Nature Needs New Financial Solutions

Giulio Boccaletti is Managing Director of Global Freshwater at The Nature Conservancy. This post originally appeared on The Guardian.

In recent years, the American Southwest has become the theatre of some of the worst forest fires in memory – an epidemic described well in a recent piece by Richard Schiffman in The Atlantic. These fires leave the scars and enduring images on communities and landscapes as reminders of the risks and costs associated with maintaining the natural infrastructure forests provide.

At the same time, the fast-developing region has had to deal with the interconnected issue of water security, amidst its increasingly hot and dry climate.

The challenge of better managing both issues converges in the forests of the Southwest. New forestry strategies in this part of the world are providing a test ground for an emerging theme: the deep connection between investment in nature and the challenges of economic development in a resource constrained, and changing world.

We have known for decades that forests can not only affect the severity of a fire, but can also impact the quality and or quantity of water supply. Actual impacts are complex and site specific.

For example, the density of Ponderosa Pine forests in Northern Arizona can impact the quantity of water collected in the watersheds. Very dense forests can increase evaporation through plants and can limit the amount of precipitation – particularly snow – that can reach the ground.

On the other hand, balanced forest ecosystems can improve the yield of water into a basin or reservoir. They also deliver other benefits, including limiting the intensity and temperature of fires, and avoiding excessive sediment reaching water supply infrastructure.

In New Mexico, ash from recent forest wildfires has been washed into the river streams. The risks of deteriorating water quality in these cases are considerable: if enough ash reaches water treatment plants, it could put urban supply at risk – as it did in Santa Fe in 2011 – by clogging the infrastructure. Better forest management in the upstream watersheds can diminish this impact.

Healthy forest ecosystems can evolve over time, and adapt to changing conditions. They offer multiple complex benefits, and at times can offset the need for more expensive built infrastructure. But despite all these benefits, their management still requires expenditure, which in most cases needs to be financed.

It is in the context of water, most specifically, where the emerging theme of investing in nature as a smart development strategy is beginning to play out.

Financing is ultimately about underwriting risks, i.e. putting money on the table today in exchange for uncertain benefits in the future. The more uncertain the benefits are, the more expensive the financing becomes.

The use of natural infrastructure at scale is in its infancy. As a legitimate part of the toolkit, its limited track record makes it subject to enormous uncertainty. Finding capital willing to underwrite this uncertain risk is a critical bottleneck to its broader adoption.

How, then, do we ensure this infrastructure strategy can reach scale?

The public sector used to act as a “risk taker of last resort,” underwriting much of the water infrastructure needed by society. This was possible in part because of the particular nature of public finance, with its secure claim on tax revenue, and in part because of the fact that the public sector does not always account for all the things that it will be liable for, should something happen.

But, as we come out one of the most profound fiscal crisis in recent memory, many public entities face capital rationing and are unable to take on the level of risk they once did.

We therefore need to get much more sophisticated at financing solutions, if we want natural infrastructure to be part of the picture. The time is right. Traditional approaches to solving our water challenges are becoming too expensive, driven by escalating marginal cost of services, growing demands and strains on water systems, and the depreciation of existing assets. A new approach is needed and natural infrastructure can be an important element of the mix.

We need to establish vehicles that can accommodate natural infrastructure, whether the subject is forests, wetlands, or the integrated workings of an entire river. We need to capitalize on the fact that natural infrastructure affords multiple benefits – ranging from helping to secure water supply and or reduce fire risk, to providing recreational activities – in order to establish viable revenue models that can attract investment. And we must segment the risks associated with these solutions smartly, so that limited public capital can be used to mobilize additional resources from the private sector.

Experiments with water funds – vehicles to mobilize water users to pay for investments in the water catchment they depend on – an example of which is in place now in Santa Fe, are a first useful step, but much more remains to be done.

As unlikely as it sounds, in the fifth year of a global crisis largely triggered by the financial sector, we need finance to help us innovate to solve interconnected issues like water security and forest health, intermediating public and private capital into investments that can incorporate nature at scale.

[Image: View of conifer forest in the White Mountains, one of Arizona’s last wide-open spaces. The Nature Conservancy works to protect the headwaters of three major Arizona rivers and restore healthy forests within the largest Ponderosa Pine community in the world. Image source: Betsy D. Warner/TNC]

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  1. TNC has gotten very good at making this point (here and your CEO’s book)–natural systems as infrastructure can and should be accounted for– but how? What are the costs and mechanisms? What is the balance between markets and taxes/fees to pay for the preservation/installation of these natural systems? What policies can the public sector put in place to incentivize private capital into nature?

  2. Fewer words. Two sentences on the problem, two on the possible solution and two on what I can help with will save me, and others a lot of time. Keep sending your good messsages, but shorter please. rm

  3. One vital policy that the public sector can put in place is to correctly price the cost of water.

    In many areas of the world, water is under-priced. As a result people do not value it properly; water saving measures are not implemented; there is excessive consumption because it is so cheap; and it does not attract the necessary financial investment because at artificially low prices it does not produce a commecial rate of retrurn.

    As a large provider of water for both cities and agriculture, the public sector should gradually, over say a decade, introduce more appropriate water pricing.

  4. I think that it is good that we see things interconnected. Water can help with temperature and weaken the severity of fires.

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