Most of the professionals working on environmental quality and green infrastructure might know the DC Environmental Impact Bond, which seeks to solve DC´s growing stormwater pollution problem with the support of private investors.
A growing number of actors is looking at Environmental Impact Bonds as a new form of Private-Public Partnerships to finance nature-based solutions, especially in the water management and green infrastructure sector.
The latest innovative design in this area of growing interest is the Forest Resilience Bond developed by Blue Forest Conservation in partnership with Encourage Capital and the World Resources Institute with support of the Rockefeller Zero Gap Portfolio and Packard Foundation.
But what is an Environmental Impact Bond anyway?
Despite the name, it is neither a bond nor a registered financial instrument. It is a partnership or more specifically a project contract where two or more parties agree on “pay-for-performance” or “pay-for-success” terms. Typically, a public entity or the government agrees to pay a return to private investors only if the implemented program meets or exceeds previously agreed upon environmental impact or performance targets. Thus, part of a project’s risk is transferred from the payor to private investors.
In general, EIBs share the following characteristics:
1. Well-defined performance metrics and a third-party evaluation
The project’s performance metrics should represent an adequate proxy for environmental performance or outcomes of the project. Blue Forest Conservation pointedly states: Measure what can be monetized, and monetize what can be measured.
2. EIBs generate savings on project costs for the payors and beneficiaries
The paying entitiy must receive a financial benefit from implementing the “pay-for-success” mechanism to finance early conservation investments. Put differently, even after paying back investors the project should be cheaper than the total losses caused by the environmental issue or the costs incurred if an alternative is implemented at a later moment.
3. Returns depend on the environmental performance or outcome of the project
Investors get paid by the government or other beneficiaries an agreed amount that is conditional on the performance of the project and the environmental outcomes achieved. The outcome is usually verified by a third-party evaluation. Sometimes additional payments are made to investors if the outcomes exceed expectations. On the other hand, the payor can withhold a portion of the interest or of the principal if the project underperforms.
In the case of the Forest Resilience Bond, the proposal is to establish a public-private partnership that enables private capital to finance much-needed forest restoration. The FRB seeks to monetize different benefits generated through forest restoration from both public and private beneficiaries (including the US Forest Service, water and electric utilities, private water-dependent companies, state governments, and insurance companies).
The FRB proposes to combine three main components: (1) measuring of benefits conferred by restoration activities (ecosystem services), (2) contracting to convert these benefits into payments from the different beneficiaries, and (3) financial structuring to turn beneficiary payments into cash flows for investors.
Blue Forest Conservation just published the Roadmap to Collective Action on the Forest Resilience Bond. Find the document attached or download it here.