The Financing of Water: Putting the Trust in Conservation
In 2019, an unprecedented number of events emphasized the urgent need to rethink humanity’s relationship to water. Chennai, India’s sixth largest city, saw its four main reservoirs run dry due to drought and widespread claims of mismanagement. Floodwaters surged in the Great Lakes Region of the United States, an area not accustomed to extensive rainfall, and Guatemala, Honduras, El Salvador, and Nicaragua’s dry seasons have at least doubled. According to new data released by the World Resources Institute, one quarter of the world’s population is now facing ‘extremely high’ levels of baseline water stress – defined as the ratio of water withdrawal relative to its availability. These events illustrate the importance of water to so many aspects of everyday life. When our normal interactions with water are disrupted, even for an instant, it does not take long for significant impacts to set in.
Today, policymakers often act in silos, and their policies and financial instruments do not always follow a comprehensive approach to managing water resources. Policy decisions that focus predominantly on land-use, for example, can have direct effects on water stress. Applying the principles of conservation to policy and finance could be a way to guarantee a more coherent approach to the financing of water. In particular, water trust funds have shown promise in valuing fresh water for the full services that it provides throughout its entire life cycle. Project finance with a focus on conservation extends beyond a single water-specific lens to include both land and water-based goals, factoring in the ecosystem as a whole. Examples of conservation-focused financing include nature-based flood-retention solutions, biodiversity and forest preservation, or organic agriculture incentives to revitalize downstream rivers.
Conservation vs. Profits?
To attract adequate levels of financing, conservation and protected areas currently need to prove their financial viability and attractiveness. This means that projects adopting a conservation approach must demonstrate their ability to generate investment returns and capacity to manage risks upfront. Yet, despite the necessary role that healthy ecosystems play in regulating the climate, protecting biodiversity, and providing environmental and cultural necessities, their economic value has been historically underestimated. This has resulted in an overall lack of investment interest in water conservation, particularly among institutional investors in the private sector. So far, mainly governments and NGOs operating with donor funding have shown interest in taking up such investments since they are not oriented towards maximising profits.
The economic agendas of different countries are also often not aligned with accurate valuation of water for effective freshwater governance. While more affluent countries have the means but can lack the desire to fund conservation, developing countries may not have adequate financing capabilities, particularly within their national budgets. Despite the potential benefits of the world’s freshwater supply and regulation having previously been valued at approximately $2.3 trillion, protected area budgets in developing countries represent only 30% of what should be allocated for effective water conservation. Although the economic benefits more than justify the cost for properly conserving freshwater and other ecosystem services, national budgets often do not have the means or support to engage in sufficient methods of conservation finance.
Local Water Management: Water Trust Funds
Policymakers and the private sector often lack the ability or the will to scale-up conservation-focused financing of freshwater resources to accurately reflect their value. An effective offset to this problem would be their support of bottom-up structures, such as water trust funds. Water trust funds engage independent financial institutions to invest in and manage funds collected from local water users. The resulting interest income is then used for a variety of land and water conservation activities (such as reforestation or sustainable ranching practices) along watersheds to guarantee a safe and reliable supply. In this case, water users, as patrons of the ecosystems they live and work in, pay into a greater conservation fund in exchange for the provision of fresh water. As the payments come directly from the community and decisions on how to use the funds are left to each trust’s stakeholders, the use of water trust funds can be highly adaptable and applied to local circumstances. With this decentralized approach, the financial and managerial flexibility of water trusts incorporate the distinct political, socio-economic, and ecological characteristics of their communities, supporting the case for a local-to-global water management approach and reducing the need for a large amount of capital to be provided up front.
Tailored Solutions Instead of “One Size Fits All”
The existing water trust structure may allow for a wide variety of funding sources depending on the users and beneficiaries of a particular watershed area. Public, private, and civil society actors may all participate in a water trust scheme, but stakeholders together must decide how the funds will be applied to water conservation activities. Therefore, water trusts can exercise a higher degree of transparency due to the contractual relationship between users and managers within this multi-stakeholder structure. This framework also provides an opportunity for policymakers to participate as invested stakeholders and promote water trust partnerships without having to be responsible for the associated financial and managerial success. While a diverse array of contracts can provide a more tailored and long-term approach to conservation, there must be adequate legal and institutional support in place for such a structure to be effective.
In Latin America, where over 30 water funds exist today, this method has shown promise in increasing the security of freshwater access by incorporating land-based and water-based goals. For example, the Guandu Water Producer Project in Brazil has paid 121 farmers and ranchers to leave standing riparian forests on their properties untouched, preserving biodiversity and helping to improve water quality and quantity for nearby Rio de Janeiro. Due to their decentralized framework, trusts can also provide better opportunities to engage the communities and industries that benefit from these watersheds.
Water trust funds offer a promising approach to financial and governance mechanisms that more directly address the challenges of water security by putting nature-based solutions and sustainable watershed management at the forefront of their activities. Countries that recognize the benefits of tackling water stress through the principles of conservation, but lack the funds to do so, must better promote this community-based structure by stimulating and supporting partnerships between interested stakeholders. In doing so, governments will help to avoid the blunder of a fragmented approach to water governance.
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