Valuing Nature

A Handbook for Impact Investing

William Ginn

• Publisher: Island Press
• Year: 2020
• ISBN:
  9781642830927
• Topic: Business
• Subtopic: Business General
• Index: Business

As the world faces unprecedented challenges such as climate change and biodiversity loss, the resources needed far outstrip the capabilities of nonprofits and even governments. Yet there are seeds of hope—and much of that hope comes from the efforts of the private sector. Impact investing is rapidly becoming an essential tool, alongside philanthropy and government funding, in tackling these major problems. Valuing Nature presents a new set of nature-based investment areas to help conservationists and investors work together.NatureVest founder William Ginn outlines the emerging private sector investing opportunities in natural assets such as green infrastructure, forests, soils, and fisheries. The first part of Valuing Nature examines the scope of nature-based impact investing while also presenting a practical overview of its limitations and the challenges facing the private sector. The second part of the book offers tools for investors and organizations to consider as they develop their own projects and tips on how nonprofits can successfully navigate this new space. Case studies from around the world demonstrate how we can use private capital to achieve more sustainable uses of our natural resources without the unintended consequences plaguing so many of our current efforts. Valuing Nature provides a roadmap for conservation professionals, nonprofit managers, and impact investors seeking to use market-based strategies to improve the management of natural systems.

Part I

Nature’s Assets

Chapter 1

Transforming Water Use

Whiskey is for drinking; water is for fighting over.

—Attributed to Mark Twain

Till taught by pain, Men know not water’s worth.

—Lord Byron

On a trip to China’s Inner Mongolia in 2017, I met with the manager of a large multinational snack food company that was growing thousands of acres of potatoes. The company has adopted the most progressive water management techniques, including sensor-driven drip irrigation, but few other farmers in the region are making similar investments. The manager lamented: “I’m growing what we hope will be a $2 billion snack food businesses in China, and I know it is not sustainable. We depend on groundwater deposited a thousand years ago when the Yellow River flowed through this area. Its present course is nearly one hundred miles to the south, and we will exhaust the available groundwater resource in the next thirty years. I will be long gone, but someone is going to have a mess on their hands.” Unfortunately, this situation is all too common across the globe.

Closer to home, almost no water from the mighty Colorado River, the river that carved the Grand Canyon, has reached the Gulf of California since the 1960s—more than sixty years ago. Most—if not all—of the flow in the Colorado is extracted for human use, mostly for agriculture, and even the major reservoirs at Lake Mead and Lake Powell have been drawn down to unprecedented low levels. Using more than you have is not sustainable, and the Colorado is by no means an exception in the United States. The Rio Grande, another major US river, which flows along the border with Mexico to the Gulf of Mexico, is in a similar perilous state. Yet even if we could dial back the human use of the river to a sustainable level, the systematic channeling and manipulation of these once-mighty rivers would no longer facilitate the regular flooding of their estuaries, essential to the productivity of both gulfs’ ecosystems and the economic viability of their fishing communities.

Sadly, the situation in the United States is not unique. India, home to 16 percent of the world’s population, has only 4 percent of the world’s freshwater resources. Water shortages impact nearly one billion people in India today, and that number is expected to grow to 1.8 billion by 2025. By 2050, five times as much land in India is likely to be under extreme drought than today.1

The overuse of rivers and lakes is not the only challenge. More than two billion people worldwide rely on groundwater as their primary source of drinking water and for everyday household activities,2 yet groundwater extraction in many places far exceeds the natural recharge levels and thus requires deeper and deeper wells—and more fossil fuels to extract. California, for example, will demand three times more groundwater than can be supplied over the next one hundred years due to increasing demand for water driven by agriculture, energy, and growing urban populations.3

The physical shortage of water is only one of the problems. Much of the world’s freshwater is polluted. Consider these facts:

• • At any one time, half of the world’s hospital beds are occupied by patients suffering from waterborne diseases.
• • In developing countries, about 80 percent of illnesses are linked to poor water and sanitation conditions.
• • Worldwide, 25 percent of deaths of children under the age of five are due to a water-related disease.

