Editor's Note: This article is part of an ongoing RANE series on the geopolitical impacts of water stress. The first installment of this series provided a broad overview of how the unequal distribution of freshwater shapes geopolitical patterns. Other installments have examined the impacts of water stress on the global economy, Europe, China, the Sahel region of sub-Saharan Africa, Israel, Central Asia, Chile, the Middle East and the Mekong River region.

Despite the growing convergence between water stress and climate finance, water-related finance and investment will continue to lag, exacerbating water stress challenges in many developing countries. Countries facing water challenges are steadily pushing water-related issues into the spotlight of U.N.-led climate negotiations, as will be on full display at this year's Nov. 11-22 U.N. Climate Change Conference (COP29). Azerbaijan, — a country already facing a high degree of water stress — will host the conference, and climate negotiators are expected to sign the COP29 Declaration on Water for Climate Action. The declaration will launch the Baku Dialogue on Water for Climate Action, which will convene each year during the annual climate change conference to discuss the intersection of climate change and water-related issues, ensure that water remains a top priority from conference to conference and establish a Water for Climate ambassador position. Additionally, COP29 will center on negotiations over the New Collective Quantified Goal (NCQG) on climate finance, which will replace the previous $100 billion annual target for climate finance initiatives in developing countries funded by wealthy developed countries, and these talks will certainly include discussions on finance related to water issues.

• The two previous U.N. Climate Change Conferences also emphasized water: Egypt officially included water on the agenda for discussion at COP27 in 2022, and the United Arab Emirates explicitly included water as a top priority at COP28 in 2023. 
• Climate negotiators at COP29 will discuss water-related issues on Nov. 19, which will be Food, Water, and Agriculture Day at the conference. 
• Momentum on global cooperation related to water-related issues and climate change is also occurring beyond the COP climate change framework, as the United Nations held its Water Conference in 2023, the first such conference in nearly five decades. The United Arab Emirates will host the next conference in December 2026.

Water stress-related finance has long lagged behind other development and climate finance initiatives due largely to the challenge of involving the private sector and the greater focus on climate change mitigation versus adaptation. The scale of global investment needed to hit development initiatives for water infrastructure in the developing world is staggering. In 2024, the World Bank estimated that $6.7 trillion in investment was required for global water infrastructure to meet 2030 United Nations Sustainable Development Goals (SDG) compared with the $164.6 billion currently spent in developing countries annually, according to a 2024 World Bank study — and that total investment will need to reach $22.6 trillion by 2050 to hit those goals. However, despite growing needs, financing efforts have lagged behind. Global water- and sanitation-related official development assistance disbursements by donor countries (primarily Western countries) peaked at $10.0 billion in 2018 and totaled just $9.1 billion in 2022 (in 2020 USD). The inclusion of multilateral financing and donor assistance is crucial for water-related infrastructure public finance, as more than 90% of annual spending on the water sector comes from the public sector and state-owned enterprises, while just 2% globally comes from the private sector — making the stagnant development assistance disbursement figures more concerning. In the context of climate finance, most water-related investments are focused on climate change adaptation projects instead of those aimed at mitigating climate change and its risks. This distinction is important because the majority of global funding programs negotiated at COP conferences and elsewhere focus on the latter type of projects, which are largely designed around reducing carbon emissions and the release of greenhouse gasses into the atmosphere, as opposed to the former, which seek to help countries and communities respond to the impacts of climate change, like worsening water stress. Although unspoken, an assumption buried in the current Paris Agreement-focused mindset is that investments into mitigation measures are a higher priority in order to keep climate change to 1.5 or 2 degrees Celsius above pre-industrial levels. Moreover, the return on investment for private sector investments in the water sector that are focused on resilience and adaptation do not always have as clear or direct future revenues as many mitigation-focused investments (like wind farms and solar power projects) because water is often a public good and many of its economic and financial benefits are indirect, like improving people's living conditions and hygiene. 

• In a report published in May 2024, the Organization for Economic Cooperation and Development, or OECD, estimated that developed countries invested a total of $32.4 billion into climate adaptation projects in developing countries in 2022, representing less than 30% of the $115.9 billion of total climate finance that year, while climate change mitigation projects accounted for around 60%. 
• In a report published in April 2024, the Climate Policy Initiative found that global climate finance — which includes finance well beyond just assistance programs like the NCQG — reached $1.3 trillion annually in 2021-22, roughly doubling the two-year average in 2019-20 when it reached $653 billion. However, global adaptation finance fell from 7% to 5% of total climate finance, as it only had a 28% increase to $63 billion over the same period. 
• Water is just a small segment of climate adaptation. In 2023, the United Nations found that water security accounted for just 7% of adaptation ''actions'' reported by countries. In its 2023 annual report, the Green Climate Fund — the world's largest dedicated fund for climate finance for developing countries — also said that it had funded $13.5 billion in climate action for developing countries, but just $1.5 billion of this (less than 15%) went to ''health and well-being, and food & water security.'' 

