Forests in catchments generally result in cleaner water downstream, thus significantly reducing the costs of purification (to what extent depends on the level and type of contamination). In addition, particular forests such as tropical moist cloud forests appear to increase flow into catchments as well as ameliorate local flooding.

With water shortages increasing in many parts of the world, the importance of this link is being rapidly realised today. Twenty-eight per cent of the world's forests are located in mountains and these forests are the source of some 60-80% of the world's fresh water resources. They are also natural barriers for landslides, torrents and floods. Tropical Montane Cloud Forests (TMCFs), which have unique hydrological values and high rates of species endemism, are today being lost faster than any other major forest ecosystem. However, nearly 30% of the world's major watersheds have lost more than three-quarters of their original forest cover.

Recognising this problem, some countries have already started protecting or replanting trees on degraded hill slopes to safeguard their water supplies. Generating more knowledge on this forest environmental service, and developing appropriate payment or compensation mechanisms between upstream watershed service providers and the downstream beneficiaries, will be a key challenge for the forestry sector in the coming years.

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