Washington DC’s Environmental Impact Bond Greening the City
Many cities are turning to Environmental Impact Bonds (EIBs) to build green infrastructure that manages water quality, enhances resilience, and restores the natural environment. Read how the District of Columbia Water and Sewer Authority used an EIB to construct green infrastructure.
In 2018, 55% of the world’s population lived in urban areas, and by 2050, it is estimated to be 68%. The world’s urban population reached 4.2 billion in 2018, and the combination of an increase in population growth and urbanisation will see the world add 2.5 billion to the world’s urban population by 2050. Finally, the number of megacities (cities with 10 million inhabitants or more) will increase from 33 in 2018 to 43 in 2030.
The significant impacts of urbanisation on the environment include:
- Water pollution (due to intensive discharges of nutrients and contaminants from urban areas combined with an increase in impervious areas and the associated increase in stormwater runoff)
- Land-use change (altering local biodiversity, contributing to urban heat island effects, and increasing localised flooding risks)
- Ecosystem degradation (resulting in degradation of urban riparian zones, loss of native biodiversity, and increases in non-native species)
Environmental Impact Bonds
EIBs are a form of debt financing in which part of the return to investors depends on the environmental outcomes of the financed projects. The return to the investor will generally include a principal, interest, and a possible performance payment. The level of the possible performance payment can be fixed (i.e., triggered by achieving a threshold on the outcome metrics) or variable (i.e., dependent on the level of impact achieved). The benefits of EIBs include the ability to:
- Pilot new projects, such as green infrastructure, which may be perceived as risky
- Transfer risk if the projects are not successful, with the investors agreeing to take a lower return based on the outcome of the project
- Engage new investors, with the multiple co-benefits of green infrastructure projects potentially able to leverage government agency or philanthropic budgets to pay for part of the project based on the achievement of these outcomes
District of Columbia Water and Sewer Authority’s Environmental Impact Bond
In 2016, the District of Columbia Water and Sewer Authority (DC Water) and its investors, Goldman Sachs and Calvert Foundation, announced the United States’ first EIB to fund the construction of green infrastructure as part of the DC Clean Rivers Project. The $25 million tax-exempt EIB was sold to Goldman Sachs Urban Investment Group and Calvert Capital in 2016 with a mandatory tender date of April 1, 2021.
The proceeds of the EIB were used to construct green infrastructure practices under The Rock Creek Project A: The project involved constructing 25 acres of green infrastructure, including bioretention in planter strips and kerb extensions, permeable pavements, and green infrastructure in parks, to reduce runoff into Rock Creek.
The financing model of the EIB involved DC Water paying for the costs of constructing the green infrastructure. At the same time, the performance risks and benefits of managing stormwater runoff were shared among DC Water and the investors:
- Runoff reduction greater than 41.3%: DC Water pays Outcome Payment of $3,300,319.00 to purchasers
- Runoff reduction between 18.6 and 41.3%: No Outcome Payment or Risk Share Payment
- Runoff reduction less than 18.6%: Purchasers pay Risk Share Payment of $3,300,319.00 to DC Water
In May 2021, DC Water announced the success of both its green infrastructure projects in Rock Creek and the EIB that financed them. The post-construction monitoring found that the green infrastructure reduced stormwater runoff by nearly 20% from previous levels, falling within the EIB’s ‘No Outcome Payment or Risk Share Payment’.
The take-out
Environmental Impact Bonds enable cities to lower the risk of constructing green infrastructure.
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