Environmental impact bonds (EIBs) use a pay-for-success approach to provide upfront capital from private investors for environmental projects. Traditionally, they are issued for one project or initiative, unlike other bonds that may be used for multiple investments. EIBs are used to pilot riskier investments or to scale up solutions that have already been tested in a pilot program. Investors pay for the costs of deploying environmental solutions. Payers such as public agencies or private institutions repay investors based on achievement (or not) of the agreed-upon environmental outcomes at the end of the program’s closing evaluation. The bond acts as a contractual arrangement between the project/initiative developer and the payer. The main difference between EIBs and traditional bonds is that the latter are often repaid with the general revenue of the issuer of the bond, while EIBs tie repayment to the revenue or cost savings generated by the successful environmental project or initiative.
EIBs could be particularly useful in cases where a project delivers climate change adaptation benefits but lacks traditional revenue streams to attract investors interested in both a financial return and environmental impact. The issuer can work with a bilateral donor or foundation to structure an EIB to ensure the project is completed. For example, an artificial wetland could be constructed with funds derived from an EIB, and then the payment of interest and repayment of principal is based on demonstrated biodiversity or flood protection gains in the area. The borrower could repay more or less than the original amount of the loan based on the level of gains as defined in the EIB contract.
Current or potential adaptation-relevant sector applications:
- ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement; fire management;
- water supply (infrastructure) – water storage; water harvesting; water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures; and
- other built environment and infrastructure – urban development.
Additional insights:
- This is an emerging instrument, with the first EIB closing in 2016.
- As of 2021, the only EIBs proposed and released were in the United States.
Considerations for using an environmental impact bond:
- The payer is usually a public institution (often a municipal government) or philanthropic foundation—organizations willing to take on more risk without a guarantee of financial return.
- Many EIBs require a third party—a foundation—to fund the structuring costs of the EIB.
- A project needs to be larger than USD 5 million.
- EIBs are case-specific, and structuring the bond is time-intensive and costly.
- The issuance of an EIB can be an important step in demonstrating whether or not private funders may be willing to finance a certain type of project.
- EIBs need specific targets/goals against which to measure success and payment.
Adapted from the following sources:
Brand, M. W., Seipp, K. Q., Saksa, P., Ulibarri, N., Bomblies, A., Mandle, L., Allaire, M., Wing, O., Tobin-de la Puente, J., Parker, E. A., Nay, J., Sanders, B. F., Rosowsky, D., Lee, J., Johnson, K., Gudino-Elizondo, N., Ajami, N., Wobbrock, N., Adriaens, P., … Gibbons, J. P. (2021). Environmental impact bonds: A common framework and looking ahead. Environmental Research: Infrastructure and Sustainability, 1(2), Article 023001. https://iopscience.iop.org/article/10.1088/2634-4505/ac0b2c
Quantified Ventures. (2018, October 31). Sharing risk, rewarding outcomes: The environmental impact bond. https://www.quantifiedventures.com/blog/what-is-an-environmental-impact-bond
Thompson, A. (2020, July 2). Environmental impact bonds: Where are they now? Environmental Finance Blog. University of North Carolina, School of Government. https://efc.web.unc.edu/2020/07/02/environmental-impact-bonds-where-are-they-now/