Climate Finance
DC Water: First Ever Environmental Impact Bond
Location: Washington, DC
Status: Complete
Quantified Ventures served as the outcomes-based finance transaction intermediary to design and guide DC Water through the process of structuring and executing a $25 million Environmental Impact Bond, the country’s first. Like many cities with aging infrastructure, the District of Columbia faced regulatory and environmental concerns from its reliance on a sewer system that combined stormwater and sanitary sewage within a single system and resulted in frequent sanitary sewage overflows into the Potomac River. As a result of enforcement action, DC Water was subject to a consent decree with the EPA to address its combined sewer overflows (CSO) problem. To address this problem, DC Water developed a multi-billion dollar gray infrastructure plan to relieve the CSO problem, but it also investigated the potential benefits of using green infrastructure to achieve the same goals at a significantly reduced cost but greater level of uncertainty. Quantified Ventures worked with DC Water to create the first ever Environmental Impact Bond to finance the implementation of green infrastructure through an approach that shared performance risk with investors by linking their returns to the project’s success. This project serves as a model for water authorities globally to leverage private capital to finance innovative but uncertain solutions to stormwater management challenges.
Problem
Washington’s CSOs were dumping an average of 2.5 billion gallons of combined sewer water annually into 3 rivers including the Rock Creek tributary that ultimately flows into the Chesapeake Bay. This polluted water overflows brought bacteria, trash, and heavy metals along with it, contaminating DC’s watershed and disrupting the entire ecosystem. In response, local residents and community organizations demanded change, resulting in legal actions which ultimately concluded with the EPA issuing a consent decree in 2005 that required DC Water to address the sewer overflow issue.
Approach
In 2016, the first-ever Environmental Impact Bond was privately issued to Goldman Sachs and Calvert Impact Capital at $25 million, funding the pilot to create 25 acres of green infrastructure (GI). GI (such as permeable pavement, green roofs, and landscaped retention facilities) mimics nature over time. If the DC Water GI performs as planned, with the ability to capture approximately 650,000 gallons of water annually, DC Water will build out its GI acreage further to include 345 acres, allowing it to avoid costs associated with the construction of a third pipeline. If it over-performs, it means the GI is more efficient and effective than expected, and DC Water can scale accordingly to achieve the desired effect.
Impact
The EIB doesn’t just reduce the flow of runoff and sewage into the Chesapeake Bay. Through the funded green infrastructure projects, the EIB delivers access to new green spaces around the District, which has been well documented to improve health outcomes. Additionally, construction of these facilities creates an additional pathway for workforce development programs for District residents. The green infrastructure implementation created jobs, sparked the creation of a green infrastructure workforce certification, and produced green spaces for the community to enjoy. All these benefits are in addition to reducing stormwater runoff into surrounding waterways—its financed metric.
In spring 2021, DC Water made mandatory tender and full repayment of the EIB, following a robust evaluation of the project outcomes that confirmed the effectiveness of green infrastructure in the District. The information gained through performance monitoring resulted in optimizations that will ensure a future for green infrastructure at DC Water. The green infrastructure projects financed through the EIB achieved the goals set in 2016, reducing runoff into Rock Creek by nearly 20 percent over 5 years.
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