Green Bonds Are a New Source of Financing for Water Security

In this interview, Todd Gartner, senior associate and natural infrastructure for water manager at World Resources Institute (WRI), provided a high-level perspective on how green bonds can support natural infrastructure for water security.

SeashoreCFN: Whom do you see as the major players in the space right now with regard to green bonds for natural infrastructure?

Gartner: There have been a lot of enthusiasm and conversation increasingly over the last couple of years with actual issuance in the green-bonds space.

Within the last month, San Francisco issued a bond related to water security. Also, DC has clearly been receiving a lot of attention for its green century bond, even though that bond was primarily focused on built infrastructure. Connecticut and Massachusetts have really been up front in this space. The World Bank deserves a lot of credit as one of the first movers, even though its investment wasn’t necessarily tied directly to water.

On the corporate side, Apple is often recognized as being a major player – and it is well-positioned to continue to lead that charge.

But I also think it’s important to recognize the contributions, interest and support of some of the federal government agencies such as the United States Department of the Interior, the United States Environmental Protection Agency, and the United States Department of Agriculture (USDA). Each one has created some kind of environmental finance center that is really looking at ways to finance infrastructure and rural development.

This will be really helpful as groups like WRI try to make this a reality.

USDA, through its Natural Resources Conservation Service, has also been a strong financial supporter through the Conservation Innovation Program, which has funded a lot of WRI’s work in this space.

CFN: Have you made any progress in demonstrating the financing model? Can you speak to that?

Gartner: I wouldn’t go so far [as to say] that we’ve been able to demonstrate the financing model yet. We’re about six months into the project and have had some really educational conversations with cities, credit-rating agencies, and financial institutions.

There’s a great deal of interest and desire to learn more from their perspectives, and at this point we are narrowing down the likely locations for a pilot effort. Things are moving forward. We’re very hopeful that by the end of the calendar year, we will have kick-started at least one opportunity.

CFN: What are your thoughts as to what the major barriers are to scaling up these deals and how you’re seeing these explicitly come out as part of this effort? (Some examples could be transaction costs, legal arrangements, and institutional plans.)

Gartner: The vanilla bonds, in general, which are not specifically classified as ‘green,’ are used all the time to finance water-infrastructure projects. But when you start to think about natural infrastructure, and what the true ‘green’ element looks like, there are still a number of obstacles we need to address to break through on the nature-based side.

I think the community has come a long way in terms of raising awareness of the approach and how natural infrastructure can complement and make gray infrastructure more resilient, but need to keep making inroads beyond the usual suspects – i.e., utility managers and engineers, who, for very good reason, were trained on the engineering of built infrastructure.

We need to help these professionals better understand and consider how natural infrastructure can be a complement to natural engineering – dikes, dams, and treatment plants.

We also need to expand the number of clear examples that prove a positive and substantial ROI. Everyone can cite the Catskills, but it is still the single example 10-15 years later.

WRI has spent a lot of time over the last number of years really looking at what that ROI can look like in a variety of other cases. [One is] Portland, Maine’s [initiative] for a water utility. [Another is] the front range of a Colorado [project] to help alleviate the impacts of catastrophic wildfires. Then, moving beyond the borders of the United States, WRI is working with the largest Coca-Cola bottler, FEMSA Foundation, in the cities of Sao Paulo, Brazil and Monterrey, Mexico, to help assist with reliable water supply.

I think the more examples we’re able to show, [the sooner] we will cross a threshold where people can have a greater comfort level that there truly is a financial return and a business case to be made.

Successful financing examples are few and far between at any meaningful scale currently.

I do believe success will breed success. There’s a lot of ongoing efforts going on right now. In a couple of years, we’ll be able to point to a number of examples that will be able to help overcome some of the obstacles we’ve had. 

I think it’s helpful to draw an analogy with the Payments for Ecosystem Services (PES) space. When I began working in the conservation finance space back in 2007, people were still very uncertain about PES. Now, nine years later, there’s much more of a foundational understanding, along with acceptance and application.

I think the same pattern is occurring in the green bonds space. There’s just no substitute for stakeholders going through the process and occasionally banging their heads against the wall until we figure it out. We are excited to be working with an incredible group of partners to… help speed up the process.

CFN: How do you see these potential projects as part of a “multi-barrier” approach to water purification (i.e., green infrastructure)?

Gartner: Four to five years ago, I was guilty of talking about this approach as a binary, green vs. gray [situation]. But I’ve changed my tune and am now a huge advocate of a hybridized, multi-barrier approach of blending and investing in both [of them]. This can save a lot of money – both upfront on capital expenditures and also on the long-term and near-term operations and maintenance.

We believe incorporating natural infrastructure [adds] more flexibility and resiliency, especially in the face of climate change and uncertain weather patterns. It also seems that natural infrastructure can help extend the life of gray infrastructure – everything from turbines in a hydroelectric facility to filters in a water-treatment facility.

Not to be minimized, the natural infrastructure approach, as a complement to built infrastructure, also enhances a plethora of other ecosystem and social services – from carbon sequestration to jobs in the woods and sustainable economic development for those living in rural areas.

