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On May 27th, Quantified Ventures issued a press release regarding the evaluation of the first ever Environmental Impact Bond (EIB). EIBs are innovative pay-for-performance debt-financing mechanisms that have been used to finance green infrastructure projects in DC, Atlanta GA, and Hampton VA. EIBs are unique in that they tend to have predetermined outcome measures that dictate the overall cost of capital. While green bonds also finance environmental projects, they typically do not measure and report outcomes. 

About the DC Water EIB

The DC Water EIB funded green infrastructure installments aimed to reduce runoff into DC Water’s combined sewer system, and eventually into Rock Creek. The EIB funded 25 acres of green infrastructure as part of DC Water’s Clean Rivers Project, which aims to reduce runoff into combined sewer systems and combined sewer overflows. The $25 million EIB was sold to Goldman Sachs and Calvert Impact Capital in a private issuance and included three performance tiers. The outcome measure for the project was runoff reduction into the combined sewer system, measured against a flow baseline established before the project was completed. 

The idea is that an EIB allows for risk-sharing. If the project underperforms, DC Water receives a performance payment from investors that reduces the cost burden on ratepayers. Because DC Water is required to reduce combined sewer overflows, underperformance might mean future investment to control the problem. The table below summarizes the range of outcomes and performance payments for the DC Water EIB, as outlined by a Goldman Sachs fact sheet

Performance Tier Runoff Reduction Performance Payment
1 > 41.3% DC Water pays investors $3.3 million
2 18.6% to 41.3% No performance payment
3 < 18.6% Investors pay DC Water $3.3 million

In short, the evaluation of the project determines the performance payout and the cost of capital for DC Water. Given DC Water’s consent decree with EPA and the need to reduce combined sewer overflows, the evaluation results not only define the environmental improvements, but also the project cost. 

So, what were the results? 

The project reduced stormwater runoff by almost 20%. According to the performance tier table above, this falls within the expected outcome range, albeit on the lower end, and thus there is no performance payment by DC Water nor by investors. The results are interesting in that just a slightly lower reduction in flow would have resulted in a $3.3 million risk-sharing payment to DC Water. Nonetheless, run off reductions within the expected range is a good thing. And the run-off reductions are just one outcome of this project. 

While the reductions in runoff were the measurable outcome in this EIB, other objectives were accomplished. Namely, DC Water used the experience to learn about the performance of different types of green infrastructure. These lessons learned provide DC Water with information to guide future stormwater decision-making and optimize the mix of green and gray infrastructure to lower total project costs while achieving necessary project outcomes. Further, the DC Water EIB’s performance evaluation and reporting sets a new standard for transparency to ratepayers, showcasing the impact of rate dollars and the efficacy of green infrastructure. 

Beyond DC Water

The lessons learned from this EIB extend past DC Water. The DC Water EIB serves as a model for other municipalities considering similar projects and financing mechanisms. To date, this includes Atlanta GA and Hampton VA, but may include more municipalities as needs grow and EIBs become a more regular fixture in municipal finance. Only time will tell, but for now, the DC Water EIB has provided runoff reductions within the expected range and served as a model for greater implementation of green infrastructure.  

Want to learn more about the DC Water EIB? Check out the EFC’s older posts on EIBs from 2017 and 2020 and Quantified Ventures’ DC Water Case Study.

Austin Thompson joined the EFC at UNC in 2018 as a project director. In this role, she conducted applied research and provides technical assistance and training for environmental service providers. Thompson holds a BS in Biological Sciences from the University of South Carolina and a Master’s of Environmental Management from Duke University, with a concentration in Environmental Economics and Policy. She is currently pursuing a PhD at NC State University, while continuing to work at the EFC conducting applied research.

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