Around the world, communities, businesses, and ecosystems are running out of water, and the water we do have access to is increasingly polluted by industrial activities, agricultural fertilizers, or lack of sufficient sanitation services to match growing human populations. At a global scale, more than half of the world’s cities and three-fourths of all irrigated farms are experiencing water shortages on a recurring basis, with damaging economic consequences. Freshwater species are disappearing as their habitats dry up from water extractions. Clearly, unless we can secure more, cleaner water for people and for nature, we are on a collision course with disaster.

One alternative water source, promoted for areas near oceans, is desalination, but the technology is expensive. The cost for desalinated water from modern plants is more than $2,000 per acre-foot, the volume of water it takes to cover one acre of field with a foot of water.4 Such high costs may be affordable in the wealthy cities of the developed world but are prohibitive for agriculture, which uses 80 to 90 percent of water globally, and most of the developing world. For comparison, California farmers pay as little as $4 per acre-foot for water delivered via aqueducts.5 In India, electricity to pump water from canals or the ground is provided for free. With water so cheap, there is little incentive to invest in conservation or efficiency improvements until it is too late and the water is gone.

The most cost-effective ways to ensure access to sufficient quantities of water is to address the efficiency of the biggest user, and that means improving agricultural water use. Fortunately, there are effective ways to dramatically lower the amount of water used by agriculture. For example, replacing inefficient flood irrigation and surface application with drip irrigation can reduce water consumption by 50 percent.6 And with agriculture consuming so much of our water, even small reductions can yield substantial improvements. Low-cost sensors, which have become increasingly affordable, can provide real-time monitoring of soil moisture content, increasing the potential for adaptive, incremental water savings.

Although improving irrigation technology is essential, so is the substitution of less water-intensive crops. For example, on India’s Indo-Gangetic Plain, more than thirty million acres of rice are grown annually during the monsoonal rain season when water is comparatively plentiful. Although much of this practice is rooted in systems established during the green revolution of the 1960s, three states in this region have had to legally prohibit rice planting until the start of the monsoon season—around June 15—in an effort to reduce the use of groundwater to flood rice fields. At the end of the monsoon, farmers switch to growing beans and wheat—crops that do not require as much water as rice—to reduce demands on the use of groundwater and river water during the dry season. This kind of crop shifting can dramatically reduce water use. Still, there are a startling number of villages in India where groundwater supplies are no longer plentiful enough to support farming. And when you consider that the country will likely need 50 percent more food to feed its still-growing population while lifting its remaining three hundred million poor out of poverty, alarms begin to ring. There is no untapped arable land in India—nor much in the rest of Asia. Far more dramatic changes are ahead unless we want to literally run out of water. The good news is that we know how to reduce water use in agriculture if we have the political will to implement these changes.7

Although it is increasingly clear that efficiency gains are the quickest, cheapest way to ensure access to water at an affordable price, the problem is getting both farmers and consumers to adopt best practices. To do so, we need both policy tools and market tools to incentivize change. These changes will not be easy to adopt; for starters, many view water as a basic human right that is not for sale to the highest bidder. Still, we must find a way to provide for essential human needs while encouraging better practices. But can markets for water work?

The Best Ways to Reduce Water Use and Contamination in Agriculture

• • Improve water use efficiency. Get more yields per cubic meter of water by enhancing farm irrigation systems, such as using better irrigation systems, sensors, and scheduling.
• • Develop alternative sources of water. Establish (or reestablish, in some cases) rainwater collection systems. India had hundreds of thousands of rainwater catchments that were abandoned as electricity for pumping groundwater became available. Many of them are now being renovated and restarted as groundwater levels decline rapidly.
• • Implement better agricultural practices. Reduce water loss by decreasing water use by minimizing soil disturbance and increasing the use of cover crops and organic matter. Conservation tillage, for example, not only protects soil architecture through minimal soil disturbance but can also increase water use efficiency.
• • Reduce water pollution. Reduce the use of pesticides, fertilizers, overirrigation, spreading of slurries, and manure to prevent the contamination of water. Some ways to avoid water pollution include the implementation of conservation measures such as riparian buffers, integrated pest management, and manure management.
• • Be smart about crop selection. Choose improved varieties of crops that need less water than other crops or switch to less water-intensive crops than previously grown, such as switching from rice to dryland wheat varieties.

