Private Investment in Water Resources Can Help Solve U.S. Supply Crises

This blog post, which describes a conference session that the author helped to organize, was originally published on the website of the Yale Center for Business and the Environment.  

“We don’t have a water crisis, we have a water-management crisis,” said Joe Whitworth, president of The Freshwater Trust, a nonprofit organization based in Portland, Ore., when he spoke at the Social Capital Markets Conference (SOCAP15) in San Francisco on Oct. 8.

Whitworth said during the “Untapped: Opportunities to Invest in Water” panel that the Colorado River is essentially experiencing the collision of a growth-based economy with a finite resource. This clash is creating substantial gaps between human needs and the sustainable water production of natural systems. Among other issues, the Colorado River no longer reaches the ocean. It hasn’t for decades.

However, United States water-management issues don’t stop at the Colorado River. Right now, half of our nation’s waterways are impaired. Millions of dollars of government, nonprofit and philanthropic capital have been thrown at this problem, but it’s not enough to repair these systems. A thorough approach would require a very different pace and scale.

The focus of this SOCAP15 panel was on market-based solutions to manage water resources to allow the recharge of our nation’s aquifers so we can grow food; improve drinking water quality; and enhance habitats for the non-human communities that depend on clean, abundant water sources.

According to the panelists, these outcomes can be accomplished while yielding financial returns.

Some of these solutions are already being practiced elsewhere. In 2009, Australia overhauled its water-rights allocation system. Ricardo Bayon, cofounder and partner of Encourage Capital, said the new Australian system is the world’s best and most-functioning water market. This system allows supply-and-demand dynamics to set the price for water while the government sets the basic rules of the game. Under this system, it makes sense for farmers to spend money to change their water-use practices. The system also incentivizes farmers to think about different ways to use water as an asset.

Absent a federal initiative like Australia’s, there are a few interesting models that suggest how to think differently about managing water in the United States. The panel highlighted some of them. For instance, The Nature Conservancy is acting as a ‘market-maker’ at the water-basin level. As part of its NatureVest Initiative, it has raised over $20 million of investor capital to purchase permanent water rights from farmers in several locations in the western United States. The nonprofit then leases these rights back to the community and donates a portion to nature by retiring the rights to, for instance, rehydrate high-value wetlands.

The Freshwater Trust has created an innovative model for water-quantity investment whereby temperature-credit units can be used to meet existing environmental regulations. The gist of this approach is that anything going down a pipe has to be treated – and heating is part of this process. This treated water has to be cooled before it can go back into a waterway. The Freshwater Trust model creates temperature credits based on thermal units by planting trees that cool water down in a natural way. These temperature credits can be sold to treatment facilities as a low-cost means of cooling water. This model began in Oregon and is now spreading to other states.

These are just two interesting ideas that came out of the SOCAP panel.

Another group, Encourage Capital, an asset-management firm specializing in profitable investments to solve critical social and environmental challenges, co-released a report this week that outlines nine investment blueprints that can both improve water quality and quantity in the Colorado River Basin and generate financial returns for impact investors. With 35 million people and 5.5 million acres of irrigated agriculture in this basin, there’s a lot of opportunity to have positive impact and generate a financial return. These ideas are applicable to other river basins across the nation.

Rivers are, in many ways, the backbone of the United States economy. This is an especially critical discussion now. There is an increasing tension between urban areas and agricultural areas across the nation regarding water distribution. So, if we think about our water issues as a management problem, then maybe we have a chance of fixing what’s broken.

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