Agriculture affects both the quantity and quality of water available for other uses, and under current production systems the impact is often negative. Adopting sustainable land management (SLM) practices can foster a more efficient water use and increase agricultural productivity, while reducing environmental risk from water pollution and regulating flows serving downstream communities. One of the key barriers to adoption of such practices is the high upfront cost associated with SLM implementation, which are a disincentive to their practice by poor landowners. This paper discusses how an emerging policy tool- Payments for Environmental Services (PES)- can bridge this gap by financing initial SLM investment costs, thereby lowering the cost barriers to SLM implementation. Drawing on ongoing experience in Tanzania, we discuss the main constraints to be addressed in order to realize this potential.