Outcomes Focus: Environmental Impact Bonds are All About Results

Environmental Impact Bonds offer governments, investors and non-government participants the opportunity to focus on outcomes rather than activities.

Environmental Impact Bonds
Jeremy King

Jeremy King

November 22, 2016 12:00 AM

Environmental Impact Bonds offer governments, investors and non-government participants the opportunity to focus on outcomes rather than activities.

The market for Green Bonds continues to build momentum. The Victorian Government has announced plans to finance low-carbon infrastructure and public transport through the issuance of $300 million in triple-A rated bonds. These Victorian Green Bonds are the first of their kind to be issued by a government in Australia and reinforce the growing prevalence of the Climate Bonds Standards. They will provide further impetus for future market growth in this area.

But there is an alternative to Green Bonds - an alternative driven by one thing: results.

A growing impact investment market is developing and with it the opportunity to drive material change in environmental practices. Environmental Impact Bonds (EIBs) are financing instruments that provide returns based on outcomes. Just as with Green Bonds, EIBs can be used to finance environmentally sustainable initiatives. However, unlike their Green Bond counterparts, they tie the financial return of the investment to the success of that initiative, so that participants can lay claim to financing a demonstrable difference to the environment.

Typically, an environmental project or initiative will be selected with the intent of improving environmental outcomes, gaining efficiencies, or both. For example, there may be a project that seeks to improve the water quality in a particular area, the key lies in quantifying the outcomes in financial terms through increased (or improved) quality or quantity, as well as reduced costs.

Growing recognition of Impact Bonds in Australia

Social Impact Bonds (SIBs) have gained prominence as a method of impact investment since the NSW Government’s issuance of two sets of bonds in 2013. These pioneering developments have caused successive State governments to explore SIBs as a way of facilitating non-government investment and monetising performance outcomes in social reform to repay investors.

For example:

• in Queensland, the State government has recently received responses to its request for proposal in relation to SIBs addressing re-offending, homelessness and issues affecting Aboriginal and Torres Strait Islander people.

• in Victoria, the State government is currently undertaking market testing and research into how SIBs can be used to fund alcohol and other drug treatment initiatives and programs to aid young people transitioning from out of home care.

Relative to SIBs, EIBs offer the advantage of a somewhat easier scientific measurement of improvement. This in turn underpins transparency in the payment mechanism from the Government. EIBs convert success in environmental initiatives into a coupon or return for investors, either by way of regular payments or bonuses paid on maturity.

Structuring EIBs to reward risk

Let’s say a project seeks to reduce soil erosion to improve agricultural production. Once the project is selected, an intermediary with the requisite environmental expertise designs performance objectives and evaluation processes, serving to provide benchmarks around which the project’s success will be measured. Investors are called on to make an upfront capital investment to establish the program, with returns paid to them based on whether the project meets the objectives set. These can be verified by an independent external agency, if required.

If such objectives are met or exceeded, the investors should receive their principal plus a return on investment that can be structured through regular payments (to match particular performance hurdles, i.e. annually) or with final repayment of the principal (similar to a zero coupon bond). Failure to meet the environmental outcomes sought may mean a reduced return.

It’s possible there could be no repayment (akin to default by the bond issuer).

As a result, the performance metric factored into the EIB will be crucial in allocating an appropriate level of risk between issuer and investor. A benchmark that is too low runs the risk of achieving mediocre environmental results and a sub-optimal ‘value for money’ outcome for Government, whilst one that is too high exposes investors to a disproportionate risk of loss (relative to the proposed gain). However, because the measurement of environmental outcomes has the capacity for rigorous and objective analysis, there is potential for more verifiable results. This should, in theory, provide greater transparency to investors.

What kind of investor?

Because the returns to investors are dependent on outcomes of the environmental project, EIBs may involve an increased level of risk beyond those of traditional corporate debt instruments (which rely solely on the creditworthiness of the borrower). In that respect, EIBs share some characteristics with equities or hybrid investments, in that returns depend not only on the capacity of the borrower to repay but the attainment of specific project goals. Because of this heightened risk, additional governance arrangements may be required to ensure independent monitoring. In the early stages of market development, some level of government guarantee or support may also be required to reduce the level of capital loss to which investors are exposed.

However, provided that measurement of deliverables is transparent, not overly complex, and includes appropriate reward relative to the risk, an EIB offers an attractive option to a socially responsible mandate seeking to make a demonstrable difference to the Australian environment.

For philanthropic investors, it also offers an alternative to providing grants or making donations, as an EIB offers a return on investment that can be recycled (rather than a one-off capital outlay). Because environmental gains can take some time to realize, they may also be suited to investors with a long-term (5-10 years) investment horizon. Those willing to do so can play a significant role in developing sustainable frameworks with lasting outcomes, and reap the benefits from not only a financial reward, but a cleaner, more sustainable, environment.

For more information, follow the source link below.

Related Articles

A Climate Duty

by Lara Douvartzidis and Samantha Daly

Converging trends in Australia and the Netherlands: reasonable foreseeability in climate change law and other novel developments.

Climate Change Law in Australia

The Great Debate Between Agriculture, Mining and Environment

by Rebecca Hoare

Can we really have it all?  The pursuit of the harmonious intersection of Australia’s agricultural and resources industries and the environment.

