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The Sony Company of Japan established one of its largest semiconductor factories in Kumamoto Prefecture in Japan in 2001. The factory could process 12,000 silicon wafers every month – or, in other words, millions of chips.

Semiconductor manufacturing requires ultra-pure water. The level of purity must be higher than drinking water standards by orders of magnitude. Kumamoto Prefecture together with Shirakawa river and local water streams was known for its pure and plentiful ground water. However, the availability of groundwater throughout the year had come under pressure due to rapid urbanisation and industrialisation.

The company adopted a strategy to overcome the water scarcity problem. It collaborated with the local government agencies and farmer associations and designed a mechanism to recharge the ground water.

Oceans and beaches are living lifelines sustaining life on earth.

After carrying out the necessary technical studies, the company made arrangements to pay the farmers to retain over 600 hectares of paddy fields filled with water after their harvest season. Then, water on the surface continued to infiltrate through soil and replenished underground aquifers. And pure ground water was available throughout the year so that the company could run its business without interruption.

World Ocean Day

Last week the world marked UN World Ocean Day – a celebration dedicated to raising awareness of the ocean’s vital role in sustaining life. Its objective was to inspire collective action for marine and coastal conservation, highlight the biodiversity crisis, and promote sustainable use of ocean resources to secure resilience for future generations.

Biodiversity Sri Lanka – the environmental unit of the Ceylon Chamber of Commerce – together with the Bank of Ceylon and other partners had also scheduled a World Ocean Day seminar. It was held at the Bank of Ceylon Auditorium in Nugegoda at which I spoke on “Payment for Ecosystem Services (PES) in Marine and Coastal Conservation”.

Sri Lanka, as an island with distinctive topographic and climatic diversity, is uniquely positioned to value and safeguard its marine and coastal environments along with the vital ecosystem services they provide. This week, I wish to turn to the economic and financial foundations of PES, particularly in relation to the ocean that surrounds the country.

Biodiversity and ecosystems

Our ocean around the country and the coastal belt are not just vast blue horizons and sandy beaches. They are living factories, delivering service flows for our benefits such as food, climate regulation, and cultural identity. These service flows are called ecosystem services.

Ecosystem services originate from the stock of natural resources, providing inputs to sustain our lives and to achieve economic progress. These services that we derive from the nature are at least four types as provisioning, regulating, supporting and cultural.

Provisioning services of nature include food and drinks, freshwater, forest resources, raw materials, medicinal plants and genetic resources. While some of them we derive from the ocean, all these provisions are necessary to sustain our life on earth and achieve economic progress.

Stock of natural resources also regulate our living environment in various ways. These regulating services include climate regulation, carbon sequestration, flood control, disease control, landslide control, water purification and many others. If we focus on marine and coastal environment, we can also include coastal protection and blue carbon sequestration by mangroves and seagrass.

There are fundamental natural processes that are supported by ecosystem services. These supporting services include nutrient cycling, soil formation and fertility, pollination, photosynthesis, and habitat maintenance for both terrestrial and marine species.

Finally, cultural services are also a set of services that we derive from the stock of natural resources. These ecosystem services include recreation, ecotourism, aesthetic value, research and education and other cultural practices.

The finance problem

Economic activities depend on the use of productive resources. Throughout history, societies have learned to pay fairly well for these productive resources available in stocks. Labour receives wages, and capital earns interest or returns.  Technology, which is also a stock of knowledge applied to transform inputs into outputs, commands its share of value. Yet, the stock of natural resources, which provides essential services to production, has not been compensated in the same way. While other productive resources are rewarded for their contribution, nature’s stock has often been taken for granted, even though it underpins all economic processes.

In economics textbooks, the stock of natural resources has often been reduced to the single term “land”. This narrow treatment has failed to capture the full nature of what resources provide. As a result, nature has not been adequately compensated, even though it contributes multiple and diverse inputs to production processes.

Like other productive resources, the stock of natural resources also depreciates and suffers damage. It does so in three main ways. First, nature continuously provides complex ecosystem services that support every form of economic activity.

Secondly, nature provides vital raw material inputs that are used up in production. All goods and services ultimately come from either “grown up” things on earth (like crops, timber, livestock) or “dug up” things from the earth (like minerals, fossil fuels). These raw materials are transformed into outputs, but their depletion is seldom accounted for.

Finally, beyond direct use, production processes often impose costs on nature as “negative externalities” through pollution, habitat destruction, and degradation of terrestrial and marine ecosystems. These damages remain largely unpaid, leaving conservation and recovery under-funded and widening the biodiversity financing gap.

Finance gap and PES

According to UNDP estimates, the world currently spends only about 20 per cent of the funding required to bridge the global biodiversity finance gap. This shortfall amounts to nearly US$ 700 billion annually, with much of the existing spending coming from government budgets and international donor funds.

The gap continues to widen. As populations grow, human activities expand, and economic growth accelerates, the demand on nature intensifies while financing lags behind. Closing this gap has become urgent. Emerging initiatives now seek to bridge the divide through innovative finance tools, including PES.

PES is one of the most promising market-based mechanisms. Markets facilitate exchanges between suppliers and buyers, and PES applies this principle to ecosystem services. It enables an exchange where suppliers such as local communities, landowners, or conservation groups who can manage and sustain ecosystem services, while buyers such as businesses, governments, or individuals pay for the benefits they receive. In this way, PES creates a direct link between stewards who protect ecosystems and beneficiaries who depend on them.

Stewards and beneficiaries

Let’s us look at our opening story, in which ground water is an ecosystem service. The farmers were the stewards of supplying ground water by undertaking activities that can recharge ground water and limiting activities that can discharge it.

They could guarantee the supply of ground water, which could benefit the semiconductor company as the buyer. There is a reasonable ground for this exchange takes place at a price, which is called PES. A PES market creates a direct link between stewards and buyers, ensuring that conservation generates tangible rewards.

Stewards of marine and coastal ecosystem services, thus include coastal communities, fishers, or landowners who undertake conservation activities such as mangrove restoration, coral reef protection, or sustainable fishing. The buyers could be the government agencies, tourists, tourist hotels and other businesses, NGOs, and carbon market players that could provide payments to the stewards.

Marine and coastal ecosystem conservation could include, for example, the following initiatives: mangrove restoration, coral reef conservation, sustainable fishing, seagrass meadow restoration, wetland rehabilitation, beach dune stabilisation, pollution control initiatives, ecotourism and sustainable aquaculture.

All these ocean and beach related conservation activities are important because they help sustain the ecosystem services that marine and coastal environments provide, ensuring that both nature and people can thrive in the long term.

Created market

Unlike conventional markets, the market for ecosystems does not emerge automatically. This is because ecosystem services exhibit the characteristics of a public good — particularly non‑excludability and non‑rivalry. Their benefits are shared by all without exclusion, and one person’s use does not diminish another’s ability to benefit.

In addition, asymmetric information further constrains natural market formation: potential suppliers may not realise they can act as stewards of ecosystem services, while potential beneficiaries may be unaware that they can contribute financially to enhance these benefits.

Because of these challenges, ecosystem markets must be deliberately created and supported through technical guidance, governance frameworks, and financial transaction mechanisms. Today, such arrangements have matured into proven market-based financial solutions, with hundreds of successful cases worldwide demonstrating their capacity to advance environmental conservation.

 (The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at [email protected] and follow on Twitter @SirimalAshoka).

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