In 2016, the District of Columbia Water and Sewer Authority (DC Water) – with support from Quantified Ventures – issued the nation’s first Environmental Impact Bond (EIB), creating an innovative financing mechanism for funding the construction and evaluation of green infrastructure intended to manage and mitigate stormwater runoff.
Now more cities have the opportunity to follow their lead. Learn more
Washington, DC is one of 773 communities across the country with a combined sewer system, which means that raw sewage and stormwater flow run through the same pipes. These systems were designed and constructed over a century ago, and not surprisingly, are no longer built today. During periods of heavy rain, these systems can become overwhelmed, and when volume exceeds capacity, combined sewer overflows (CSOs) occur where raw sewage is dumped into area watersheds. In DC alone, approximately two billion gallons of CSOs pollute the Chesapeake Bay Watershed annually.
To mitigate these effects, in 2005, DC Water entered into a Long Term Control Plan Consent Decree with the District of Columbia, the U.S. Environmental Protection Agency and the U.S. Department of Justice. This agreement served as the foundation for DC Water’s Clean Rivers Project, a capital improvement project designed to curtail combined sewer overflows. DC Water began work on a $2.6 billion grey infrastructure project to build three deep tunnels to capture CSOs and deliver them to DC Water’s Blue Plains Advanced Wastewater Treatment Plant.
"This environmental impact bond represents the first time that DC Water has explicitly tied financial payments to environmental outcomes, in this case reducing stormwater runoff which causes the CSOs that pollute the District’s waterways"
- Mark Kim, Former CFO, DC Water
Source: DC Water
To build and evaluate the efficacy of green infrastructure, DC Water issued a $25 million, tax-exempt Environmental Impact Bond, the first of its kind, through a Private Placement Agreement to pilot green infrastructure on 20 acres of the planned 365. This marked the world’s first Pay For Success (PFS) project focused on the environmental sector.
However, this innovative financing strategy took the Pay for Success model one step further. In a traditional PFS contract, performance failure may result in no return on investment and possibly a complete loss of principal. Performance risk falls complete on the investor. DC Water, working with Quantified Ventures to analyze the risks of the project’s performance, designed the Environmental Impact Bond to share performance risk between itself and investors, decreasing the cost of capital to the water authority in the event of underperformance and increasing the cost of capital in the event of flow reduction overperformance.
- TierOutcome rangesContigent payment
- Tier 1Outcome ranges Runoff reduction: > 41.3%Contigent payment DC Water will make an outcome payment to investors of $3.3 million
- Tier 2Outcome ranges Runoff reduction: 18.6 - 41.3%Contigent payment No contingent payment
- Tier 3Outcome ranges Runoff reduction: < 18.6%Contigent payment Investors will make a risk share payment to DC Water of $3.3 million
The issuance served as a catalyst for cities to consider innovative ways to fund green infrastructure that can serve resiliency efforts and is the basis for Neighborly’s and Quantified Venture’s efforts to bring Environmental Impact Bonds to the public market. There is no one way to issue an EIB, and efforts will be tailored to the context of the issuing municipality.
More information on DC Water’s Environmental Impact Bond can be found here.
Links to the Private Placement Agreement and Supplemental Indenture can be found here.
Neighborly and Quantified Ventures are excited to work with the Rockefeller Foundation to open up the market through a public offering of Environmental Impact Bonds. This public offering should reward credit and cash flow positive expenditure decisions and diversify the investor marketplace, creating liquidity and broader distribution.
By developing a methodology to bring these bonds to the public market, we believe we can reduce dependency upon philanthropic expenditures by broadening the investor base and to the extent possible, work toward standardizing the process of issuing municipal EIBs.
Read more about building the future of Environmental Impact Bonds with the Rockefeller Foundation.