Innovations In Green Finance

Opening Remarks: Smart Money for Sustainable Cities

Rising seas, stronger storms and changing landscapes are literally reshaping the world in which we live, and the world of green technology is mobilizing to find solutions to these environmental challenges. We find ourselves in a pivotal moment: new sources of renewable energy, energy efficiencies and technology are being developed to reduce the carbon output of our energy systems, but what does that mean for the world of finance? This panel inquires into the role finance plays in allowing the development of new technological innovations. It asks: Are new forms of finance appearing to meet and motivate market demand? How can we build and grow investor confidence in a low-carbon future?

To answer those questions, the Sallan Foundation brought together leaders in the emerging field of green finance to the New York Institute of Technology for the panel discussion Innovations in Green Finance: Smart Money for Sustainable Cities. The panelists, hailing from the worlds of government, private finance, and nonprofit advocacy, discussed new tools for lowering the carbon emissions of the global power supply, as well as the financial innovations undertaken by corporate and public entities to finance those important endeavors.

Sallan Executive Director Nancy Anderson makes opening remarks

Charlotte Kim jumps in to lead discussion on promising green energy financial tools

Josh Feldman takes the lead describing yieldCos

Kevin Smith speaks to the development of the green bond market

Event attendees

In between panels

Moderator Nick Lombardi opens Panel Two — why aren't we seeing more projects?

Tria Case notes 64% of the cost of solar projects is soft costs

Yerina Mugica pivots to commercial tenants control over energy consumption

It's a wrap

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Opening Remarks: Nancy Anderson

Nancy Anderson, Sallan's Executive Director, opened the panel discussions by posing two questions to the audience: What can grow investor confidence in the green economy and how can we learn to do it better as we go along?

The scale of devastation threatened by global climate change means there is a clear need to adapt to a changing world, to enhance its resilience and to manage risks. Today, tools are becoming available to help finance global resilience, such as green bonds, yieldCos and green banks. It's time to understand why and how use of these tools has grown in the past several years.

Dr. Anderson stressed that the term green finance implies a myriad of opportunities, products, markets and risk-management strategies now available to investors. Since metrics used to assign value to green companies and technologies are in their adolescence, the task of this panel is to delve into questions about "green" asset prices, corporate carbon disclosure, and their financial impacts.

She concluded her remarks with a nod to competing quotations to identify where we stand on climate action. First, as Pogo remarked, "We have met the enemy and he is us." On the other hand, Miguel de Unamuno wrote, "We should try to be the parents of our future rather than the children of our past." However, the most apt may have been Molière, when he said, "It is not what we do, but also what we do not do, for which we are accountable."

Panel One: Greening Municipal and Corporate Bonds; Greening Utilities; and Building Investor Confidence

The first panel was moderated by Charlotte Kim, a partner at Wilson Sonsini Goodrich & Rosati. The discussion centered on emerging financial tools in the green energy marketplace.

The panelists were:

• Mary Barber, Director of New Jersey Clean Energy, Environmental Defense Fund
• Joshua Feldman, Manager, Distributed Generation Solar M&A, NRG Energy, Inc.
• Carol Kostic, Deputy Comptroller for Public Finance, Office of the NYC Comptroller
• Kevin Smith, Vice President, Environmental Markets Group, Goldman Sachs

All the panelists agreed that the renewable energy investment markets have seen significant growth and maturation in recent years and examples of promising green energy financial tools discussed by the panelists were yieldCos and green bonds.

YieldCos

Josh Feldman took the lead describing yieldCos, which are publicly-traded companies formed to own operating assets that produce a predictable cash flow. YieldCos are "interesting," said Feldman, because the publicly-traded instruments mean renewable energy investment is now available to "regular" investors. Traditionally, large investment funds were the primary investors in renewable energy projects.

Josh Feldman on YieldCos

For Feldman and Kevin Smith, yieldCos show that renewable energy assets can produce long-term, stable financial returns. They see yieldCos as representing the maturation of the renewable energy finance market; five or ten years ago, investment in renewable energy projects was a risky concept but now is considered fairly status quo.

Several panelists described a fierce competition between yieldCos for a small amount of suitable renewable energy projects. Feldman saw this competition as good for energy markets and the environment. Competition drives down the cost of capital for the energy projects and makes more money available for renewable projects overall.

Moderator Charlotte Kim asked the panelists about the near-term future of the yieldCo market. Federal tax benefits have driven the growth of the solar installation market but are only available until 2016. In response, a prediction about a slowdown of renewable projects in the U.S. was made. Therefore, there would be fewer U.S.-based projects that will be available for yieldCo investment. YieldCos will turn to various overseas markets to compensate.

