Australia is one of the driest inhabited places on Earth. Yet nearly two-thirds of the country’s land area is devoted to agriculture, generating 93 percent of the domestic food supply. The country is only able to sustain this level of food production through irrigation and an active water market—a system in which water-use entitlements can be bought and sold and water can be transferred from one user to another. The system is working for farmers, but Australia is still trying to figure out how to meet the needs of one specific water user—nature. One potential solution to balance the water needs of people and nature, though, may lie with the power of impact investment.
Around the world, more than 30 percent of all rivers, lakes and aquifers are being heavily tapped, mostly for irrigated agriculture. These sources are spread across 60 countries, and dependence on them continues to grow. But as use grows, so does the impact on people and nature. Since 1970, freshwater species populations have declined by an estimated 76 percent globally. And depletion of water sources leaves our communities and economies vulnerable to water shortages in drier times.
To date, our approach to overcome these water scarcity challenges has been to invest more in infrastructure to increase water supplies, such as large reservoirs that store river water, canals that import water from distant sources and wells that go deeper into our aquifers. But we can no longer build our way out of water scarcity—the cost of new infrastructure remains out of reach for many communities, and there are no new supplies to tap.
Water markets have proven immensely effective in many regions—from Australia to the western United States—for stimulating water conservation and enabling the transfer of saved water to other users who need more. By making water a tradeable asset, the system rewards those who can save some water and make it available to others. Furthermore, the cost of providing water to new users through markets is far less than the cost of infrastructure-based approaches and further damage to the environment can be averted.
Water markets can be especially effective when implemented in areas where water is mainly consumed for irrigation. If we can find ways to save just a small percentage of the water used on farms, it will free up a great volume of water that can be used for other purposes, including the protection and restoration of natural ecosystems. But having a water market does not necessarily ensure benefits for nature. In Australia’s Murray-Darling Basin and many other areas with water markets, too many entitlements were originally issued, too much water has been withdrawn from the environment and freshwater ecosystems are suffering the consequences.
This is where impact investment can help. Investors who wish to see environmental and social returns, as well as financial returns, can put their money toward market-based solutions that direct water back to the environment while still preserving human uses. One example of this is Water Sharing Investment Partnerships (WSIPs), which operate within existing water markets and use investor capital and other revenue sources to acquire water-use entitlements from willing sellers.
These rights can then be reallocated to depleted freshwater ecosystems or sold or leased to other water users seeking more supplies, thereby generating financial returns for investors. While the primary purpose behind WSIPs is to move water back into the environment, another critically important purpose is to keep farmers farming. In some areas, funds from WSIPs could even be used to help farmers invest in more efficient water technologies, freeing up some of their water to be returned to the environment or sold on the market.
The Nature Conservancy, through a partnership between the Conservancy’s impact investing unit, NatureVest, and its Australia and Water teams, launched its first WISP, the Murray-Darling Basin Balanced Water Fund in Australia, in April 2016. This and other impact investment-driven solutions are explored in a new report released by the Conservancy, titled “Water Share,” which shows the potential to return water to depleted ecosystems in many of the 37 water-scarce countries that already have water rights systems, the basic prerequisite for a water market. If all regions with existing water rights systems could establish water markets functioning on par with the Australian market, they could collectively generate total annual water sales of US$13.4 billion per year, equating to market assets of US$331 billion.
Those numbers indicate the great potential water markets hold for nature and investors, and it is high time to unleash that potential—because scarcity is expanding and intensifying around the globe. But with creative financial solutions, nature and people can better share the most precious resource on our planet.