Equitable Adaptation Legal & Policy Toolkit
Bonds and Bank Loans
Public entities often secure financing for resilience and adaptation projects through municipal bonds, including general obligation bonds and revenue bonds, or through loans from banks.See footnote 1 An increasing number of bond-like instruments and bank-like institutions that focus on support for environmental and social concerns support resilience and adaptation measures. Note, however, that municipalities face debt limits — limits in the amount of debt they accrue through the issuance of bonds (also known as debt securities) and other means.See footnote 2
Traditional municipal bonds that include explicit attention to climate change and related social concerns include ‘green,’ ‘social’, and ‘sustainability’ bonds. These bonds generally function the same way traditional municipal bonds do: government entities secure funds from investors in exchange for a government guarantee that the bond and interest (which is tax-exempt) will be paid according to an agreed payment schedule.See footnote 3 Although these bonds often provide lower returns, they appeal more to socially- and environmentally-responsible investors who value the lower risk. The New York City Housing Development Corporation (NYCHDC) is a leading issuer of sustainability bonds, using them to finance mortgage loans and subsidies for affordable LEED-certified housing in New York City.See footnote 4 Although such traditional bonds address environmental and social concerns, they do not automatically include attention to who pays. Application of an equity lens to these bonds requires additional assurances that repayment costs do not disproportionately impact low-income and disadvantaged communities. Using a regressive tax to pay off these bonds, for example, would increase rather than decrease attention to equity.See footnote 5
Environmental impact bonds (EIBs) and social impact bonds (SIBs) - also known as ‘pay for success’ bonds — often offer opportunities for attention to equity in how bonds are repaid.See footnote 6 Similar to traditional bonds, these bonds allow entities to secure funds for an environmental or social concern but, unlike traditional bonds, they also enable these issuers to share risks with investors and usually to secure new sources of revenue for bond repayment.See footnote 7
Risks for issuers, such as municipalities, are reduced because issuer repayment is tied to a specific social or environmental outcome and not just to a fixed payment schedule. Investors agree to receive a reduced financial return when outcomes are less than expected, and issuers can use these cost savings to modify the project to further improve outcomes. These investors, in turn, benefit when outcomes exceed expectations, securing a larger return on their investment.See footnote 8
Entities structuring these bonds attempt to ensure that outcomes can be measured, valued financially, and used as investment ‘assets.’ The goal for the issuer is to ensure that the financial value associated with the measured outcome provides a financial benefit that exceeds costs associated with inaction. For example, for an EIB-funded stormwater management project in Atlanta, economic modeling predicted that the outcomes, including reduced flooding and reduced combined sewer overflow events, would provide millions of dollars in benefits to the city of Atlanta as compared to a no-action scenario. As described in a case study of this bond, several economically and environmentally stressed neighborhoods benefitted from the project.See footnote 9
Financial benefits associated with an outcome might provide a source of revenue to pay off the bond or related interest. For example, when impact bonds support measures that help specific beneficiaries avoid costs, these beneficiaries can contribute to bond repayment with these savings.See footnote 10 A recent EIB to prevent coastal erosion in Louisiana, described in the case study below, provides one such example.See footnote 11 The project’s likely outcome — reduced flooding of an important coastal road and port — should provide critical protection to local property and business operations. Assuming this protection is provided, these local asset owners can help pay interest on the bonds in exchange for this benefit. Similarly, for an EIB project in Iowa, financing is being used to increase crop cover on agricultural fields to decrease nonpoint source pollution.See footnote 12 The potential for decreased nonpoint source pollution provides the potential for a tradable ‘credit’ under the Clean Water Act. This credit can be monetized and used to contribute to payments on the bond.See footnote 13
Impact bonds have offered opportunities for attention to equity in a few ways. First, they have attracted a new set of impact investors that prioritize attention to principles of equity while seeking to secure a better financial return on their investment.See footnote 14 Second, when impact bonds or related interest can be repaid using cost savings, it is less likely that disadvantaged local communities will bear a disproportionate share of the bond repayment burden.See footnote 15
Most impact bonds to date have required upfront support from philanthropic and nonprofit organizations to ensure their success, (i.e., these entities have provided funds to structure the investment, identify interested investors, and issue the bonds).See footnote 16 Moreover, most investors to date have been ‘impact investors’, willing to assume more risks to support environmental and social benefits in addition to financial benefits. An exception was the EIB in Atlanta, which was a public offering. Additionally, identifying bonds that meet all the criteria for success — measured, valued financially, and used as investment ‘assets — and structuring these bonds, can be difficult. Measuring outcomes also poses significant challenges.
