Environmental infrastructure presents a peculiar financing problem. A forest can protect a city's drinking water without belonging to its water utility. A watershed can lower costs for businesses hundreds of kilometres downstream. Green infrastructure distributed across a city can reduce stormwater flows, improve waterways and create value for residents who may never know what financed it.
In each case, the problem is not an absence of value. It is that the value - and responsibility for producing it - often sits in different places.
Environmental finance frequently begins with a familiar question: Who will invest? It is an understandable question, particularly given the enormous gap between environmental investment needs and available capital. But it may not always be the right first one. Before deciding who should provide capital, we may need to ask four other questions: who receives the value, who carries the risk if the system fails, who has the authority to act, and who is responsible for delivering and maintaining the outcome?
For conventional infrastructure, those answers can sometimes sit relatively close together. Environmental infrastructure is often different. Its benefits cross property lines, jurisdictions, institutional mandates and balance sheets. The organisation receiving the benefit may not control the system producing it, while the institution carrying much of the risk may lack the authority to address it. Meanwhile, those responsible for maintaining the environmental outcome may capture only a fraction of its economic value.
This makes alignment part of the financing challenge itself.
When the infrastructure you depend on isn't yours
Consider Denver. Denver Water provides drinking water to 1.5 million people, drawing from a collection system covering roughly 2.5 million acres. Yet the utility owns only about 2% of that land. Much of the system upon which Denver's water security depends is therefore not a pipe, reservoir or treatment plant owned by the utility. It is the health of forests and watersheds across a landscape governed and managed by many different actors.
Wildfire makes that dependency painfully visible. The 1996 Buffalo Creek and 2002 Hayman fires burned approximately 150,000 acres in Denver Water's South Platte River watershed. The erosion and sediment that followed ultimately cost the utility more than $27 million in infrastructure repairs, sediment removal and land restoration. Those experiences helped lead to From Forests to Faucets, through which Denver Water works with the U.S. Forest Service and other partners to reduce wildfire risk and improve watershed health.
The economic logic is straightforward. The watershed may not appear on the utility's conventional asset register, but the utility's economic dependence upon it is unmistakable. Yet Denver Water does not control most of the landscape upon which that value depends. Authority is distributed among other institutions and landowners, while responsibility for maintaining the system must similarly be shared.
The question is therefore no longer simply what a healthy watershed is worth. It becomes how institutions that depend upon it can be organised around the outcome they collectively need.
One system, many economic relationships
The Upper Tana watershed in Kenya takes this dynamic a step further. It supports approximately 95% of Nairobi's water supply and much of Kenya's hydropower generation, while also sustaining agriculture, businesses and communities throughout the watershed. Decisions made upstream about farming and land management can affect erosion and sedimentation, with consequences that travel downstream into water treatment, electricity generation and economic activity.
The Upper Tana-Nairobi Water Fund was established in 2015 around this interdependence. It brings together downstream public and private water users with upstream farmers and land stewards, supporting conservation and land-management measures intended to improve water security while strengthening local livelihoods. Its original business case projected that every dollar invested could generate more than two dollars in benefits, principally through lower water-treatment costs, increased hydropower production and improved agricultural yields.
Businesses are part of that system too. East African Breweries, for example, continues to work with the Water Fund on watershed conservation. A partnership highlighted this year involves 272,000 farmers around the Aberdare water tower. For a brewer, water security is not simply an environmental objective; it is also an operational dependency.
Upper Tana illustrates this particularly well. The watershed creates one environmental system, but its value is experienced very differently across the economy. A Nairobi resident depends upon it for water. A farmer depends upon it for production and livelihoods. A company may depend upon reliable water for its operations. Water and power utilities experience the watershed through the cost and reliability of essential services.
The Water Fund therefore does something more interesting than simply putting a price on nature. It creates a practical mechanism through which actors who experience the watershed's value in very different ways can participate in sustaining the same underlying system.
