Pay for Success: nature, paid on delivery (Environmental Policy Innovation Center)

Impact investment, where investors seek measurable social and environmental benefits side-by-side with profits, is expanding rapidly around the world. One of the most promising opportunities for impact investment is through a contracting tool called “Pay for Success.” The organization, Social Finance, has a great overview of how ‘Pay for Success’ works and benefits communities, government and investors and the Nonprofit Finance Fund maps all the projects in the U.S. related to social issues including criminal justice, early childhood and homelessness. Basically, a government agency contracts with a company or partnership with access to private capital and program delivery know-how at a negotiated price. However, government – i.e. taxpayers – only pay for the work if the company delivers the agreed upon outcomes.  

Such private investment for public good has spread fastest as a solution to address social issues. Our new report, Conservation & Impact Investment, highlights how U.S. states are beginning to use Pay for Success approaches to deliver the restoration and protection of wetlands, stream and other natural resources. 

In Maryland and California, agencies have used contracts with private investment-backed companies to secure restoration services at prices at or below what other similar projects have cost when the state oversees the work themselves. By its nature, this approach to payment on delivery is premised on human behavior and incentives that motivate speed and quality of performance.

Louisiana’s leadership on Pay for Success investment is an order of magnitude bigger. A just-passed law signed by the Governor Edwards authorizes restoration projects of up to $250 million to be delivered by private companies or partnerships, paid back when they achieve predetermined coastal restoration goals. Such restoration is critical to Louisiana’s efforts to halt the ongoing loss of thousands of acres of its coastline which is imperiling both communities and the state’s economy. 

Nevada’s sage grouse habitat exchange is covered in the report even though its currently funded by public dollars. With efforts to reduce investor (and the state’s) risks to the program, mostly created by the Department of Interior’s unpredictable behavior, Nevada could dramatically expand funding by the private sector to address one of its conservation priorities.

Louisiana’s legislation is particularly important because regulatory policies like it can lead to much more growth in this effective approach to conservation. Legislation in other states would give agencies more incentives to launch bigger, multi-year projects and set standards that make contracts more enforceable and help set rules for the determination of conservation outcomes that really matter to the state. In addition, such legislation can help ensure that the contracting process and contract tools remain simple enough (quick, more predictable, based on full-price accounting) to be attractive to investors. Third Sector Capital Partners has a review of other important legislative considerations here.

The conservation community needs to up its game. We need faster, smarter delivery of restored and protected natural resources - and expanded stewardship - that matter to all Americans. Our strategies are failing unless this work occurs at a pace that matches that of the energy, water, habitat, climate and biodiversity crises we face. The billions in funding for that work are far more likely to come from impact investors than from Congress. Those investors then become allies in seeing such work succeed and grow.

Timothy Male - Executive Director at Environmental Policy Innovation Center