Calculating the return on investment of nature-based solutions for water security

Globally, climate change, population growth, and changing land-use present major challenges to water security. The high sunk costs, lack of adaptive capacity, and complex implementation of traditional "grey" infrastructure options, such as dams or reservoirs, have increased interest in applying nature-based solutions that leverage biophysical processes to improve water quality and quantity. This interest has been particularly strong in Latin America, where exceptional institutional and cross-sectoral partnerships in recent years have resulted in remarkable policy developments and financial commitments for collaborative water resources management. One of the most innovative schemes are water funds, devised as long-term financial mechanisms to invest in a portfolio of natural infrastructure to support water security for a potentially diverse set of stakeholders.

One of the main challenges for such schemes is to demonstrate the effectiveness and reliability of natural infrastructure to improve watershed services, such as increased base flows, greater reliability of water stores and flows, and better water quality. We have developed a methodology for the hydro-economic evaluation of natural infrastructure and related watershed interventions using the water fund of Quito (FONAG) as a case study. The methodology integrates data collection, ecosystem functioning understanding, quantitative predictions, hydro-economic evaluation, and risk and uncertainty analyses.

We find that natural infrastructure can be an economically effective way to improve the supply of ecosystem services, including but not limited to hydrological regulation, water yield, and water quality, especially sediment control. As a result, a combined portfolio including nature-based solutions can be more cost-effective than purely grey alternatives to supply water to diverse stakeholders. In addition, this study also reveals the significant value of data and monitoring to inform this type of analyses and the associated risks involved under deep sources of uncertainty. Nevertheless, it is paramount to explore how multiple stakeholder cooperation and alternative solutions can complement each other to support water resources management, policy making, and sustainable development in a changing world.