Things just got very exciting in the geeky world of environmental impact bonds. The City of Atlanta Department of Watershed Management just issued the first ever public environmental impact municipal bond. The bond, which will finance green infrastructure to address water quality, reduce flooding and improve stormwater management in Atlanta’s Proctor Creek Watershed neighborhoods, is a collaboration between the City of Atlanta, impact investing firm Quantified Ventures, and Neighborly, a broker-dealer that specializes in public financing for impact projects. The ‘first ever’ part comes from the fact that the bond was sold on the open market – more on this later.
If you haven’t heard of environmental impact bonds and “Pay-for-Success,” you are not alone. These are still relatively new. In the environmental impact context, Pay-for-Success contracts, also called pay for performance, link a payment or financial return on investment to performance against pre-determined and measurable environmental results. Environmental Impact Bonds—one approach to pay-for-success—allow municipalities or other jurisdictions to raise funds from investors in order to finance green public sector projects. Repayment rates on the financial investment are based upon achieving particular benchmarks. In the case of Atlanta’s new EIB, the benchmark is 6.52 million gallons of stormwater managed by green infrastructure financed through the bond. That’s enough water to fill nearly 10 olympic-sized swimming pools.
The $14.02 million bond has a 10-year maturity (that is, investors will get their money back after 10 years), and an additional $1 million will be paid out pro rata to investors after 6 years if the stormwater management goal across the city’s six green infrastructure projects are achieved. A third-party engineering firm will do the evaluation and audit to ensure that there is no conflict of interest for any of the parties to the contract.
I’m excited about this Atlanta EIB for two reasons. For one, it is a step toward connecting green infrastructure and impact projects to public financial markets. Quantified Ventures previously closed an EIB—with DC Water, also for stormwater management—but that one was financed through a private placement (i.e. sold directly to only a couple of investors). For years, practitioners interested in impact investments have tried to figure out how to connect impact deals to the bigger finance markets. The Atlanta offering was sold through Neighborly, in $100,000 increments. With a lot of excitement generated by the Atlanta EIB, it only took a couple of hours for it to sell out to investors, which is a great indication that such financing mechanisms don’t have to stay small forever. Quantified Ventures’ Ben Cohen points out that it’s not mainstream yet, but it’s a move in the right direction.
The other thing that makes Atlanta’s Department of Watershed Management EIB so exciting is that it will produce not only key environmental and water management outcomes for the City, but it will do so with the support and participation of communities, and with environmental justice and jobs top of mind. New green space will sprout up in neighborhoods that have been on the receiving end of pollution and flooding from an aging and ill-equipped sewer system. The City also aims to create lasting local jobs to maintain the green infrastructure projects over decades.
While the details of the bond may be geeky, the outcomes are not: Local jobs in lower income neighborhoods that will benefit in many ways from stormwater projects. Opportunities for the public to invest in the same kinds of profitable ways that have previously been reserved for institutional investors. Cleaner flows of freshwater in and around the City of Atlanta.