Guest Column | October 8, 2019

Considering Bonds To Fund Green And Hybrid Infrastructure

By Julie King


Interviews:  Dr. Sudhir Murthy, Senior Vice President, International Water Association, and Dr. John Matthews, Alliance for Global Water Adaptation and key contributor to Water Investment Criteria for the Climate Bonds Initiative. The interviews were conducted in the context of sessions held during Stockholm International Water Institute’s World Water Week 2019.

At the Stockholm World Water Week 2019, the need for new water infrastructure was a theme running through the conference agenda. As extreme weather events occur now with alarming regularity, the question is material for every water user, not the least of which are utilities and local governments. The solution that is coming into sharper relief is the use of nature-based and hybrid solutions using both green and grey infrastructure in tandem for water management strategies.

Environmental Impact Bond: Context

In 2015, DC Water issued the first even Environmental Impact Bond (EIB) to finance the construction of green infrastructure[1] for Rock Creek sewer shed as part of its $2.6 billion DC Clean Rivers Project. Dr. Sudhir Murthy, SVP at the International Water Association, worked with DC Water at this time as Innovation Chief. 

According to Dr. Murthy, the context for developing the EIB was that the city was looking at new infrastructure and wanted to take a new approach, even though they were uncertain how it would work.

“So, we began with small projects, pilots, a microcosm of a bigger whole, to try and understand how something will work,” explains Dr. Murthy. “The knowledge of green infrastructures for engineers and operators wasn’t there, so we didn’t know how well green infrastructure would work. So, for example, we used contingency payments or tiered payments for the EIB. This is at the project level.”

Dr. Murthy continues, “The [second and third] points are how will the green infrastructure work and how will it help save the environment, which translates into creating prosperity.  We know water is linked to prosperity, but we cannot yet follow or identify the breadcrumbs to point to. Utilities are in the middle, between creating the infrastructure and the prosperity from it. But as we identify and define those links between green infrastructure, water, and prosperity, then it will be full circle because future prosperity should pay for the projects. As a utility, our job was how to bring it all together in a reasonable approach and to understand the operational side and how that related to the return on investment for investors.” 

Contemporary Evolution And Applications

John Matthews, PhD, is Executive Director of the Alliance for Global Water Adaptation (AGWA), which is an international network of water and climate professionals focused on how to mainstream technical and policy approaches to freshwater climate adaptation. Dr. Matthews’ work with the Climate Bonds Initiative led to the development of the Water Infrastructure Criteria for investments in bonds to finance nature-based solutions (NBS) and climate adaption infrastructure projects. These criteria took into consideration additional factors of how the evaluation of green infrastructure varied from conventional grey infrastructure.

Over the past 25 years, Dr. Matthews has seen the financing of the NBS market evolve significantly in terms of investor sophistication and opportunities in the market. “Twenty-five years ago, nature-based solutions were framed strangely. People talked about ecosystem services and economic discussions. Now the talk has shifted to infrastructure and a move to finance. This is a signal change, developed through the Climate Bonds Initiative. The bond market is a powerful way to influence climate change.”

Dr. Matthews continues, “We crowd-sourced around 200 people for discussions about NBS. Then the first bond was issued by the San Francisco Public Utility Commission to address problems with stormwater. That bond sold out in around two hours. It was completely oversubscribed. Then the first significant issue was in May 2018 for EUR 5 billion, which was a Sovereign Bond issued by the Dutch Ministry of Finance. Of the projects covered by that bond, three were nature-based solutions about climate adaptation. It was the first issue to use the extra set of Water Infrastructure Criteria. This bond was oversubscribed by six-to-seven times. It was used for the flood control approach, Room for the River, to turn even brownfield sites [into] wetlands to allow the river to spread out during heavy water seasons.”

Focused And Results-Driven

Resilience Bonds and Restoration Bonds are two more recent configurations in bond issuances. Dr. Murthy says, “we call them ‘Res-bonds’. The Resilience Bonds are designed to fund mitigation of climate-related, acute events, such as loss mitigation from flooding. [It] is designed to preserve wealth — to protect on-the-ground assets. For example, by building the levy, surrounding property and assets can be protected. We look at how this step translates to prosperity for the local community and how to take the next step to support this.” 

