How Environmental Impact Bonds Can Help Louisiana Restore its Coast Better, Faster, and for Less Money

08.15.2018 | In Funding & Policy
By Steve Cochran, Campaign Director, Restore the Mississippi River Delta and Associate Vice President, Coastal Resilience, Environmental Defense Fund

Learn more about EDF’s new environmental impact bond feasibility report at edf.org/environmental-impact-bond.

Louisiana has a $50+ billion Coastal Master Plan to protect and restore its coast, and a number of projects are underway or completed, thanks to the dedication of billions of dollars of penalties that followed the Deepwater Horizon oil disaster. Over all, the state has currently identified $9 billion to $12 billion of the funds needed to fully implement the plan, which is a great start, but far short of the funding need over time. That sets a clear goal for finding the remaining capital necessary to protect coastal communities and infrastructure from climate-driven increases in sea levels and storm intensity.

As a step in that direction, Environmental Defense Fund and Quantified Ventures recently set out to determine if an environmental impact bond, a new form of pay-for-success debt financing, could be designed for Louisiana: to help the state restore its rapidly disappearing coast sooner, for less money, while involving the private sector and local asset owners.

Why environmental impact bonds?

An environmental impact bond, or EIB, is a form of pay-for-success debt financing in which investors purchase a bond and repayment to investors is linked to the achievement of a desired environmental outcome, such as reduced land loss.

Structure of an Environmental Impact Bond. Credit: EDF.

Environmental impact bonds provide a range of potential benefits for projects with environmental outcomes. EIBs may be attractive to local asset owners, such as landowners and businesses that directly benefit from earlier coastal restoration. They are attractive to the state of Louisiana, because they use innovative public-private partnerships based on delivery of performance. And because of their environmental benefits, EIBs also may be attractive to social impact investors as well as traditional investors.

This kind of approach is also appealing because it is a performance-based bond, meaning payback is based on the project achieving specific outcomes. Avoided land loss is a readily measurable outcome from wetland restoration activities because it reduces the vulnerability of assets – homes, businesses and infrastructure – to the damages caused by rising seas and storms. That makes it an ideal metric for measuring outcomes, and allowed us to design an environmental impact bond to help advance wetland restoration projects that realize superior reduction in land loss and avoid storm damage costs.

In this case, the bond transaction specifically includes a performance payment at the end of the bond period only if the wetland achieves a pre-established mutually-defined level of avoided land loss. The performance payment is provided by local asset owners, or “partner-payers,” that determine the benefits they receive from earlier wetland restoration outweigh the risks they face from storm damages and the costs of the performance payment. This payment rewards both investors and contractors for their roles in creating high-performing wetlands.

Benefits of environmental impact bonds

The environmental impact bond approach offers many rewards.

Ability to measure wetland restoration benefits: Due to the pay-for-performance, outcomes-based focus, the environmental impact bond transaction model results in the generation of data that quantifies the effects of wetland restoration. This helps establish to stakeholders the real benefits derived from wetland restoration projects.

Aligns interests in coastal restoration and superior project performance: By featuring a performance payment based on evidence collected by an independent party, environmental impact bonds align the interests of the state, asset owners, contractors and investors to ensure wetland restoration projects create desired outcomes.

Attractive to impact investors: We designed this environmental impact bond to be attractive to private investors, particularly “impact investors,” who seek not just financial returns but also environmental and social returns. Investors interested in coastal restoration and/or making coastal communities more resilient to rising seas and increased storms should be interested in this kind of bond.

Can increase government effectiveness: Environmental impact bonds can help accelerate and magnify the state’s effectiveness and impact by restoring wetlands that contribute to protecting communities and stabilizing local economies, jumpstarting job creation through coastal restoration, and preserving tax bases.

Benefits of Environmental Impact Bonds. Credit: EDF.

Our study demonstrates that it’s feasible for a wetland restoration environmental impact bond transaction to be designed to be financially advantageous to all parties: the state of Louisiana, communities, investors and local asset owners.

What remains now is for the state of Louisiana to make its own decision about whether to proceed with a detailed transaction and implement what would be the first-ever environmental impact bond for wetland restoration.

Learn more about EDF’s new environmental impact bond feasibility report at edf.org/environmental-impact-bond.

This work was funded by NatureVest, the conservation investing unit of The Nature Conservancy, through its Conservation Investment Accelerator Grant, which aims to find and support the best talent and most meaningful work in the field of conservation investment.