With wildfires burning across the western United States and hurricane season off to a troubling start, 2018 could outpace 2017 as the most costly natural disaster year on record. As we wrestle with more frequent and damaging weather events as the new normal, the question of who’s responsible for footing the bill in their wake has led to contentious debates between public and private sector stakeholders. While the finger pointing rages on, it’s important to keep two things in mind:
- Investing in resilience saves money – every $1 invested returns up to $6 in avoided future losses, and;
- New financing approaches that align interests of public and private sector stakeholders are critical for future deployment of resiliency projects.
Determined to design new solutions, a team of scientists and economists at the Environmental Defense Fund (EDF) and Quantified Ventures (QV) evaluated whether environmental impact bonds (EIBs) – an innovative form of performance-linked debt financing – could help finance coastal resiliency projects in Louisiana. The state’s Coastal Protection and Restoration Authority (CPRA) faces a significant funding gap to fully implement its 50-year, $50 billion plan to save Louisiana’s coastlines. After a year’s worth of intensive feasibility analysis, funded by NatureVest – the conservation investing unit of The Nature Conservancy – through its Conservation Investment Accelerator Grant, the conclusion is a resounding yes.
What we found
The Louisiana coast is under assault from sea level rise and land subsidence, ceding a football field’s worth of area to open water every 100 minutes. We developed the EIB to advance projects that will stem the tide, significantly reduce land loss, and mitigate storm damage costs.
What emerged was a conceptual $40 million EIB transaction for a portion of the Belle Pass-Golden Meadow Marsh Creation project.
The project site lies adjacent to Port Fourchon, which serves as the primary port for US oil and gas operations in the Gulf of Mexico. The significance of the port to the offshore oil and gas industry was a key factor in our site selection as it provides an ideal location for a “partner-payor” EIB transaction.
In conventional EIBs, investors provide capital for service providers to implement a project or intervention that targets specific outcomes desired by a third party payor – typically a public sector stakeholder. The achievement of these outcomes determines investors’ rate of return. A “partner-payor” EIB transaction augments this structure by expanding the set of payors to include additional public or private stakeholders that share a common interest in realizing the project’s targeted outcomes.
The study found that EIBs could help Louisiana:
- Use capital more efficiently by building wetland restoration projects sooner;
- Involve local asset owners who benefit from wetland restoration projects;
- Reward high-performing wetland projects and the contractors who build them;
- Build an evidence base for the value of wetlands for reducing land loss, and;
- Expand the range of possible coastal restoration financing tools.
Investors can have impact while growing returns
Demand for green financing is growing significantly. Globally more than $22.8 trillion are invested sustainably, with 84% of asset owners pursuing, or considering pursuing, ESG integration in their investment process. Leading investors consulted in the analysis see key opportunities:
- Client interest in performance-based investments is motivating investors to engage in the growing market for social and environmental impact bonds;
- Investor familiarity with pay-for-success investments is limited but growing. As with any investment that has a limited performance record, investors exercise caution and favor familiar transaction structures;
- Investors acknowledge the benefits that a “partner-payor” EIB transaction creates by aligning interests of additional stakeholders, but see additional parties adding complexity to the due diligence process;
- Tax-exempt funds, funds with social, environmental, or sustainable return goals, and corporations with their own green investment mandates are likely candidates for investment in the proposed coastal wetland EIB.
The path ahead
Coastal communities around the world are looking for innovative ways to finance their resiliency plans. Implementing the first-ever environmental impact bond for wetland restoration will provide a model for unlocking private capital to help communities mitigate their coastal vulnerabilities. This innovative financial approach allows for public and private sector stakeholders to work together to direct investment dollars to urgently needed coastal protection projects, thereby avoiding future losses to businesses, homeowners and future generations. If implemented, Louisiana could emerge as a world leader in financing coastal resilience with private investment.
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