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Environmental impact bonds: Next big thing for green investments?

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Diego Herrera / Published July 14, 2017  See full Environmental Defense Fund Blog article here

… a growing number of state and local governments are looking to wetland restoration and other nature-based solutions to try to tackle longstanding water management and conservation needs in a changing climate.

Only problem is, who will fund such non-traditional infrastructure projects as public funding sources become increasingly stretched? Try private-sector investors willing to bet on a “pay-for-success” bond offering, a new financial tool that ties rewards to measurable social or environmental outcomes. Environmental impact bonds, or EIBs, fit under the broad umbrella of green bonds and are just now beginning to gain some traction.

We think EIBs could hold the key to the financing of wetland restoration projects to reduce flooding in coastal areas in the U.S. and beyond – much-needed projects for which private-sector support is critical.

DC Water, Washington’s water utility, pioneered the nation’s first EIB bond offering in late 2016 when it sold a $25-million, tax-exempt EIB in a private placement to the Goldman Sachs Urban Investment Group and the Calvert Foundation. The money will initiate the city’s DC Clean Rivers Project, a $2.6-billion program to control storm water runoff and improve local water quality using natural infrastructure.

It could mark the beginning of a new environmental financing mechanism that could eventually open up funding for wetland restoration and coastal resilience projects worldwide.

Three key components must be present to make such a financial tool successful:

1. Returns must be determined by outcome…

2. EIBs should generate savings on project costs…

3. Performance metrics must be well-defined…

….The timing for such sustainable finance strategies looks good. While still representing less than 1 percent of global investment assets, the impact investing sector is expected to grow tenfold from $77 billion to about $700 billion by 2020.

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