However, as entities such as Quantified Ventures gain more experience structuring impact bonds, and the resiliency ‘assets’ are more easily priced on capital markets, it is likely that reliance on philanthropic, NGO, and government funds and support will be reduced. In any event, great potential exists to use impact bonds for a variety of equitable adaptation measures and outcomes, (e.g., impact bonds can fund measures to increase energy efficiency in low-income housing), and money saved through the reduced energy bills can be used to pay off the bond and/or interest on the bond.
Banks and Other Lending Institutions
Green banks, and similar lending institutions, are mandated to invest in climate-friendly projects and attract additional private investment into the climate mitigation and adaptation space.See footnote 17 Currently, they are relatively limited in number in the United States, but, with the support of groups such as the Green Bank Network and the American Green Bank Consortium, they are becoming more prevalent. Lending through these institutions does not necessarily include attention to equity, but it can, and has.See footnote 18 These entities are capitalized in various ways, including, for example, through surcharges on electricity rates, public grants, foundation grants, etc.,See footnote 19 and fall into three general bank models: (1) quasi-public corporations that permit private investment in the bank to enable loans that leverage private capital (e.g., Connecticut’s Clean Energy Finance and Investment Authority (CEFIA))See footnote 20; (2) repurposed finance authorities that have shifted from a grant to a lending model and combined the authority’s funds with private funds; and (3) a combined infrastructure bank with a clean energy finance bank to fund energy projects.See footnote 21
Additionally, states and municipalities are adopting laws and policies to promote traditional bank loans to low- to moderate-income (LMI) borrowers for resilience and adaptation efforts. Generally, these laws and policies reduce lender risks associated with climate-related ‘assets,’ such as residential solar assets.See footnote 22
Finally, an increasing number of Community Development Financial Institutions, which are institutions that offer financial services to low-income and disadvantaged communities, are lending for resilience and adaptation projects.See footnote 23 The Low Income Investment Fund (LIIF) is one example, providing financing for energy-efficient housing measures through its Green Finance Program.See footnote 24
Considerations of Bonds and Bank Loans
- Impact bonds enable issuers to share risks with investors and to secure new sources of revenue for bond repayment.
- To succeed, a key goal for the impact bond issuer is to ensure that the financial value associated with the measured outcome provides a financial benefit that exceeds costs associated with inaction.
- An increasing number of policies and laws incentivize traditional bank loans to low- to moderate-income (LMI) borrowers for resilience and adaptation efforts, reducing lender risks associated with climate-related ‘assets.’
- Greenwashing’ - the process of conveying a false impression or providing misleading information about how a company's services or products are environmentally sound — should be considered in the context of impact bonds. Not all impact bonds robustly advance social and environmental goals.See footnote 25
- Although green and social bonds address environmental and social concerns, they do not automatically include requirements as to who pays.
- An increasing number of municipalities are promoting traditional bank loans to low- to moderate-income (LMI) borrowers for resilience and adaptation efforts, which reduces lender risks associated with climate-related assets.
- Most impact bonds to date have required upfront support from philanthropic and nonprofit organizations to ensure their success. However, as resiliency ‘assets’ are more easily priced on capital markets, it is likely that reliance on philanthropic, NGO, and government funds and support will be reduced.
- Impact bonds are not always the most effective option for public entities; given administrative costs and performance incentives, sometimes it is more cost-effective for public entities to fund an activity directly.
- It is possible to make the bonds public offerings, and not rely entirely on private investors.
- Green banks currently are limited in number, but growing significantly in recent years.
- Municipalities face debt limits — limits in the amount of debt they accrue through the issuance of bonds, including green and social bonds.
