Financing Resilience: How Environmental Impact Bonds Can Help Louisiana

By Shannon Cunniff and Carolyn Dupont

Shannon Cunniff is the Director of Coastal Resilience for Environmental Defense Fund.

Carolyn duPont is a Director at Quantified Ventures.

Oct 1, 2018 | Economy, Governance | 0 comments

Last week, Environmental Defense Fund (EDF) and Quantified Ventures released a report defining how using an innovative financing tool—an Environmental Impact Bond—can help Louisiana and other coastal areas protect their coastal communities and economy.

Louisiana’s coast is disappearing at a rate of roughly one football field every 100 minutes. The state has put together a bold $50 billion Coastal Master Plan to address these losses through investments in coastal resilience and protection, including through nature-based solutions such as wetland restoration. While the state has some funding identified for this work, it’s not enough—and these projects get increasingly expensive over time due to inflation and as more land is lost to the sea.

 

The Pilot: A $40 million Pay-for-Success Transaction

Through EDF’s long history of working in Louisiana to protect and restore land and habitat, we saw that financing coastal resilience projects would be a key challenge for Louisiana. With climate change, other states and communities are also struggling to find funding that would allow them to adapt to rapidly changing coastal conditions. With this realization, EDF’s team partnered with Quantified Ventures, an impact investing consulting firm, to explore a key question: can innovative financing through an Environmental Impact Bond help bring much-needed capital to restoration or other coastal resilience projects, and quickly?

In short, the answer is yes. Our report finds that Environ­mental Impact Bonds could help Louisiana restore its coast faster and for less money. Through a process outlined in detail in the report, our EDF-Quantified Ventures project team—with guidance from Louisiana’s Coastal Protection and Restoration Agency (CPRA)—conceived a pilot $40 million pay-for-success transaction that would support the construction of wetlands that provide flood risk reduction benefits to on-shore assets. The hope is that the bond will help Louisiana attract financial support from parties that directly benefit from immediate efforts to restore the coast, including local asset owners like ports, Gulf Intercoastal Waterway users, oil and gas companies, and utilities.

For this pilot, with input from CPRA, we structured a prototype Environmental Impact Bond transaction in which both contractors and investors receive a performance bonus if the wetlands perform better than expected in terms of stemming land loss. That performance payment would be contributed by local, private asset owners who benefit from earlier wetland restoration, helping the state leverage private dollars and engage the stakeholders who share a vested economic interest in the future of Louisiana’s coast.

The next steps for Louisiana are to enable the Coastal Protection and Restoration Financing Corporation’s bonding authority, and then to structure and issue the bond. Fortunately, Louisiana can look to its Tobacco Settlement Financing Corporation as a template for utilizing its bonding authority.

We applaud Louisiana’s leadership in coastal resilience financing by signaling an interest in cultivating innovative public­ private partnerships that will help reach attain their economic, environmental, and social goals as the coastal resilience challenge is too big to be solved by the public sector alone.

 

The Promise of Environmental Impact Bonds

Quantified Ventures first introduced the Environmental Impact Bond model in 2016 with DC Water. As with any new financial instrument, it has taken some time to socialize this concept, which brings private investors to the table to finance environmental and health challenges that may otherwise be delayed or never started. While public private partnerships are not new, the twist here is aligning incentives by predetermining how success will be measured and rewarding service providers that meet and exceed these goals.

We are encouraged by the progress public officials are making. In March, the cities of Atlanta and Baltimore announced that they are employing the Environmental Impact Bond to finance green infrastructure projects in their cities, decreasing the chance of pollution and flood damage. With each transaction, we continue to learn about how Pay-for-Success can best benefit partners on the ground. This model is under consideration for financing a variety of resilience projects, including preventing agricultural runoff from contaminating nearby water sources, building a mountain bike trail in a national forest to spur the local economy, and recovering and recycling urban demolition materials to keep valuable wood out of landfills.

EDF and Quantified Ventures believe that Environmental Impact Bonds represent a true opportunity for Louisiana—and indeed for coastal cities and states across the country and the world—to accelerate coastal resilience investments. By demonstrating how the private sector can partner with government to implement coastal restoration projects, while generating a financial return for investors, Louisiana can become a leader in using private investment for coastal resilience.

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