Secondary market for energy efficiency could spur institutional investment – report

Major new research from Ceres and Investor Network on Climate Risk

A new report from sustainability advocacy groups Ceres and the Investor Network on Climate Risk (INCR) has proposed a secondary market for energy efficiency loans as a way to unlock capital from institutional investors in the US.

It suggests they could be bundled together, securitized and sold to investors.

It’s the latest research to point to pooling as a way to attract major institutional backing for climate change mitigation efforts. Earlier this year, San Francisco-based think tank the Climate Policy Initiative argued that better pooled vehicles could be one way of boosting institutional investment in renewable infrastructure.

The new Ceres/INCR report, released today, cites three areas of policy that can get energy efficiency to a scale big enough to attract institutions. They are: utility regulation; demand-generating policies; and innovative financing policies. “Many of these policies do not require public funds, and they can put money back into the pockets of homeowners and business leaders around the country,” said Mindy Lubber, president of Ceres and director of INCR, the network of 100 institutional investors with collective assets totaling more than $11trn (€8.5trn).

“A financing structure in which energy efficiency loans are securitized and sold on a secondary market may represent an attractive option for institutional investors to expand their investments in energy efficiency whilealso lowering the cost of financing projects for building and industrial facility owners,” state authors Brandon Smithwood of Ceres and Ryan Hodum of David Gardiner & Associates.
The 30-page report is called Power Factor: Institutional Investors’ Policy Priorities can Bring energy efficiency to Scale.

The project had input from investor groups such as Boston Common Asset Management, the California Public Employees Retirement System (CalPERS), Trillium Asset Management, Impax Asset Management, California State Teachers’ Retirement System (CalSTRS), Bank of America and Citigroup.

“The market has yet to develop an institutional-scale investment product capable of financing energy retrofit loans,” the researchers write, identifying barriers such as the lack of energy efficiency loan standardization, limited data on loan and project performance, and an insufficient pipeline of projects.

Smithwood and Hodum argue: “There must be quality and scale in the energy efficiency finance market to aggregate loans into a loan pool that can be rated and achieve a high rating (e.g. AA).”

A webinar on the report will take place on June 6 from 3-4 p.m. ET, with participants including Smithwood, CalSTRS’ Portfolio Manager Brian Rice and Alan Gordon, Deputy Controller for Environmental Policy in the California Controller’s Office.