MODULE 2: Economic & Financial Analysis
The economic and financial analysis for building investable NbS programs – outlined in this guidance – is one component of a comprehensive business case and is meant to complement other modules in the business case process which will be available in Summer 2021.
Conventional interventions to secure water focus on grey infrastructure – constructed, man-made structures such as treatment facilities, stormwater systems, storage basins, dams, pipes, etc. – to transport, store and filter water for use, but nature, or green infrastructure, can perform many of these same functions, often at more cost-effective rates. The costs and benefits associated with constructing, operating and maintain grey infrastructure are relatively well-known and, therefore, well-integrated into current planning and lending processes.
The same cannot be said for nature-based solutions (NBS).
THE BUSINESS CASE FOR NBS
Though becoming increasingly defined, the business case for investing in nature is still an emerging field: robust examples of application in the water sector are required so that these solutions can become a trusted, mainstream alternative or addition to grey infrastructure. A business case, in the most basic sense, would provide the reasoning for initiating an NBS project.
Identifying the magnitude of benefits, who receives them, how much they are worth and when investors can see a return on their investment is critical and forms the basis of a “good” business case, but more is needed to attract investments. There are critical elements of a preparatory package – economic and financial analysis, governance arrangements, financial structuring, etc. – that practitioners need to generate financeable & fundable NBS projects:
Constructing A Business Case: Module 2
2021 Guide that outlines the economic & financial analysis of nature-based solutions (NbS) for achieving water security, including context for water funds.
ABOUT THE GUIDANCE
The economic and financial analysis – outlined in this guidance – is one component of a comprehensive business case and is meant to complement other modules in the business case process which will be available in Summer 2021.
While this guidance was originally developed to support the establishment of financially viable water funds, the guidance is also useful for others looking to make the case for investing in NBS for water security. For example, managers of feasibility studies that include the definition of prioritized packages of NBS interventions, some of which could lead to the establishment of a water fund if the institutional context is supportive.
As such, language and terminology will be inclusive of a broad range of NBS for water security projects, as much as is feasibly possible. The reader will, however, note callout boxes and sections dedicated to guidance specific to water funds throughout the document.
This guidance is developed for non-expert practitioners, and therefore serves as an introduction to economic and financial analysis best practice to identify the most cost-effective package of nature-based interventions. It provides an overview of,
- the economic and financial analysis methodology;
- the capacities required to complete the analysis;
- the types of economic and financial tools and indicators (return on investment, net present value, benefit-cost analysis, etc.) you can calculate;
- how to communicate results to your stakeholders; and
- how you can use the results to leverage funding.
Each step of the methodology starts with a short introduction describing the purpose and expected outcomes of the step, and information the team should have in hand before advancing to the next phase. A series of key questions are also provided to help project teams navigate each stage.
If your team decides an economic and financial analysis is the right tool to advance your project, the guidance has accompanying work planning and Terms of Reference templates to set your program up for success. Links to completed economic and financial analyses are included at the bottom of the page, and the guidance references additional resources in Appendix I to help the reader go further.
Video
ROI & Economic Analysis for Water Funds
Water Funds Network (WFN) webinar recording from December 7th, 2020
HAVE QUESTIONS, COMMENTS OR NEED SUPPORT?
If you have questions about the Module or are interested in receiving guidance or coaching, please contact Brooke Atwell, Conservation Strategy Manager, Water Security at: brooke.atwell@TNC.ORG
Case Studies
Assessing the Return on Investment in Watershed Conservation: Best Practices Approach and Case study for the Rio Camboriu PWS Program
Credible economic assessments of watershed conservation or restoration are almost entirely absent from the literature, leaving the business case for watershed conservation an important yet largely unanswered question. Likewise, those interested in evaluating the business case in their own geography lack the examples and tools to do so in a robust manner. Remedying the situation requires a rigorous analytical framework to assess the return on investment of watershed conservation. The Nature Conservancy—in collaboration with Stanford University, EPAGRI-CIRAM and EMASA—recently conducted such an analysis of a payment for watershed ecosystem services (PWS) program in Santa Catarina State, Brazil.