Green Bonds

Smith described Goldman Sachs's efforts to assess environmental investment risks and to identify emerging commercial opportunities in the green marketplace, including the development of the green bond market.

Green bonds are municipal or corporate debt securities that are publicly traded but whose proceeds are linked in some way to environmental solutions. The proceeds of the bond sales are either earmarked for specific green purposes or subject to broadly green criteria. Panelists agreed that it is largely up to the investor to decide if a bond's criteria are sufficiently green.

Smith mentioned that by some estimates the green bond market could reach $100 billion in 2015. He cautioned, however, that the market is still a small slice of the broader global bond market, which is estimated at $100 trillion. So far, multilateral banks, such as the World Bank and the International Monetary Fund, have been the largest issuers of green bonds. Lately, European corporations and municipalities, as well as U.S. municipalities, have also entered the market.

Smith then described new services that have sprung up to help investors enter and succeed in the green bond market, including underwriters, advisors and market indices. Because the market is young, however, he noted that issuers and service providers are still grappling with their individual roles and responsibilities.

Carol Kostic on Green Munis

On the municipal side, Carol Kostic described the New York City Green Bonds program, conceived over a year ago by the Office of the New York City Comptroller. The comptroller's office spent several months meeting with investors and advocates to vet the program, and was "gratified, but not surprised" to receive strong, positive feedback on the plan and its potential effect on the green bond market as a whole.

Kostic noted that there have been 15 U.S. municipal green bond issuances since September 2014, and more issuers have begun to seriously consider the idea. As for New York's potential entrance into the market, the Comptroller's office believes that the program will benefit New York City in three ways: by expanding its investor base, creating a national model for other U.S. cities to follow and encouraging a greener capital program.

On the investor side, Mary Barber described the Investor Confidence Project, a "specific tool for engaging more private capital in the energy efficiency space." The Environmental Defense Fund (EDF) created the project after examining a range of barriers to the deployment of capital to energy efficiency projects. One problem it found was that lenders, insurers, regulators, building owners and engineers lacked a standardized method to gauge the accuracy of predicted energy and financial savings from efficiency upgrades. So the EDF assembled a group of national engineers to develop a set of best practices and protocols for investment underwriting in order to create "investor ready" energy efficiency projects ranging from multi-family to commercial projects.

Mary Barber talks transparency

Barber noted that the Investor Confidence Project is helpful to the green bond marketplace, especially in terms of project transparency. Many investors are concerned about greenwashing, or the deceptive promotion of certain projects as environmentally friendly, when in fact they are not. The project provides independent, third-party project credentialing to ensure investor confidence and help spur renewable energy investments.

Kim asked Barber about specific examples of investor use of the protocols. Barber noted that the protocols are only just now being rolled out, but that PACE programs in San Francisco and Texas, as well as municipalities in New York and New Jersey have begun to use the standards in some public projects.

Kim asked the panelists what impact the expected long-term rise in interest rates will have on the green bond market. Kostic predicted that a higher interest rate environment will bring in more individual investors and will create more opportunities to sell green bonds.

Smith noted that because interest rates and bond prices are inversely correlated, there could be an impact on green bond issuers. As interest rates increase their cost of capital will also rise. However, issuers are still going to issue debt and investors are still going to want green bonds, so Smith doesn't view higher interest rates as a risk to the green bond market. Issuers may have to pay a little more for their cost of access to capital but the effect won't be detrimental.

Kostic was optimistic about the ability of the green bond market to grow with the help of younger investors. These new investors are more socially conscious than previous generations; in turn, she anticipates that green bonds will help securities firms attract new and younger buyers. This will add new resources to the marketplace, benefitting renewable energy companies and issuers alike. Overall, Kostic stressed that increasing green bond demand is important for the larger renewable energy marketplace.

During the Q&A session, audience questions ranged from broad subjects such as the role of public pension funds in the green bond market to specific issues such as whether all bonds should be identified in terms of green ratings. Panelists also discussed the role of green bond markets on municipal green infrastructure development and the perceived competition between green investments and "gray" investments in municipal budgets.

Panel Two: Office and Home Energy Performance Upgrades — Making It To Scale; New York Green Banking; and Solar Aggregation Heats Up

The second panel was moderated by Nick Lombardi, a Program Manager for Conservation Services Group, and it focused on the financing aspects of the renewable energy market and the overall state of the market for clean energy projects in New York.

