City to issue $6.2 million in ‘environmental impact bonds’ to finance runoff-reducing green infrastructure
Baltimore is slated to be the second city in the Chesapeake Bay region to try a novel way of financing its costly water pollution reduction projects under a plan announced Monday by city officials and the Chesapeake Bay Foundation.So, just what is an "environmental impact bond" and how does it differ from normal municipal bond?
City officials said that with assistance provided through the Bay Foundation, they expect to issue up to $6.2 million in “environmental impact bonds” later this year to help pay for green infrastructure projects aimed at managing stormwater in more than three dozen neighborhoods.
“Baltimore can and, we predict, will be a model for innovation in pollution reduction,” declared Bay Foundation President Will Baker at a news conference announcing the deal in West Baltimore by the site of one of the planned projects. “It’s a partnership with nature to save dollars and reduce pollution.”
Environmental impact bonds are a variation on “social impact bonds,” which are familiar to charity-minded investors who focus on issues like chronic homelessness and prison recidivism. These bonds are meant to attract investors who not only expect a modest financial return, but also want to support environmental improvements.So, it's a bond with an added risk of failure. Pardon me if I don't run to include them in my portfolio. Especially when I would be relying on Baltimore to carry out its promises.
As with conventional municipal bonds — which fund schools or roads, for instance — the bond issuer (the borrowing municipality) makes periodic interest payments on the amount invested, at an agreed rate, until the bond’s maturity date, at which point the borrower pays back the entire principal.
But environmental impact bonds differ from traditional bonds: The municipality and investors share the risk of the investment to some degree, because the payback of the bond is based on the relative success or failure of the project. Given that setup, they are often called “pay for success” bonds.
If the project simply meets expectations, the investor will receive interest payments at the agreed-upon rate. If the project fails to meet expectations, the terms of the bond help the municipality recoup some of the cost by specifying that the investor earns little or no interest. This allows the city to protect its budget and likely channel the money held back from investors toward additional projects that help meet regulatory requirements.