CFN: How do you see green bond financing for water security efforts as amplifying the existing work WRI is doing around natural infrastructure for water investing?

Gartner: The idea of green-bond financing is really a perfect complement to the broader portfolio of what WRI works on in the natural-infrastructure-for-water space.

Over the last five-plus years, we’ve really focused on raising the awareness and the understanding of the approach, trying successful and unsuccessful examples to… get a handle on the key enabling conditions, and [attempting] to develop new tools and approaches to identify where natural-infrastructure approaches are going to be most beneficial and appropriate.

One of the core approaches we’ve been focusing on is trying to articulate the business case – [to say] what the return on investment of a hybridized green/gray approach is. That being said, I think we have been relatively successful in moving the space forward, but financing is still probably the largest obstacle that hasn’t been addressed at any meaningful scale.

Green bonds represent one arrow in the quiver that we hope, among other options, can move the space forward. We’re hoping the initiative we’re working on now with NRCS can make a major contribution towards proof of concept, even if it’s at a pilot level, to help set the stage for public and private infrastructure.

CFN: How do you see the green bond financing for water-security efforts as leveraging already-existing financing mechanisms or pools of finance?

Gartner: Ultimately, there needs to be a variety of financing options at the disposal of decision makers for different situations and contexts.

Green bonds will be appropriate for municipalities, facilities and companies that have strong credit, a track record, and recently diversified sources of revenue.

However, arguably, they are less appropriate for the short term for smaller and more rural areas. In those cases, we still need to continue looking at everything from voluntary contributions, philanthropy, investments from downstream beneficiaries, and ways to leverage federal cost-share programs such as the farm bill.

We need to understand the viability of ballot measures and, more broadly, think about how investment decision-makers can diversify their strategies to think more holistically about water financing and management approaches.

The initial pilot will be focused on private lands. However, recognizing the need for scale and the USDA priorities about an “all-lands” approach, WRI has partnered with Blue Forest Conservation and Encourage Capital on a parallel effort to explore the application of a Forest Resiliency Bond (FRB) to complement the green-bonds effort.

The objective of the FRB is to access private and institutional capital to fund and accelerate fuels-reduction treatments across watersheds in the western United States on a matrix of public and private land.

The primary sources of cash flows in the FRB will be from cost-share payments and pay-for-performance contracts from utilities, companies, and federal land-management agencies based on restoration costs for protected water quality, avoided sedimentation, and other agreed-upon water benefits.

CFN: What role is WRI playing in the effort to apply more standards to create natural infrastructure for water security? In other words, are you advocating for third-party certification?

Gartner: Overall, I do think that standards could be really helpful.

One thing that we consistently hear from issuers and investors – folks in the conservation community – is that they really want to make sure that green bonds truly are green and that the proceeds are going to projects that are really going to enhance water-related services – whether it’s water storage and flow, quantity and quality, flood control, or others – while also factoring in things like the impacts of climate change and other climate-related issues.

As importantly, I think we need to normalize the financing of natural infrastructure as much as we need to standardize the approach.

[We need to] really move the idea of investments in natural infrastructure from what is generally in the appendix section of alternatives and really try to get it into the core suite of options that decision makers are considering when thinking through water security in the face of aging of infrastructure, increased incidence of catastrophic events, and so forth.

If we’re able to normalize it, then I think we’re in good shape.

CFN: What are investors in these potential deals asking for with regards to tracking metrics? What existing resources do you plan to draw upon?

Gartner: From the conversations we’ve had, they want to know, most importantly, that green bonds are truly green.

That is where the idea of a standard, such as the one by currently under development by the Climate Bonds Initiative, CERES, Alliance for Global Water Adaptation, and WRI, comes into play.

You also have a number of groups such as The Nature Conservancy, International Union for Conservation of Nature, and the World Business Council for Sustainable Development serving as advisors on this effort.

From our research to date, the metrics on green bonds that have been issued have been fairly high-level, focusing mainly on how proceeds are being used (i.e., riparian enhancement) as opposed to some of the more granular, rigorous, and even quantitative programs that you see in Payments for Environmental Services programs that focus on trying to model out the pounds of nitrogen, tons of carbon, etc. that are being reduced from the approach.

I also think the sometimes punctuated changes in restoration work need to be taken into account. Often, the outcomes happen over a longer period of time. That is important to keep in mind from the investor and issuer side.

Ultimately, it’s a fine balance to try and ensure that the investors and issuers are getting what was promised, but are also not are not overburdened, thereby causing potential harm to the process.

It’s a balance between precision versus practicality and cost. I think normalizing the effort is key. Maybe it’s through standards, but ultimately, time will tell. As a think tank, we need to be open to adapt as the space develops.

Note: World Business Council for Sustainable Development (WBCSD) has a collaborative relationship with Yale Center for Business and the Environment. United States Department of Agriculture and The Nature Conservancy are supporters of Conservation Finance Network. Donors and partners outside CBEY and CFN do not review our articles or editorial calendar, but interviewees can review their quotes and Q&As.

Note: On 7/1/2016, a correction was posted here. "Carbon Disclosure Project," which was listed as a collaborator of WRI's, was replaced by "Climate Bonds Initiative."

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