New Water Funds for city water supplies
Water continues to rank high on the World Economic Forum’s risk ladder. The water crisis, together with extreme weather events, natural disasters, and the failure of climate change mitigation and adaptation, forms part of the top 5 risks in terms of expected major impact. Extreme weather events and natural disasters rank in the top 5 of the most likely risks to materialise.
This paints a bleak picture, yet where there are risks there are often opportunities. This includes tackling threats to global water security. A recent report provides a deeper insight into how investing in water source protection helps cities, utilities and farmers alike. Andrea Erickson, Managing Director of Water Security at The Nature Conservancy, and one of the report’s authors, states “Our latest results show that forest protection, reforestation and the use of cover crops can help four out of five of the 4,000 cities analysed reduce sediment and nutrient pollution in waterways by a meaningful amount.”
Total global investment in water source protection using payments for watershed services, including water funds, is currently estimated at USD 24.6 billion. An additional USD 48 billion will be needed per year to realise a 10 percent reduction in sediment and nutrient levels in 90 percent of watersheds according to the report. This represents 8 percent of current levels of global investment of around USD 600 billion in water services provision, approximately USD 2-6 per person per year.
Water funds can provide a mechanism to connect the benefits produced by source water protection to potential beneficiaries who are willing to pay. For example, downstream cities, utilities and hydropower producers, can benefit significantly from lower sediment and nutrient levels that can reduce their water treatment, energy or refurbishing costs. The report highlights that the return on investment in ‘nature as infrastructure’ can be 2.5 times that of the equivalent investment in grey infrastructure.
While individual downstream companies can benefit from secured water flows, multiple additional benefits can be generated for those living upstream. Farmers protecting their land and reducing the loss of nutrients from productive fields, will help increase nutrient stocks and boast crop yields. Through better management of forests and wetlands, and the ecosystem services they provide, new business opportunities can be generated. For example, bamboo along rivers can help reduce siltation and nutrient flow into the river, while creating new opportunities for local entrepreneurs to harvest bamboo and produce valuable materials for construction and furniture. Carbon sequestration can be an important additional function that can generate much needed cash-flow for watershed protection.
Numerous cities, utilities, companies and local communities have set-up watershed funds. However, the spreading of these funds to other locations is hampered by the complexity of land and water rights at the local level. Frequently, the many actors involved have to agree upon the rules of the game before they can start to participate. The benefits created are often not well quantified and qualified, making it hard to allocate financial resources from watershed funds in the most effective way.
The scaling-up of water funds for source protection is urgently needed. To attract additional capital at the scale that is required, we need the development of better tools to monitor and track the delivery of results and outcomes from watershed fund’s investments. We will also need new financial vehicles that can connect these funds to the major capital markets and institutional investors. Further innovation and trial is now needed to build a well-documented track record of water(shed) funds and their performance. If we are able to that, investing in securing our water sources could become mainstream.