What’s going on?

As discussed in this first blog, many companies include a water stewardship aspect in their environment, social and governance (ESG) programs and commitments. Terms like “net zero” or “net water positive” are used to describe the water targets. To meet these commitments, companies must find projects that are developed enough to provide a cost and an estimated replenishment volume. The types of projects vary widely from reserving water rights to green infrastructure projects such as removing thirsty invasive plant species and restoring land and stream areas to prevent excess run off. Companies work with partners to identify these projects, such as non-governmental organizations (NGOs), including the Bonneville Environmental Foundation (BEF), The Nature Conservancy, The Freshwater Trust, and Ducks Unlimited, to name a few.

With the increase in corporate ESG commitments and associated funding, there has been rapid growth in the demand for water replenishment projects. However, there continues to be limited supply of ‘shovel ready’ opportunities. In many watersheds, companies are unable to meet their commitments because they cannot find adequate shovel ready replenishment projects to meet their targets.

We expect this replenishment project supply-demand imbalance to result in a rapid maturation of the water investment market. Improved standards, measurement approaches, and validation will occur. Also, for-profit interests, such as brokers and developers, will likely become more present and influence the market. We anticipate three structural changes in the market:

  1. Formalized marketplace. A formal marketplace will standardize replenishment projects, allowing companies to fund or buy-in to projects to meet their commitments. This would allow NGOs and municipalities to match their projects with a wide array of funding sources, including private companies, federal programs, foundations, and other NGOs.
  2. Public sector projects. Public sector (utility, agency and municipal) projects will bolster the supply of viable replenishment projects capitalizing on the need for water replenishment to offset overall project funding and budget shortages.
  3. Brokers and Developers. The presence of a project brokers and developers, either for-profit entities or the chartering of a water replenishment development bank will increase the available investment opportunities to meet ESG goals.

All three of these structural changes are taking shape in some form right now, either in small-scale implementation or in brainstorming sessions on the sidelines of industry water conferences.

A marketplace example

Early versions of a water replenishment marketplace are already being developed, mostly by NGOs. One example is the BEF water restoration certificate (WRC) portfolio. This portfolio lists projects that have been developed in different watersheds by various NGOs and are either ready for funding or partially funded. BEF uses a consistent standard, the BEF Flow Restoration Standard (BFRS), to evaluate the project replenishment or restoration benefits. They also issue a certificate indicating a certain amount of replenishment volume achieved. This example has many of the key ingredients expected in a future, more developed market.

We anticipate the continued rapid maturation of the water replenishment marketplace—first driven by NGOs and then likely further driven by for-profit entities and/or by an alliance of private companies that are the primary buyers of these projects or credits. In any case, the mature market will include:

  1. Project development standards
  2. Project rating criteria (e.g., uncertainty, climate risk, beneficial impact)
  3. Increased access to project supply
  4. Certificates/credits establishing the replenishment volume purchased
  5. Monitoring and data-backed validation with reporting

Municipal and utility projects – the missing supply

At present, the majority of projects providing water replenishment benefits are water rights reservations or green infrastructure projects developed by NGOs. Historically, public sector water replenishment projects have not been available or visible to investors. These projects, often referred to as gray infrastructure projects, include activities such as urban leak detection and repair, treatment of municipal effluent for reuse, aquifer storage and recovery and water reuse infrastructure expansion.

The difficulty with public sector replenishment projects is that investors require some basic degree of definition prior to investing, and municipalities do not always have access to funds for these studies. Gray infrastructure projects often have the following benefits:

  • Increased certainty of achieving target benefit
  • Easier to validate than green infrastructure projects (easier data collection)
  • Implementation schedule less prone to slippage
  • Long term returns (enduring value) of investment because of agency maintenance commitments to infrastructure

Private sector funded municipal replenishment projects address two key shortcomings of the current watershed health dilemma:

  1. Funding shortage: Provides a new funding source for municipalities that is not tied to increased rates or additional debt.
  2. Project shortage: Provides new supply of water replenishment projects to a market that currently faces the conditions of high demand and low supply.

We believe it’s mutually beneficial for the public sector to begin accessing the water replenishment market as a new source of funding. This will result in more gray and gray/green infrastructure projects available in the market and thus relieving some of the current supply-demand imbalance. This also creates a scenario that increases the likelihood of catalytic funding opportunities for large watershed level transformative projects.

Brokers, developers, and bankers? Maybe so.

Let’s start by using renewable energy as an analog for this part of the discussion. As the private sector began committing to reducing their carbon footprint and purchasing more renewable energy, a supply-demand imbalance presented itself, similar to the current water replenishment market. For-profit entities entered the space and changed the market by carrying the up-front development costs for projects (e.g., solar and wind power installations) and recovering their costs through long-term leases or power purchase agreements. The private sector also drove the maturation of the renewable energy market by building coalitions of buyers to help drive standards and accelerate investments. A good example of this is the Renewable Energy Buyers Alliance. The water replenishment market will likely experience a similar influx of for-profit entities, project developers, and buyers’ coalitions.

If we carry this market maturation forward even further, we land at more developed institutional entities, such as a water replenishment bank. Such an entity would allow for the accumulation of capital, development of projects, certification of projects, and sale of replenishment credits. This approach prevents companies from having to search and match to specific projects and also shifts the project development risks away from NGOs and municipalities. At this time, a water replenishment bank is not imminent, primarily because the current commitments of private companies are voluntary and typically only extend to 2030. With that said, a bank concept could be realized should commitments and capital allocations extend to a post-2030 market.

What will the future hold? 

As water stewardship evolves, we anticipate rapid maturation of the water replenishment market that includes a more accessible and standardized marketplace, an increase in municipal and utility projects, and an increase in for-profit entities in the development space.


About the experts

Thomas Steinwinder leads Brown and Caldwell’s team focused on data center and mission critical water. He has led due diligence and infrastructure projects for hyperscale data center clusters in all regions of the USA. The evolution of water risk management and stewardship programs is a major focus for the data center water team.

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