Water Online

January 2017

Water Innovations gives Water and Wastewater Engineers and end-users a venue to find project solutions and source valuable product information. We aim to educate the engineering and operations community on important issues and trends.

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By Julie King E nvironmental finance was in the spotlight recently with two fixed income products. In September, DC Water and Sewer Authority (DC Water) issued the first Environmental Impact Bond (EIB) as part of its $2.6 billion program, DC Clean Rivers Project. The EIB will provide up-front capital for the construction of green infrastructure for the Rock Creek sewer shed with the aim of reducing the approximately 2 billion gallons of combined sewer overflows (CSO) that pollute local watersheds and tributaries each year when stormwater runoff exceeds the drainage capacity of the sewage system. The five-year, $25 million EIB was sold by private placement to two investors, Goldman Sachs Urban Investment Group and the nonprofit investment fund, Calvert Foundation. In October, the City of Gothenburg, Sweden received the 2016 UNFCCC Momentum for Change Lighthouse Award as the first city in the world to issue a green bond. Proceeds from the green bonds are being used, within the city's stringent environmental framework, to fund climate change and environmental sustainability projects that aggressively promote its objectives of transitioning to a low-carbon economy and climate-resilient growth. These two investment instruments represent a growing trend — and opportunity — for infrastructure finance, particularly for water infrastructure. UN Water has concluded that "...water is the primary medium through which climate change impacts the earth's ecosystem and people ... [and] adaptation to climate change is mainly about better water management." i By combining the EIB's mandate of investing-for-impact with increasing demand from investors for Environmental-Social-Governance (ESG) investments, it is no longer contradictory to talk about building infrastructure and protecting the environment. Impact Bonds: Innovation In Financial Structure The EIB issued by DC Water is a financing mechanism designed to share risks and align incentives between investors and the municipality. DC Water uses the EIB proceeds to pay for the costs of installing green infrastructure. Using a tiered payment approach to share performance risk, the amount of the return then paid to investors is tied directly to the degree of success or failure of the green infrastructure in achieving its impact objective: managing stormwater runoff. It will be considered successful if it falls within the conditions of Tier 2 of the payment structure (see Table 1). If the green infrastructure exceeds expectations, DC Water will make an Outcome Payment to investors for sharing the performance risk; if it falls short, investors will make a Risk Share Payment to DC Water. If the green infrastructure is successful in controlling stormwater runoff and managing the problem of CSOs, it will be validated as an effective climate adaptation tool, which is also a goal of the EIB. "The Impact, from an investor perspective, is about improvement to the water system," explains Derek Strocher, CFO of Calvert Foundation. "The return mechanism ... is tied to the outcome results. If the project outperforms, then investors receive an additional payment. If the project underperforms, then investors pay back a risk sharing amount." Strocher continues. "What we, as an investor, are doing is encouraging service providers like DC Water to take a chance on an impactful project like green infrastructure by offering to soften the blow if doesn't work out .... Impact bonds can encourage all sorts of companies to take chances with their businesses to improve the environment ... or any other social issue they are qualified and wateronline.com n Water Innovations Financing Infrastructure Through Environmental Impact By combining the EIB's mandate of investing-for-impact with increasing demand from investors for Environmental-Social-Governance (ESG) investments, it is no longer contradictory to talk about building infrastructure and protecting the environment. With Environmental Impact Bonds, everyone can win. Shared risk means there are no big losers even if the project falls short. 34

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