The Murray-Darling basin in Australia provides a prototype of how markets can be implemented on the scale of a river basin. The basin, the largest freshwater system in Australia, is 3,375 kilometers (2,097 miles) long and contains the catchments of the Murray and Darling Rivers. With Australia’s on-and-off drought-driven climate, water shortages are a frequent problem in this largely agricultural basin. Beginning in the 1980s, Australia began a decades-long process to clarify water ownership in the basin and establish a transparent system to allow users to buy and sell water across the basin. This market-based approach is very different from the government-driven regulatory system used by most water basins.

Here is how the system works. Through a long and deliberative process, water ownership rights have been established across the entire basin. These water access entitlements give rights to an ongoing share of the total amount of water. They never expire and can be bought and traded across the basin. To guard against the overallocation as the amount of water available from nature varies year to year, each water access entitlement represents a proportional allocation based on rainfall and supply projections. River flow can vary enormously: 118 billion cubic meters of water rushed downstream in 1956, but only a paltry 7 billion cubic meters of water was available in 2006. Thus, in a dry year, farmers may get a fraction of their total entitlement filled, whereas in a wet year, they will get their full entitlement. This approach helps equitably address the problem that so many rivers (such as the Colorado) face: in drought years, there is not enough water to meet the demands of all users on the river.

Underpinning this allocation system is a clear and transparent water trading platform where farmers, cities, and other water users can sell—or buy—either entitlements (permanent rights) or annual allocations if they believe that they will have more—or less—water than they need in any given year. Driven by the record-breaking millennium drought that lasted from 1997 to 2009, trading has dramatically increased in recent decades. By 2010, more than 1.4 billion cubic meters of annual water allocations were being traded annually, along with sales of more than 700 million cubic meters of permanent entitlements.

Initially, the system was seen as controversial and was opposed by some farmers who feared that they would be put out of business by the escalating costs of water over time. Today, however, with more than a decade of trading to reflect on, some interesting trends have emerged. Over time, farmers began to realize that in addition to their land and their crops, they owned another asset—water—with real economic value. This realization has begun to transform how they use water. For example, when water prices are high, some cotton farmers decide not to plant and instead sell their water to others because they can make more money with water than cotton. Other farmers, who grow highly water-intensive but also high-value crops such as almonds, have taken comfort in knowing that there are willing sellers from whom they can buy water for their crops as needed. This ability to shift water resources to where they are most valuable is beginning to increase the overall value of agricultural commodities grown across the basin. It has also dramatically increased the pace of investment in irrigation technology: if a farmer invests in high-tech irrigation equipment to save water and then resell the excess water to neighbors for more than the cost of the equipment, the farmer has made a good investment. Today, it is safe to say that farmers have benefited from a predictable, transparent market both economically and agriculturally.

Although the overall picture is positive, not everyone is happy. In 2014–15, the Murray-Darling basin was hit by a severe drought. The Australian, a regional paper, reported, “A meeting of more than 1000 angry and worried farmers this week heard the price of irrigation water available to be bought by farmers has jumped from $60 a mega liter to nearly $200 a mega liter in the past year.”8 These farmers blamed the government for taking too much water from the basin for use in cities and for ecological system health at the expense of the agricultural community. These other uses, farmers said, made it uneconomic to grow crops such as rice, irrigated wheat, and cotton. As a result, in some areas, more than half the farms have sold their water allocations back to the government and have stopped growing irrigated crops. The impact on local communities has been significant because irrigated farming employs more contractors, agronomists, and farmworkers than dry-pasture sheep or cattle grazing. The industry has shrunk so much that in one district alone, five hundred farm jobs have disappeared, nine hundred people have moved out of the district of just five thousand, and $30 million of annual wages and food production has been lost.

Another challenge of the Murray-Darling basin is that it is extensively engineered. The banks of the river are diked, and farmers pump water from specific withdrawal points according to their allocations. This practice allows for a tightly regulated system, but it also has a big downside: the traditional wetlands and marshes of the river—which play a critical role in delivering valuable ecosystem services like water filtration, flood mitigation, and habitat provision—are largely behind the river dikes and never see wat...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Figures and Tables
• List of Deal Books
• Acknowledgments
• Introduction: Finding Value in Nature
• Part I. Nature’s Assets
• Part II. Tools for Investors
• Resources
• Notes
• Index
• About the Author