Environmental Issues of the World

The Story Behind the World’s First Environmental Impact Bond

Intrigued by the potential of the Pay For Success model, two organizations partnered to creatively apply the model to the vexing social and health challenges of green infrastructure.

An Initial Solution

It became increasingly clear that the system would not be sustainable in the long-run. So in 2005, the U.S. Environmental Protection Agency (EPA), U.S. Department of Justice, District of Columbia and DC Water entered into a consent decree, a legal agreement, to address the problems created by a combined sewer system. DC Water’s solution was grey infrastructure: a $2.6 billion tunnel system designed to capture the combined sewer overflow and prevent it from entering our rivers.

The Rise of Green Infrastructure

Halfway through the 20-year project, in 2015, the practice of green infrastructure (e.g., rain gardens, permeable pavement, green roofs, and rain barrels) emerged as a viable alternative to the grey infrastructure tunnels as a means to manage urban storm water volume.

Green infrastructure mimics nature by serving as a sponge during storms; it soaks up precipitation, slowly releasing it into the sewer system over time to prevent system overload. In addition, green infrastructure brings about other benefits such as sustainable green jobs, more appealing aesthetics, and healthier communities.

Given the advantages of green infrastructure, DC Water decided to include it as part of its solution to storm water overflow. The big questions DC Water was faced with were “What if it doesn’t work? Would it be worth the risk?” The efficacy of green infrastructure as a large-scale solution was still untested. Compared to grey infrastructure, it was harder to predict whether green infrastructure would be successful; while tunnels may not be innovative, we knew they would get the job done.

Creating an Environmental Impact Bond

So how could DC Water manage the risk associated with green infrastructure but still test out its potential? Enter PFS, an emerging model that enables governments to pay for social, health, and environmental outcomes by sharing performance risks with investors who seek a financial and social return. Intrigued by the potential of the PFS model, DC Water engaged Quantified Ventures, a PFS transaction broker with a proven track record of creatively applying the model to vexing social and health challenges. Together, they applied the tool of PFS to green infrastructure and began structuring the nation’s first Environmental Impact Bond (EIB). Through an iterative process of outcomes research, analysis and collaboration across disciplines (e.g., finance, engineering, legal, technical research), the result was a $25 million, tax-exempt bond sold in a private placement to Calvert Foundation and Goldman Sachs Urban Investment Group.