the EU is approximately €150 million and around €50 million outside of the EU.
Although EIB finance has, so far, been provided mainly for new or upgraded sanitation and drinking water infrastructure, the bank increasingly supports projects in other areas, such as flood risk reduction, erosion prevention, new water supply (including desalination), new efficient technologies and revitalisation of watercourses.
This support for water is made through different types of loans. It is mainly classic investment loans to clients such as utilities, governments, or provinces or regions. The bank also provides framework loans for smaller projects. These might be with a government ministry, for example, covering a sector across a country, or a multisector loan to a region or city. EIB also gives global loans, designed to channel investment through to even smaller investments by working with public or private intermediate banks. This approach has included a project working with two large French banks to implement 640 small wastewater projects totalling €730 million – just more than one million euros per project on average.
Core water utility projects will typically be evaluated by the bank’s water management division, but involvement with water goes wider than this, especially when it comes to flooding in urban areas. The bank supports integrated approaches to urban water, including, for example, the use of infiltration to help manage stormwater. Responsibility for this type of activity may well be with the city rather than the water utility. In this case, the main contact with the bank may be through its urban development team, which typically provides multisector loans to cities and regions.
In parallel to this project focus, the EIB raises its funds from investors on the capital markets. This is the other side of EIB’s business, and here we can see how the bank is both cultivating and reflecting changes in investor appetite.
The recent announcement from the EIB about its shift away from fossil fuel projects is the latest step in its evolving approach to climate-linked investment. This has included the pioneering launch, in 2007, of its Climate Awareness Bonds (CAB).
Funding sources are assigned to projects by the bank. CABs were set up to draw in investment specifically targeting climate change mitigation and greenhouse gas reduction. For this reason, CABs can be connected to water through projects including biogas and power generation from sewage sludge treatment, for example.
According to unaudited EIB data for allocations in 2019, recent projects receiving CAB support include the Energy Optimisation through Sludge Treatment project of Vienna wastewater utility EBS, which received 41% of the cost of the submitted project through CAB, representing more than €20 million. Further afield, is the Panama City and Bay Wastewater Treatment Project, in Panama. Both are eligible for CAB under the bank’s sub-category of ‘energy from waste’.
The bank took this shifting investor appetite further with the issuing, last year, of its first Sustainability Awareness Bonds (SAB) – a €500 million issue that was substantially oversubscribed. As the name suggests, these tap into the global support for progressing action on the Sustainable Development Goals. They are aimed at funding investments that advance the SDG targets.
For water, for example, this means connecting people to water supply systems or sewage systems who were not connected previously or delivering substantial gains in areas such as pollution prevention or drastic reduction of non-revenue water.
This emphasis means that disbursements for projects outside of the EU could well be allocated under SAB for almost all of their investment. According to unaudited EIB data for allocations in 2019, projects in Tunisia, Bangladesh, Morocco, Egypt, Jordan and Ecuador, for example, have attracted 100% SAB allocation. Even projects such as the Thames Tideway Tunnel in the UK, and the Brussels South Wastewater Treatment Plant in Belgium, have received a high SAB allocation for projects submitted.
The circular shift
The next emerging direction – again reflecting EU policy – is support for the shift to a circular economy. In July of this year, the EIB, along with five national banks, announced the launch of the Joint Initiative on Circular Economy, targeting investments of at least €10 billion over 2019-2023 to accelerate the transition to a circular and sustainable economy. According to the announcement, the initiative will provide loans, equity investments and guarantees to eligible projects for public and private infrastructure, municipalities, private enterprises, and research projects. It stated that one focus of the initiative will be circular value recovery, recovering materials and other resources from waste, recovering waste heat, and/or reusing treated wastewater.
This announcement followed a signal by the bank for wider commitment to the circular economy given by the release, in December 2018, of the report The 15 circular steps for cities. A specific link with water made in the report is the opportunity to close loops by connecting waste/residue/water/heat generators with off-takers.
Much of the water sector’s direct activity around the circular economy is likely to be in relation to sewage sludge, for example. This is an area already funded by the bank, but the EU policy direction in particular signals that activity will increasingly be able to attract financing through the bank, including in areas such as nutrient recovery and water reuse. This might mean activity in terms of specific projects or broader initiatives – such as those aimed at supporting innovation – connecting, in particular, with the European Fund for Strategic Investment and its aim of mobilising private sector capital.
Prospects for water
The investment needs around water are huge. Figures from within the EIB, for example, put the estimated average global investment needed in all forms of water infrastructure at €640 billion a year until 2030.
EIB has a track record of connecting projects that respond to those needs with investment finance. Its progress with climate, sustainability, and looking forward to the circular economy and use of nature-based solutions, suggests this role will only grow – and it is one that can tap into what the bank sees is a growing desire for green and sustainable investment opportunities.
EIB water and wastewater sector activity:
Water sector lending orientation:
Belgium to benefit from nature-based financing support
Another emerging dimension of EIB’s financing options is the support it is giving to nature-based solutions. This is being done through its dedicated Natural Capital Financing Facility (NCFF), with the deadline for project proposals extended to the end of 2021. The bank sets out details of how to access the facility in its guide Investing in nature: Financing conservation and nature-based solutions.
EIB describes the NCFF as a dedicated programme to support pioneering conservation and nature-based solutions projects, consisting of a flexible finance facility (typically providing direct/intermediated debt or investing in equity funds) combined with a technical assistance support facility to help with grants for project preparation, implementation, monitoring and evaluation.
The initiative taps into the growing recognition of the value of nature. Citing WWF, the report says nature’s contribution to the global economy is worth more than $125 trillion a year. It adds: “Building conservation and nature-based solutions into projects represents a massive opportunity: from lowering operational costs and unlocking new revenue streams, to increasing customer engagement and delivering public environmental goods.”
EIB is currently preparing a new loan to Société Publique de Gestion de l’Eau (SPGE), the wastewater authority for Wallonia, Belgium, in what would be the bank’s first NCFF support in Belgium.
Unlike previous SPGE investment programmes supported by the EIB, there will be a component with nature-based solutions. The proposed investments consist of two groups of schemes.
One has nature-based solutions using planted reed beds for the treatment of wastewater in very small locations (from 250 to 760 population equivalents) with the ultimate objective of achieving very good water status in receiving water bodies in accordance with the EU Water Framework Directive. This will contribute to the conservation and recovery of the freshwater pearl mussel, a species extinct in most of western Europe, as well as its host species, the brown trout.
The other group consists of measures that promote biodiversity in the water abstraction catchment areas for which the SPGE is responsible. These measures include, for example, ecologically managed pastures, creating meadows, and setting up natural ponds or lagoons and reducing water overflows.
According to EIB, these steps go beyond the legal obligations required of SPGE, and this component will benefit from support from the EU under the NCFF.