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Guest post by Reed Perry, a Master of Environmental Management candidate at the Duke University Nicholas School of the Environment.

A $25 million dollar Environmental Impact Bond (EIB) issued by DC Water last year has captured the attention of environmental groups, investment firms, and policymakers alike. The nation’s first of its kind, this bond was announced in September 2016 and was followed by a buzz of excitement and inquiry. But what exactly is an EIB, and how plausible is its application for your organization’s project?

This particular EIB serves to fund green infrastructure to manage stormwater runoff in Washington DC. Structured like a traditional tax-free bond, the EIB allows for risk associated with a given infrastructure project to be transferred from the bond issuer—DC Water, a not for profit water utility—to the investors, Goldman Sachs and the Calvert Foundation. In addition, the DC Water EIB is tied to a “pay for success” contract, under which the potential return realized from the investment is based on the outcomes of the project. By transferring risk, EIBs can support innovative natural infrastructure solutions to achieve an outcome which may otherwise be too risky for utilities and public entities to pursue.

In addition to risk transfer, EIBs can encourage private investment in projects to achieve environmental outcomes. The DC Water EIB is intended to reduce stormwater runoff through natural infrastructure and as a result, to improve the water quality of the surrounding Washington D.C. waterways. Natural infrastructure like green space and vegetated buffers can achieve the same or better results at a lower cost than traditional gray infrastructure like tunnels and storm drains. In addition to providing environmental benefits, green infrastructure can more sustainably mitigate climate change effects like rising seas or destructive weather events. Considering the DC Water example, there is strong potential for EIBs to play an important role in financing environmental and climate change mitigation projects through natural infrastructure.

Many articles about the DC Water EIB have discussed its advantages and benefits. Missing from the discussion about a potential EIB trend, however, are the financial and technical risks and constraints that will limit the use of EIBs in financing natural infrastructure. More data on natural infrastructure benefits and costs, as well a better understanding about the best project fit for EIB, is needed for communities and environmentalists to understand the potential opportunities of this investment vehicle.


Interested parties should be realistic about the potential opportunities and inherent challenges that exist for EIBs. While EIBs may be very useful for large cities and municipalities, smaller communities may find it challenging to attract private capital for smaller projects simply because the deal sizes are too small. EIBs will also be constrained by project type: projects centered on a reliable revenue stream—like water utility revenue from ratepayers—will be favored by investors. However, many natural infrastructure projects, like wetland restoration or coastal sand dunes, have benefits that are not as easily monetized. The uncertainty and variability of green infrastructure projects present considerable financial and technical risks that will steer at least some investors and public entities away from such projects.

Variability and Uncertainty

A paper by the Environmental Defense Fund on natural infrastructure performance demonstrates the wide variability and uncertainty associated with natural as opposed to gray infrastructure. The variation of natural features like sand dunes, beaches, or wetlands over time, coupled with the uncertainty of a feature’s lifetime and the regional differences between natural features, is an inherent challenge. This degree of uncertainty makes risk assessment for achieving project outcomes especially difficult. The variation by geographic location also makes it difficult to replicate projects. For these reasons, the EIB may not be a good investment vehicle to match private capital with certain green infrastructure projects.

Lack of Data/Performance Metrics

Another related risk is the lack of data on natural infrastructure projects. A white paper released by The Nature Conservancy in January 2015 notes that “gray infrastructure approaches have been deployed for decades…Natural infrastructure has shorter technical, environmental, and financial track records.” The lack of data is problematic for investors who would assume the risk of achieving successful project outcomes in an EIB structured similarly to that of DC Water. As more natural infrastructure projects are undertaken, and if these projects are more cost effective than gray infrastructure, environmentalists will have a greater case to present to investors and governments.

There is also a lack of common metrics to evaluate performance for natural infrastructure projects. The Environmental Defense Fund recommends that metrics to evaluate project performance could focus on project outputs—the short-term services produced by the asset and on project outcomes—the long-term impact of the project. It is important that outputs and outcomes can be easily quantified. Performance measurements should be compared to a benchmark of outcomes that would result in the absence of a project11. Standardized metrics would help both EIB issuers and purchasers determine the success of project outcomes and, as a result, better assess the risks and returns associated.

Monetizing Natural Amenities

As compared to other energy projects or water resources projects like the DC Water example, some natural infrastructure projects do not have a stable revenue stream. For example, while ecosystem service markets monetize certain conservation benefits, these projects are difficult or impossible to monetize without a fee or regulatory structure (for instance, payments for environmental mitigation). Furthermore, many investors remain skeptical about the potential revenue streams, regulatory uncertainty, and the deal size of such conservation projects. Suitable projects for EIBs include those with a fixed income stream; it will not be possible for communities to finance natural infrastructure projects through EIBs without a fee structure in place.

The Role of Government

It is important to note that regulations often set the structure creating an incentive for private investment in natural infrastructure. In 2003, the Environmental Protection Agency found that DC Water had violated the Clean Water Act by frequently discharging raw sewage, industrial waste, storm water, and nutrients into the surrounding waterways. The EPA issued a decree for DC Water to comply with clean water standards, and in 2015, EPA modified its decree to allow DC Water to use green infrastructure to meet the EPA water quality standards. The EPA requirements forced DC Water to consider cost-effective, sustainable, and politically palatable ways to reduce its discharges into surrounding waterways. Private investment through the EIB has enabled DC Water to accomplish this objective through green infrastructure.

Despite budget constraints, government funding is still critical for natural infrastructure projects. For coastal climate change mitigation projects, this fact seems particularly salient. A 2016 United Nations Environment Programme report on private finance for climate adaptation states that “economic cost-benefit analyses show that investments in coastal protection measures generally pay off in well-populated areas with high value property and strategic infrastructure, but not in moderately-populated areas.” For communities that don’t fit the criteria of high property values or strategic infrastructure, the economics are not likely suitable for private investment through an EIB. Federal funding through Clean Water and Drinking Water State Revolving Funds, USDA conservation programs, the Land and Water Conservation Fund, and other programs provide essential support to states and local communities seeking to upgrade water infrastructure, reduce runoff, and conserve green space; furthermore, these programs can directly and indirectly support green infrastructure projects.

Moving Forward

The DC Water EIB is an exciting development for financing green infrastructure and for achieving environmental outcomes. Already, other EIB proposals are appearing in states and municipalities throughout the country. The firm Quantified Ventures, one of the key partners in developing the DC Water EIB, will soon consider proposals from other cities for two EIB-financed projects. In its request for proposals, Quantified Ventures has stated a preference for green infrastructure projects related to stormwater management, though it is considering other project types.

It is evident that large infrastructure projects, with a stable revenue stream and quantifiable performance outputs and outcomes, are good candidates for private investment through EIBs. It is less likely that EIBs could be used for other natural infrastructure projects if they do not meet the aforementioned criteria. For the EIB market to grow and support other green infrastructure projects, more data is needed on the quantified benefits and cost savings from natural infrastructure. As more EIBs are issued and as projects are completed, performance metrics can be established and standardized which will help the EIB market continue to grow. Lastly, environmentalists and communities should continue to advocate in support of federal programs that fund water infrastructure and land conservation projects, as these programs are critical for communities that cannot raise sufficient capital through taxes or through private investment.


Collapsing riprap wall on the Anacostia River in Washington, D.C. | Photo credit: Tim Evanson


Reed Perry is a Master of Environmental Management candidate at the Duke Nicholas School of the Environment. Prior to Duke, Reed served as a Legislative Aide to former US Senator Barbara Mikulski and later as a Fellow with the Chesapeake Conservancy.