WaterEquity maximizes its impact by integrating financial resources with local knowledge & support

Paul O’Connell has been leading WaterEquity since 2019, leveraging over two decades of financial expertise from his tenure at FDO Partners, LLC. An accomplished author and TED speaker, Paul has deep knowledge of exchange rate behaviour and international capital flows. His commitment to global development is reflected in his previous board roles with Water.org and Gavi. Marlene Hormes directs WaterEquity’s investment strategy, overseeing four funds with more than $436 million in capital raised. With a career spanning 20 years, Marlene has held significant positions at Annycent Capital, Alphamundi, DEG, and Goldman Sachs. Her extensive experience includes managing investments across 26 countries. Marlene also serves on several boards and investment committees, including the African Development Bank. Please read on for their insights and perspectives.

Can you share with us the story behind the founding of WaterEquity and what inspired you to tackle the global water crisis through impact investing?

Paul O’Connell: WaterEquity was founded on the belief that capital markets offer a powerful way to address the urgent need for safe water and sanitation in emerging markets. Our co-founders at Water.org, Gary White and Matt Damon, had already achieved significant success by encouraging microfinance companies in emerging markets to provide credit to households for water and sanitation improvements. But once the model was proven, there was a need for more capital. That was the genesis of WaterEquity.

The idea was to launch an investment management company to raise funds from the broader capital markets and put those funds to work in investment vehicles that not only provide the opportunity for financial returns but also drive meaningful social impact. There is a large and growing pool of impact-oriented investors who seek a double bottom line from their investments. Water and sanitation access is a relatively uncontroversial impact goal that many investor groups can coalesce around, given its interaction with climate change, gender equality and poverty alleviation. To date, WaterEquity has raised $463 million in capital commitments, alleviating the capital shortfall that Gary and Matt first identified.

What are some of the key challenges you've encountered in your efforts to increase access to clean water and sanitation, particularly in underserved communities?

It is clear that those at the base of the economic pyramid often pay more in absolute terms for water and sanitation than the global average

P.O.: One of the key challenges is the sheer scale of the problem. 1 in 4 people worldwide lack access to safe water and sanitation in their homes (Source: WHO and UNICEF (2023) - Progress on Household Drinking Water, Sanitation, and Hygiene 2000-2022: Special focus on gender). Each day, women around the world spend an aggregate of 200 million hours collecting water and many families pay exorbitant prices for tanker water, which can be up to 20 times higher than the cost of tap water (Source: Graham, Hirai, Kim. (2016). An Analysis of Water Collection Labor among Women and Children & Unilever Domestos, WaterAid and WSSCC (2013). We can't wait: A report on sanitation and hygiene for women and girls).

Time spent gathering water or seeking safe sanitation accounts for billions in lost economic opportunities. There are also invisible costs to account for, including treatment for illnesses caused by contaminated water, and lost educational opportunities for children who assist with water collection instead of attending school. Overall, $260 billion is lost globally each year due to a lack of basic water and sanitation (Hutton, G. and M. Varughese (2016). The Costs of Meeting the 2030 Sustainable Development Goal Targets on Drinking Water, Sanitation, and Hygiene. World Bank Water and Sanitation Program Summary Report).

The magnitude of the problem necessitates solutions that go beyond traditional philanthropy, and this is where capital markets can come in. For example, if just one-fifth of one percent of world equity market capitalization was directed to water and sanitation in emerging markets, the crisis would be solved in a matter of years, according to Hutton and Varughese.

 But this brings us to the second key challenge we’ve faced: persuading investors that water and sanitation is an investable asset class. There is often a lack of awareness and understanding of the benefits of investing in water and sanitation among traditional investors. Overcoming these barriers requires innovative financial mechanisms, capacity building, and advocacy efforts to highlight the social and economic returns of such investments.

Can you describe the innovative financial mechanisms and investment strategies that WaterEquity employs to address the water crisis while also generating financial returns for investors?

P.O.: Water and sanitation are what economists call necessity goods — they are consumed by each of us every day, irrespective of income. The only question is at what price? The evidence is clear that those at the base of the economic pyramid often pay more in absolute terms for water and sanitation than the global average. The price might be paid in money, as in the case of tanker water, or it might be paid in walking time or lowered health and education outcomes.

The realization that everyone is already paying for water and sanitation is the insight that allows financial returns to be generated for investors. The cost of credit to install a permanent household solution for water or sanitation is less than the daily price that those without access are already paying. Our financial solutions are designed to funnel credit to households to finance these solutions. Once installed, they produce “Day 1” benefits and savings, which allows families to repay the cost of credit over a modest and manageable timeframe that typically runs from 18 to 24 months.

Our screening and investment process proceeds in stages. First, we seek out opportunities with significant scalability and a track record of reaching underserved communities. Then, we prioritize impact and responsible investments by analyzing the social impact and ESG considerations of each opportunity. Finally, once an investment is made, we measure success, closely monitoring impact and financial performance throughout the investment lifecycle.

Beginning in 2022, WaterEquity embarked upon a new initiative with Water.org to originate investable opportunities in both microfinance and infrastructure. Water.org's engagement in market-building activities fortifies WaterEquity's pipeline, facilitating technical assistance and advocacy to nurture nascent markets. Underpinned by this initiative, our first infrastructure fund, the Water & Climate Resilience Fund (WCR Fund) achieved its first close in February 2024. Lead investors include blue chip, Fortune 500 corporations with water-related impact objectives and a belief in the investment strategy of WCR Fund.