Australia Agriculture, Mining & Environment

Announcing The Best Lawyers in Australia™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Australia.

The Best Lawyers in Australia™ 2023

Celebrating Lawyers From Around the World: Annabel West

by Rebecca Blackwell

We are honoring the achievements and career of Annabel West, lawyer and wife of South Australian Premier Peter Malinauskas.

Accomplished Australian Lawyer Annabel West

Tampa 2022 "Lawyer of the Year"

by Best Lawyers

George F. Gramling III is honored as 2022 "Lawyer of the Year" in Environmental Law for Tampa.

Tampa 2022 "Lawyer of the Year"

Checks and Balances

by Michael Sullivan

Ensuring probity and above-board behaviour in both the public and private sector is always important—and that importance can be particularly stark during a major crisis like the pandemic. An overview of a year’s worth of commissions and inquiries.

Australian Commission Governance Structure

Blurred Lines

by Andrew Kirby

Where does responsible lending end and unconscionability begin? Australian courts have come to vastly different conclusions. An overview of current case law.

Australian Courts Assess Loan Repayment

The Partnership Opportunity

by David Harley, Shaun Whittaker, Tony Rutherford and Troy Lewis

Doing well and doing good need not be mutually exclusive. Housing developments that provide both solid long-term returns and positive social outcomes, often through public-private partnerships, are an idea whose time has come throughout Australia.

Housing Developments in Australia

Announcing the 2022 Best Lawyers™ in Australia

by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing the 2022 Best Lawyers™ in Australi

What Does It Take to Join The Best Lawyers in Australia?

by Best Lawyers

We asked The Best Lawyers in Australia: What advice would you give your younger self?

Nominate a Lawyer in Australia

Working With Changes

by Best Lawyers

Carolyn Pugsley, the Joint Global Head of Practice for Corporate, Australia at Herbert Smith and Freehills, discusses policy changes affecting the M&A market in Australia as well as the impact of the pandemic on the practice.

An Interview With Herbert Smith and Freehills

Government of the People

by Allyn Stern

A baker’s dozen tips for working with the Environmental Protection Agency

Tips for Working With the EPA

The Generals’ Next War

by Alison Torbitt and Gayatri Joshi

Businesses’ Sense of Corporate Social Responsibility Is Increasingly Driving Long-Term Growth. Here’s How General Counsel Can Best Confront CSR’s Numerous Challenges and Opportunities.

The Generals’ Next War

2020 Vision

by Sean Devlin

What Does Corporate Environmental Concern Look Like in 2020?

Best Lawyers Ones to Watch Canada Legal Insights

Can Your Option to Purchase Get Lost in a Franchise Agreement?

by Alicia Hill and Benjamin Caddaye

With the changing of a contract in a franchise agreement, certain rights you thought you were entitled to might get lost in translation.

Franchise Agreements and Purchase Options

River Deep, Mountain High

by Hayley Carlock

Lessons from the birthplace of modern environmentalism.

How Environmental Nonprofits Got Their Start

Trending Articles

Announcing the 2023 The Best Lawyers in America Honorees

by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Best Lawyers: Ones to Watch in America for 2023

by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

Announcing the 2022 Best Lawyers® in the United States

by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

Famous Songs Unprotected by Copyright Could Mean Royalties for Some

by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

Announcing the 2023 The Best Lawyers in Canada Honorees

by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots

Choosing a Title Company: What a Seller Should Expect

by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

What the Courts Say About Recording in the Classroom

by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Announcing the 2022 Best Lawyers in Canada™

by Best Lawyers

The results include an elite field of top lawyers listed in the 16th Edition of The Best Lawyers in Canada™ and 1st Edition of Best Lawyers: Ones to Watch in Canada.

Announcing the 2022 Best Lawyers in Canada™

Caffeine Overload and DUI Tests

by Daniel Taylor

While it might come as a surprise, the over-consumption of caffeine could trigger a false positive on a breathalyzer test.

Can Caffeine Cause You to Fail DUI Test?

The Real Camille: An Interview with Johnny Depp’s Lawyer Camille Vasquez

by Rebecca Blackwell

Camille Vasquez, a young lawyer at Brown Rudnick, sat down with Best Lawyers CEO Phillip Greer to talk about her distinguished career, recently being named partner and what comes next for her.

Camille Vasquez in office

Announcing the 2022 "Best Law Firms" Rankings

by Best Lawyers

The 2022 “Best Law Firms” publication includes all “Law Firm of the Year” recipients, national and metro Tier 1 ranked firms and editorial from thought leaders in the legal industry.

The 2022 Best Law Firms Awards

All Eyes to the Ones on the Rise

by Rebecca Blackwell

Our 2023 honorees recognized in Best Lawyers: Ones to Watch™ in America tell us more about how their path to law formed, what lead them to their practice areas and how they keep steadfast in their passion to serve others.

Person walking between glass walls towards window

Wage and Overtime Laws for Truck Drivers

by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

Announcing The Best Lawyers in Australia™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Australia.

The Best Lawyers in Australia™ 2023

Announcing the 2022 Best Lawyers™ in Australia

by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing the 2022 Best Lawyers™ in Australi

Announcing the 2022 Best Lawyers in South Africa™

by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing 2022 Best Lawyers in South Africa