Despite water's growing prominence in international climate change negotiations, financing for water projects will likely continue to lag far behind other climate projects seen as more pressing and profitable. There are already clear divergences between climate negotiators over how much wealthy Western countries should spend on international climate finance for the NCQG and how the goal should be structured, much less on how to structure or how much to finance water-related projects. Proposals from some developing countries have called for the mobilization of over $1 trillion annually in financing, but Western countries have refrained from explicitly committing to a certain investment amount and have instead focused on getting other wealthy countries, such as China, to contribute to the NCQG. Negotiators have suggested that the target could have a headline figure and then sub-layers for more specific funding commitments, such as spending on adaptation versus mitigation. But a detailed target for water-specific investments is unlikely to be met, even if one is included in the NCQG. This is because donor alignment with water-sector plans has been notoriously poor, with the latest U.N. review of its SDG water goal noting that less than a third of countries' said there was high alignment by donors with national water-sector plans in 2021. Additionally, it is far more difficult for countries to estimate their water-financing needs compared with other climate financing needs, like the cost of investing in solar power plants to replace a coal-fired power plant. This means that even if specific water targets are included in the NCQG or countries' individual adaptation plans, the estimated needs versus actual needs will likely vary widely. Azerbaijan, Egypt and the United Arab Emirates — non-Western countries that are all major hydrocarbon producers and facing high levels of water stress — have a vested interest in steering global climate talks away from mitigation efforts toward climate adaptation and water issues. But Western countries appear unwilling to abandon their focus on climate mitigation, particularly as the European Union is also expected to push heavily on phasing out fossil fuels at COP29. In its joint negotiating position, the European Union also noted that ''private investment will have to provide the largest share of the required investment in the green transition,'' suggesting Brussels will only back relatively modest public finance figures for the NCQG. There is also little reason to believe that the private sector will become more interested in water-related projects as the underlying economics for many types of investments is still not always favorable without large public-private partnerships where local governments or international donors and banks are involved. 

• As of the 2023 U.N. Water Conference, just 22% of the more than 700 water action targets submitted by governments included tangible quantitative targets. This illustrates how the vast majority of water actions governments are currently exploring are not aimed at reaching specific targets that can be easily aligned with donor support, and are instead more vague and thus more difficult to determine their financing needs.
• Climate finance talks at COP29 will likely focus heavily on the loss and damage fund established at COP27 and COP28, which focuses more on providing funding for developing countries to mitigate the specific impact of extreme weather events and other climate change-related disasters. The fund is thus likely to be inundated with calls to back projects responding to short-term immediate crises, like repairing infrastructure damaged in a major flood or storm. Such crises are often unrelated to longer-term issues regarding water stress, though some of the short-term financing could go to alleviating the impact of droughts.

Inadequate financing for water stress-related projects will hamper global economic growth and contribute to greater violence and instability in water-insecure developing countries. While not always an immediate contributor to slow economic growth or economic recessions, insufficient investment into projects designed to alleviate water stress will eventually have a detrimental impact on the global economy's long-term growth potential. Estimates on the ultimate impact vary widely, but the World Bank projected that the world's most water-stressed regions could see a GDP loss of up to 11.5% by 2050. In 2023, the U.S.-based Bank of America also estimated that 31% of the world's GDP could be exposed to high water stress in 2050 compared with just 25% in 2010. In wealthy countries, including most Western countries, as well as water-stressed countries like Saudi Arabia, institutional strength and public and private spending will likely offset many of the losses associated with water stress by enabling these countries to, for example, offer employment opportunities in less water-intensive industries. Geographically large and diverse countries, like the United States, will likely fare better as well, as certain areas will be less impacted by water stress than others. But this will not be the case in most of the developing world, particularly Africa, where domestic finance simply cannot offset international financing assistance, creating a long-term drag on national economic growth, as well as local welfare and living standards at the local level. The consequent rise in absolute global inequality will only reinforce social unrest in developing countries, while accelerating migration levels and refugee crises as worsening climate disasters, like droughts and floods, drive more people to flee their home countries. The resulting instability will also enable militant groups — regardless of their ideological underpinning — to recruit from and radicalize youth populations that are struggling with the status quo. Even in wealthy countries, water stress will exacerbate the growing divide between urban and rural communities as rural communities are often more dependent on water consumption for agriculture and mining than urban communities, which will invariably reinforce already high political polarization. In sum, inadequate international finance for water stress-related issues and its limited discussion at climate change conferences like COP29 will exacerbate many of the issues that this ongoing RANE series on water stress is discussing.