- Not all bonds labeled ‘green’ and ‘social’ achieve meaningful results. Carefully consider whether a bond will perform to expectations.
- Application of an equity lens to these bonds requires additional assurances that repayment costs do not disproportionately impact low-income and disadvantaged communities.
Miami Forever Bond - City of Miami, Florida
Atlanta, Georgia Environmental Impact Bond for Green Infrastructure
In 2017, the City of Miami, Florida passed the $400 million “Miami Forever Bond” authorizing the City government to borrow money through a general obligation bond to address sea-level rise and Miami’s affordable housing crisis. A 3 percent property tax will be used to repay the debt. Miami is one of the most vulnerable cities in the U.S. to sea level rise - facing increasing and compounding climate change impacts from flooding, storm surge, and saltwater intrusion into the Miami’s drinking water. The City estimates that flooding has increased by 400% over the past five years. Furthermore, Miami has also been subject to growing social inequities and a lack of affordable housing, which exacerbates climate risks to low-income and other marginalized communities. The bond was designed to provide the funding the City needs to enhance resilience to these climate risks as well as other challenges.
Financing resilient communities and coastlines: How environmental impact bonds can accelerate wetland restoration in Louisiana and beyond
The City of Atlanta, Georgia Department of Watershed Management is issuing an environmental impact bond (EIB), which will finance green infrastructure to address water quality, reduce flooding and improve stormwater management in Atlanta’s Proctor Creek Watershed neighborhoods. The $14 million EIB - the first to be offered on public markets - was the result of a partnership between the City of Atlanta, Quantified Ventures, the Rockefeller Foundation, and broker-dealer Neighborly. Supporting the expansion of EIBs into public markets, the Rockefeller Foundation will cover the costs of structuring a public bond with a grant to Atlanta - chosen from applicants of its 100 Resilient Cities network.
Connecticut Green Bank Solar For All Program
The Louisiana Coastal Protection and Restoration Authority (CPRA) recently issued an environmental impact bond that will finance the creation of ‘natural infrastructure’ — restored wetlands — to prevent coastal erosion along the Gulf Coast and flooding of a key road from the Gulf oil port area to the mainland. The area is home to many low-income communities that face major challenges from land loss, as well as oil and gas companies that significantly support the Louisiana and national economies. This immediate action to restore the wetlands and stave off erosion will save Louisiana at least $10 million dollars. Waiting to respond would have cost $57 million dollars, whereas the use of an EIB to finance more immediately will cost approximately $46 million dollars. Oil and gas and utility companies that rely on the road and port will contribute approximately $8 million dollars toward repayment of the bond. Environmental Defense Fund, a nonprofit partnering with CPRA to advance the project, estimates that ‘performance incentives’ — additional payments to contractors to complete the project quickly — will reduce interest payments on the bond, and reduce the overall cost of the project by $2.4 million dollars as compared to costs for a more traditional bond.
In 2015, Connecticut recognized that its standard solar incentive program for homeowners, the Residential Solar Incentive Program (RSIP), had successfully promoted residential solar development, but was serving very few low-income homeowners. To increase low and middle income (LMI) homeowner access to credit for solar, the Connecticut Green Bank (which was established by the Connecticut General Assembly), developed a model for providing these homeowners with cost-effective residential solar power and energy efficiency and applied it to a partnership with solar provider PosiGen Solar (PosiGen). The Bank provides financial support to PosiGen, which uses this financing to build solar panels on LMI homes. PosiGen retains ownership of the panels, benefits from the solar rebates provided under the RSIP, and leases the solar panels to homeowners. Homeowners benefit financially by avoiding large upfront payments for their solar systems, and by reducing electricity costs. Additionally, all PosiGen customers receive efficiency upgrades. The average PosiGen customer in Connecticut receives a net annual financial benefit of $450. For the first six years of solar panel operation, PosiGen owns and benefits from the Renewable Energy Credits – the excess power created by the panels. Ownership of these credits is then transferred to the Bank, which makes back some of the money it spends on the RSIP.
Financing & Funding Tools: Paying for Equitable Adaptation Insurance-Related Finance