Much research in recent years has addressed the contribution of indigenous knowledge (IK) to development initiatives in developing countries. An IK system that continuously evolves and adapts in response to environmental and socio-economic change is often considered to be at the core of sustainable natural resource management practices and rural livelihoods. In the context of indigenous wetland management in western Ethiopia, this paper examines the relationship between IK and wetland sustainability, focusing on the mechanisms through which IK evolves and how local adaptive capacity is built up. A series of participatory research activities undertaken in four wetland communities revealed spatial variations in the degree of innovation and communication taking place. The paper argues that these mechanisms are key factors influencing adaptive capacity, suggesting a key link between wetland sustainability and the occurrence of innovation and communication among communities.