Report explores water markets and impact investing to improve water security

Arlington, Va. — As cities grow and farms expand, many rivers and lakes are being dried up by water diversions. The Nature Conservancy is now working with environmentally minded investors to buy back some water for nature. That story is told in a new report, “Water Share: Using water markets and impact investing to drive sustainability.” The report explores the use of creative impact investing solutions to alleviate water scarcity, restore ecosystems, support farmers and drive sustainable water management, especially in areas where water trading exists and water use is dominated by irrigated agriculture.

Today, nearly half the world’s population is impacted by water shortages. More than 50 percent of the world’s cities and 75 percent of all irrigated farms experience water shortages on a regular basis. Water sources around the world are being over-exploited with over 30 percent near exhaustion. Traditional methods for securing additional water supplies, such as building more reservoirs or aqueducts, are often beyond affordable reach for people living in water-scarce regions.

Nature is the silent and often unseen victim of water scarcity. A recent report noted that since 1970, 76 percent of recorded freshwater species populations have declined with water depletion being a lead cause of their decline. Climate change is expected to place even more challenging conditions on nature in the future.

“We need to get smarter about how we use every drop of water,” said Brian Richter, Chief Scientist for the Water program at The Nature Conservancy. “We can no longer build our way out of water scarcity. The closer water consumption grows toward the limits of water availability, the more we put ourselves at risk. But new approaches in water management can shift us toward long-term sustainability.”

A water market is an effective tool for managing limited water supplies by giving users the opportunity to freely trade any surplus water to other users. When water carries a monetary value, those who have the rights to water supplies are motivated to conserve water and sell their surplus to other users. The key benefits of a water market include: stimulating water savings, increasing water availability, improving productivity and allocation efficiency, returning water back to nature and improving accountability for water use.

The report highlights an innovative new concept — known as Water Sharing Investment Partnerships (WSIP) — that stimulates strategic trading of water-use rights within select river and lake basins. Created by the Conservancy’s Water program and its impact investment unit, NatureVest, a WSIP operates within an existing water market using investor capital and other revenue sources to acquire water-use rights. These rights can be reallocated to depleted freshwater ecosystems, or sold or leased to other water users seeking more supplies, thereby generating financial returns for investors. A WSIP can acquire water rights in a variety of ways, including outright purchases of water rights from willing sellers in a water market, and by collaborating with irrigation farmers to implement water saving measures that enable farmers to transfer some portion of their unneeded water rights to the WSIP.

“The WSIP model is one of several tools the Conservancy is developing to improve water security among all water users,” said Lauren Ferstandig, Director of Product Development for NatureVest. “The hope is that these partnerships can help provide a more water-secure future for cities, agriculture, industries and nature.”

Four case studies highlighted in the report reveal the creative ways cities and farmers are working together to reduce consumptive water use on irrigated farms, and transfer the usage rights to the saved water to other farmers or users including industry, cities and the environment.

The San Diego County Water Authority, California — Negotiated an agreement with a large irrigation district that pays farmers to reduce their consumptive water use. The water saved is transferred to the metropolitan area, providing more than one-third of its water supply each year.

Austin Water, Texas: Purchases up to 40 percent of its water each year from a river authority that has been bolstering the volume and reliability of its own water supplies through acquisition of water rights from irrigation districts.

San Antonio Water System, Texas — More than half of the water deliveries have come from water rights purchased from farmers or through water-lease agreements with other water providers.

Murray-Darling Basin, Australia — Farmers have prospered from an active water market in which more than 40 percent of water use comes from trades in annual water allocations. This water trading has provided a new revenue stream for farmers and helped them manage the impacts of irrigation shortages during severe droughts.

“WSIPs and other creative financing solutions to water scarcity have the potential to be implemented around the world,” said Richter. “Currently, 37 countries in water-scarce regions have established water allocation systems based on the issuance of water rights and these countries are potential candidates for impact investment-driven solutions if the right enabling conditions are put into place.”

The report also found that the benefits for adopting water market systems include enabling overall GDP growth due to improved water availability, and giving water users more opportunities to manage the economic shocks associated with water shortfalls.

Investor-funded solutions to water scarcity can take many forms and some may also serve as the basis for a future WSIP. The four major market-based strategies identified include facilitating:

• Long-term water trades within farming communities by establishing ‘farmers’ water markets’ – suited for basins with chronic scarcity and most water use going to irrigated agriculture
• Long-term trades between farmers and cities – designed for basins experiencing chronic water scarcity with mixed uses of water
• Short-term trades within farming communities – where farmers temporarily reduce water use on low value or annual crops and trade the saved water
• Short-term exchanges between farmers and cities – freeing up agricultural water during drought years may be more effective than urban conservation strategies.

“If all four of these strategies could be implemented, just in the countries with existing water right systems and trading taking place already, they could generate annual water sales of over USD$13.4 billion per year. This is equal to USD$331 billion in market assets,” said Ferstandig. “Bold leadership and action will be required to truly unleash the benefits and potential of water markets around the globe.”

Read the report at www.nature.org/watershare.