How does WaterEquity measure the social and environmental impact of its investments, and can you share any notable success stories or impactful outcomes resulting from your initiatives?

P.O.: We take a rigorous approach to impact measurement, using industry standards such as the IRIS+ metrics and the Operating Principles for Impact Management.

WaterEquity measures impact through several key metrics, including the number of people reached with safe water and sanitation, both directly and indirectly, as well as the volume of water provided, or wastewater treated. Where possible we also track greenhouse gas emissions financed and avoided. Our investments aim to provide clean water and improved sanitation to millions, enhancing health and quality of life. Additionally, we strive to treat significant volumes of wastewater, reduce environmental pollution, and save water through conservation efforts. These initiatives collectively improve health, promote sustainability, and support global environmental goals.

One notable success story is Satin Creditcare Network Ltd. Satin is one of the largest microfinance institutions in India, with a gross loan portfolio of over $1B and more than 3M clients. It operates in nearly every state in India and serves primarily rural, female clients. In 2016, Satin launched its water and sanitation loan product with technical assistance from Water.org and now disburses an average of 70,000 water and sanitation loans annually. The majority of clients use the loan to invest in household sanitation facilities. Results from a client feedback survey indicated that 99% of Satin’s customers are satisfied with Satin’s service. In 2023 our funds made an investment in Satin that is projected to reach 100,000 people with water and/or sanitation over four years.

What role do partnerships play in the work of WaterEquity, and how do you collaborate with other stakeholders such as governments, NGOs, and local communities to maximize your impact?

Marlene Hormes: Partnerships are crucial to WaterEquity’s mission to mobilize private capital to address the water funding gap in emerging markets. We collaborate with diverse stakeholders, including NGOs, governments, and local communities, through two strategies: infrastructure investments and on-lending to low-income borrowers.

Infrastructure investments: Our infrastructure investment strategy relies heavily on the Public-Private Partnership (PPP) model, involving close engagement with governments, local communities, and the private sector. For example, we help structure municipal water projects to attract private investment, including from our Water & Climate Resilience Fund (WCR Fund). The WCR Fund also invests in private companies with scalable business models that offer proven water technologies, products, and services. Our non-profit sister organization, Water.org, plays a critical role by providing technical assistance in the early stages of a project's development or a company’s growth. Once ready, WaterEquity provides the necessary investment to build the projects or scale these companies.

On-lending for access to household water: Through our on-lending strategy, WaterEquity provides capital to financial institutions, which then lend to low-income individuals to construct water and sanitation facilities. Water.org supports these institutions by offering technical assistance to develop effective lending programs. This support includes helping these institutions understand the water crisis, assess loan demand for water and sanitation, and create targeted marketing materials. WaterEquity supplies the capital to scale these lending programs, ensuring they are tailored to local community needs and priorities.

By collaborating with governments, NGOs, and other private investors, WaterEquity maximizes its impact through the integration of financial resources with local knowledge and support, creating sustainable and scalable water and sanitation solutions. Our infrastructure investments aim to reach 15 million people with water and sanitation access, indirectly benefiting millions more through improved water quality and scarcity. Since 2016, our investments via financial institutions have enabled 1 million microloans, reaching over 5.8 million people with safe water and sanitation solutions.

In what ways does WaterEquity prioritize sustainability and resilience in its investments, particularly in the face of climate change and other environmental challenges?

M. H.: By 2025, 50% of the world's population is projected to live in water-stressed areas due to climate change, with low-income families bearing the greatest burden. (Source: The United Nations World Water Development Report 2018).

Our approach integrates environmental, social, and governance (ESG) criteria into our investment process so that our projects contribute to long-term environmental and community resilience. Additionally, we invest in business models and technologies that support a more resilient future, including investments in wastewater reuse, reducing physical water losses, and resource recovery.

Can you discuss the importance of gender equity and social inclusion in your efforts to improve access to clean water and sanitation, and how does WaterEquity ensure that marginalized communities are not left behind?

M. H.: The burden of inadequate water and sanitation is disproportionately felt by women and girls, who are typically responsible for providing water and caring for sick family members. At WaterEquity, our investments specifically target women beneficiaries, and we integrate gender considerations into our investment decision-making processes, carefully evaluating opportunities to maximize our impact on women and girls.

95% of WaterEquity’s end-client beneficiaries are women: our primary gender focus is on the impact of improved access to water and sanitation on the lives of women and girls. We disaggregate end-beneficiary feedback by gender to understand how women are affected by our investments, and we integrate gender into impact verification research whenever possible.

WaterEquity also conducts a gender inclusion analysis for every investee in our portfolio as part of the ESG process. This analysis covers the investee’s gender-inclusive strategy, leadership, employment policies, and product design. For example, we assess whether women have been consulted during project design, market research, or through stakeholder feedback. We also evaluate the representation of women on boards and in senior leadership, the state of gender parity among employees, and the presence of policies that support or hinder gender inclusion. WaterEquity flags areas in need of improvement and collaborates with investees to suggest and implement changes.

What opportunities do you see for scaling up your impact and expanding access to clean water and sanitation to even more people in need, both within existing regions of operation and in new areas? 

At WaterEquity, our goal has always been to build a sustainable, global capital market for safe water and sanitation to reach those in need. We aim to reach 100 million people in emerging markets by building a $1.9 billion portfolio of innovative investments that span household-level solutions to climate-resilient water and sanitation infrastructure. By continuing to attract capital from global investors and leveraging our deep expertise and partnerships in the sector, we can expand our reach to new regions and underserved communities.