Environmental finance has rightly devoted enormous effort to making the economic value of nature visible. Better valuation has helped demonstrate that forests, wetlands, watersheds and other environmental assets provide services that traditional accounting often ignored. But demonstrating that value exists is not quite the same as determining whether the institutions receiving it can be organised around maintaining the system that produces it.
Knowing that a watershed creates substantial economic value does not tell us who should pay to maintain it. Nor does it determine who has authority to intervene, who carries which risks, who should be accountable for performance or how responsibilities should be divided among institutions.
The same pattern appears elsewhere. A mangrove can reduce coastal risk for property it does not belong to. A forest can protect water infrastructure located far downstream. A wetland can reduce risks that ultimately appear on household, corporate, insurance or public balance sheets. The value may be substantial, but it is distributed.
We often respond by searching for a mechanism capable of monetising one of those benefits: a carbon credit, biodiversity credit, user fee, insurance saving, public subsidy or another revenue stream. Those mechanisms can be valuable, but they do not necessarily resolve the underlying question of how institutions with different interests, mandates and exposures become organised around the same environmental outcome.
This is where looking separately at value, risk, authority and responsibility can be useful. The actor receiving the greatest economic benefit may not carry the greatest risk. The institution carrying the risk may not possess the authority to intervene. And the public body with statutory responsibility may lack either the capital or operational capacity to deliver the outcome alone.
Seen this way, some financing problems actually begin before anyone starts designing the financing structure.
Can finance help?
Financial innovation can nevertheless play a role. In 2016, DC Water issued a $25 million Environmental Impact Bond to finance green infrastructure designed to reduce stormwater runoff and combined sewer overflows in Washington, D.C. The structure was designed to share some of the performance risk between DC Water and investors: substantial underperformance could trigger a payment from investors to the utility, while substantial outperformance could trigger an additional payment to investors.
Post-construction monitoring ultimately found that the green infrastructure reduced stormwater runoff by nearly 20%, within the expected performance range, so no additional outcome or risk-sharing payment was required.
The significance of DC Water is not that every environmental project needs an Environmental Impact Bond—most do not—but that connecting part of the financing architecture to an agreed and measurable result made questions of performance and risk more explicit.
Outcomes-based approaches can be useful in this context because defining the result first can bring otherwise diffuse questions of performance, responsibility and risk into sharper focus. But an outcomes-based instrument cannot make the underlying institutional challenge disappear. It still depends upon institutions capable of defining the outcome, measuring performance, allocating responsibility and sustaining delivery over time.
Finance can help with that alignment, but only where the institutional arrangements needed to sustain it are already in place—or can be built alongside it.
Ask a better first question
Environmental finance has spent much of the past decade searching for ways to mobilise more capital. That remains necessary. The financing gap for environmental infrastructure is real, and many worthwhile projects will continue to require new sources of public, private and blended finance.
But starting with capital can sometimes cause us to skip a more fundamental step. Before asking Who will invest? perhaps we should first understand the outcome we are trying to sustain, who receives value from it, who carries the risk if it fails, who has authority to act, and who is responsible for delivering and maintaining it. Only then should we ask how the system ought to be financed.
That sequence changes the conversation. It shifts attention from finding a single investor or monetising a single environmental benefit toward understanding the institutions already connected to an outcome. It can reveal commercial dependencies, avoided costs, public responsibilities and risk exposures that conventional project boundaries obscure.
And it may help explain a paradox at the heart of environmental infrastructure: the problem is often not that nobody benefits. It is that everyone benefits differently. Value sits in one place, risk somewhere else, authority somewhere else again, while responsibility is distributed among institutions that were not necessarily designed to work together.
Perhaps, then, the first task is not always to find another source of capital. It is to understand how the institutions already connected to an environmental outcome can be better aligned around sustaining it.
And that raises a larger question: have we been defining the infrastructure itself too narrowly?
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