The panelists were:

• Jessica Aldridge, Vice President, NY Green Bank
• Tria Case, Esq., University Director of Sustainability, City University of New York
• Yerina Mugica, Managing Director, NRDC Center for Market Innovation
• Michael R. Weisberg, Founder, M-Core Credit Corporation

Nick Lombardi opens with a challenge

Moderator Nick Lombardi opened the panel with a challenge: Why are we not seeing a higher number of renewable energy and energy efficiency projects, given innovations in financing and public policy of recent years? Is it just a matter of patience? Or have we gotten our projections all wrong? Through this challenge Lombardi solicited the panelists' observations and analyses about the slower than predicted growth by advocates of renewable energy and energy efficiency projects.

For Jessica Aldridge, renewable projects' soft costs, such as higher financing costs, keep them at a disadvantage compared to traditional energy projects. For example, banks are more likely to lend at favorable rates to carbon-based energy projects because banks better understand the risks and rewards involved with carbon-based project financing, as they've been financing these projects for years. Renewable energy projects tend to be more complex and perceived risks are less well understood.

Aldridge's employer, NY Green Bank, (NYGB) is a state-sponsored investment vehicle dedicated to overcoming obstacles in clean energy financing markets. NYGB is designed to address gaps and barriers in clean energy financing markets — and to transform those markets as part of the integrated statewide transition. It is market-focused and market-responsive, in that we work with private sector capital providers and project developers who are prepared to move forward with a project, but for a specific barrier or financing gap. We'll work with them to address that specific gap and in doing so, Aldridge said, we ensure this solution is easily replicated to allow for greater private sector capital to be deployed into the marketplace.

Lombardi seconded the point that soft costs hold up renewable projects and asked Tria Case about CUNY's efforts to develop tools to enhance consumer knowledge and other specific ways to address soft costs.

Tria Case makes the case for use reduction

Case noted that 64% of the cost of solar projects is soft costs. As state incentives for renewables drop, as they usually do, soft costs must be lowered if projects are to remain viable. One way CUNY is addressing that issue is through the development of the website NYC Solar Map, an online tool for breaking down barriers to information and informing City residents about the potential for solar on their buildings and around New York. Case also spoke to the decision making processes that govern energy efficiency projects. For instance, she spoke of CUNY's change management approach to create institutional change, by disseminating information about energy reduction measures across all communities, creating buy in from the top and constituencies on the ground.

For Case, providing consumers with information is key to encouraging renewable energy project investment. She sees it as incumbent upon those in the green financing realm to figure out how to get good information out to consumers in the marketplace.

Yerina Mugica pivoted to complex issues regarding the kinds of control that commercial tenants have over their energy consumption. When done right, this often leads to significant opportunities for savings and energy use reduction. To highlight this point, Mugica described the Natural Resources Defense Council's efforts at creating energy efficient and investment processes for tenants. NRDC worked with ten commercial tenants moving into newly-leased premises, an ideal time to implement energy efficiency measures. Her team helped the tenants develop strategies for realizing energy efficiency investment returns over their lease terms. Then, using that knowledge, the group developed guides and financial calculator tools for replication in the marketplace.

Reinforcing a theme flagged by other panelists, Mugica cited the lack of information on the part of affordable housing and commercial tenants as a significant barrier to investment in energy efficiency projects. She also pointed to NYC Local Law 87, the NYGB, and the NYC Energy Efficiency Corporation as examples of innovations New York has developed to regulate and grow the green energy market. Mugica also advocated for "a level playing field" of energy subsidies so that the green technology industry in the U.S. can compete with established fossil fuel industries more effectively.

Michael Weisberg favors building codes

Michael Weisberg counseled a measure of patience when it comes to building energy efficiency projects. "How lacking are we of financing? At the end of the day some buildings make sense and others don't." For Weisberg, there is more traction in the green finance marketplace than ever before. He is hopeful that green financing tools and projects are here to stay, as they are being "baked into younger folks mindsets."

Weisberg also seemed skeptical about any attempts to compel building owners to adopt energy efficient practices by using shame tactics such as green building ratings. He prefers the use of incremental building codes to encourage energy efficiency projects. On the other hand, Aldridge pointed out that shaming gives consumers the power to "pull" the market, as opposed to a regulatory "push."

During the final Q&A session, audience questions ranged from broad subjects such the extent to which states, municipalities, and public institutions pool their purchasing power and the ability of small- and mid-sized business to access to financing. Panelists responded by citing specific examples of a lack of institutional investor familiarity with — or interest in — financing smaller scale solar projects and the need for better educational tools for both consumers and financiers in order for the energy efficiency marketplace to grow.

The panel wrapped up, having covered the topic of green finance innovations in both broad strokes and fine detail and it's fair to say that we are seeing the start of something really big.

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