Dr. Murthy outlined the next step: “This is where we look at Restoration Bonds for green infrastructure. Restoration Bonds [are] aimed at increasing wealth and prosperity if things are not destroyed as a result of the extreme weather event. So if the levy is built and it protects assets, Restoration Bonds finance further economic development of the community.”

“Currently, [the International Water Association] is using a Resilience Bond to fund flood control in Panama and a Resilience Bond for a project in Peru. The objective is to create synergy between the two. We are also looking at these instruments for restoration of a degraded lake in Paraguay and its impact on tourism — which goes to creating prosperity for the community. We are looking at a Restoration Bond, which looks beyond repairs and at the lifetime of the asset. For example, using a typical pay-out period of 30 years for a bond, we are looking at creating prosperity in the community, with the help of investors in the bond.”

Closer To Home

A lot is happening in the U.S. as well to bring in nature-based solutions for infrastructure needs. Cities like Little Rock, Charleston, Raleigh-Durham, and Santa Fe are lined up to issue bonds for NBS over the next 6 to 18 months.  Atlanta and Louisiana are also issuing bonds for NBS.

John Matthews, PhD from AGWA maintains, “There’s been a pretty significant shift in thinking about nature-based solutions. The big transition that has occurred is a shift from an advocacy perspective [for NBS] to a new set of solutions. It has gone from “How should we do this?” to “We should be doing this.”

Dr. Matthews believes the shift has been both political and financial. The political influence is from utilities and politicians “trying to appeal to the electorate.”

“They want to tell the ratepayers that they put what we’ve invested into climate security and ecosystems to create a nice place to live in the future. It is not only for investors.”

The financial influence has also changed, but it has been less noticed. Dr. Matthews explained: “When Moody’s issued its rating for the San Francisco bond, they did a short writeup explaining why they selected that rating. It was the third certified bond of San Francisco, and Moody’s wrote that they ‘admire San Francisco, that it had assessed its climate and water risks.’ They said, ‘Simply because someone has not assessed these risks does not mean these risks do not exist.’ San Francisco got a higher rating because it had done this work. It validated the long-term thinking about risks, that it paid off financially with lower interest rates. It is viewed as having more confidence with investors. This was a game-changer.”

Which Color: Grey Or Green Infrastructure?

As cities of all sizes continue to face the reality of water infrastructure needs and increasingly extreme and more frequent weather events, the extra set of investment criteria from the CBI for assessing investments in green infrastructure provides a framework for financing nature-based solutions alongside grey infrastructure investments. Dr. Murthy believes the optimal approach to solving the need for more water infrastructure will be a hybrid of both grey and green solutions. He explains that “Green infrastructure absorbs water from smaller storms. But for larger storms, grey infrastructure is needed to handle large volumes of water quickly. Green infrastructure is not enough for that. But we must get much better at collecting water from grey infrastructure. It is the right infrastructure to address flooding and green infrastructure deals with increased or incremental water flow beyond floods. And by adding this, it can reduce the required size of the grey infrastructure.”


“The key to green infrastructure is O&M,” Dr. Murthy explains.  “How is it working? …which means measuring, monitoring, maintenance. These are the key aspects. Sensors and IoT are becoming more common and will be even more [common] if they make sensors cheap enough.”

“One positive thing about green infrastructure is it allows for transparency and to bring the public into the debate because green infrastructure is about where people live. Green infrastructure is integrated into the public’s living space. This means they can participate in providing input on how it is integrated and feedback on how it works. It is also interesting to look at opportunities for crowdsourcing and crowdfunding, etc. in this context. Green infrastructure opportunities mean that we don’t have to think only in terms of traditional options. We have opportunities to think differently in regard to public projects.”

Julie King is a co-founder of Waterhound Futures Ltd. and serves as Managing Director of the international company. Waterhound is a cloud-based predictive simulation modeling software for design, auditing, monitoring, and data analytics for water and wastewater treatment systems.

[1] The aim of the green infrastructure is to reduce the approximately 2 billion gallons of combined sewer overflows (CSO) that pollute local watersheds and tributaries each year when stormwater runoff exceeds drainage capacity of the sewage system.  See article:  Financing Infrastructure through Environmental Impact.