Financial tools for the water sector to support drought risk management

This working paper examines financial tools for drought risk management in the water sector, focusing on meso-level stakeholders like water utilities, irrigation associations, and reservoir operators. While existing literature often concentrates on micro and macro-level financing, this paper addresses the critical gap in meso-level instruments. It reviews common climate and disaster risk finance tools, proposing adaptations and new mechanisms tailored to meso-level needs, including risk pools, contingent financing, and new operational tools.

Case studies from various regions illustrate the application and effectiveness of different financial instruments, emphasizing the context-specific nature of drought risk financing instruments. The paper concludes that meso-level drought risk finance must be co-designed with stakeholders, ensuring clear risk ownership, transparent data models, and alignment with local regulatory and operational contexts. Guided by drought-specific methodologies like the Drought Risk and Resilience Assessment, tailored financial instruments can enable long-term resilience in the water sector.