WASHINGTON, DC:Green Bonds- Sharing the Risk of Green Innovation

DC Green Bond

Sharing the Risk of Green Innovation

COHORT CITY WASHINGTON, DC
Case Study

The DC Green bond is an example of how outcome-based financial tool can transfer the risk of an innovative infrastructure approach from agencies to impact investors. The District of Columbia was required by the U.S. EPA to address water quality problems arising from combined sewer overflows (CSOs). These occur when water flows from heavy rainfall exceed the capacity of the District’s sewer system, causing sewage to runoff into area watersheds, such as the Potomac River and Rock Creek.

The city was interested in using a green infrastructure (GI) model instead, but was concerned about the risk that less proven green technologies (permeable pavement, bioretention, subsurface storage, rooftop collection practices before rain barrels and downspout disconnections) and targeted sewer separation wouldn’t perform well enough to meet their legally-required water quality targets. The more expensive alternative was to use a more traditional “gray infrastructure” approach that would have expanded the capacity of the sewer system with tunnels.

The District issued an environmental impact bond to fund initial construction of the GI projects. The GI approach also includes a significant workforce development component, offering training on GI maintenance and inspection via a partnership with the Water Environment Federation. At least 51% of the participants will be District residents.

Both DC Water and an independent validator will measure the effectiveness of the GI investments, by comparing the level of runoff after construction to the baseline. The performance target is to reduce runoff by at least 18.6%. The $25 million bond is structured to pay the investors a $3.3 million “Outcome Payment” if the GI approach reduces runoff greater than 41.3%. The investors will pay a $3.3 “Risk Share Payment” if the GI system delivers less than 18.6% runoff reduction. These performance ranges were based on modeling scenarios, with the most likely outcomes falling between 18.6% and 41.3%.

The bond issuance was designed to attract part of a growing class of “impact investors” who seek to use their capital for projects that also advance social goals.


This rendering shows some of the green stormwater technologies that will be funded with bond proceeds, such as permeable pavement and bioretention.

If the GI achieves its goals, which are runoff reduction between 18.6% and 41.3%, the investors (Calvert Foundation and Goldman Sachs) will get an expected return of 3.43%, and the District will adopt the GI approach for planned future projects. If it exceeds performance goals, and the investors receive the Outcome Payment, the expected return will rise to approximately 6.4%. If the goals are not met, the risk share payment will reduce the investors’ return to only 0.5%. If this happens, DC Water will probably just construct tunnels for future projects.