What’s the right way to grow energy efficiency finance?

In the last issue of Pacesetter, I talked about how we need to identify the right underwriting behaviors that need to accompany our evaluation of green properties.  Pacesetter Nancy Anderson, Executive Director of the Sallan Foundation, replied with a link to a panel session she’d moderated that focused on the same issue, but from a variety of perspectives.

Called Reimagining the Metropolis — No Joke, the session featured three panelists with different areas of energy efficiency finance expertise sharing their perspective on the approaches they saw as being critical for growing a liquid market for energy efficiency financial products and services.

Which idea will have the most impact?

The three big ideas boiled down to:

More data and best practices for lenders - Sam Marks, from Deutsche Bank Americas Foundation, talked about how their Living Cities project was in the process of studying and aggregating  benchmarking data on housing energy efficiency performance. That benchmarking data, should cover 12,000 multifamily units. It will eventually identify best practices for lenders.

More data, particularly for the multifamily market is desperately needed. I have to add, though, that any such project should ultimately focus on satisfying the needs of appraisers, since any regulated financial institution ultimately relies on an appraisal in order to estimate how much they will lend on the property.

Teach lenders how to incorporate energy efficiency within underwriting - The Community Preservation Corporation’s Sadie McKeown showed how underwriting for energy efficiency finance is not as hard as it seems, plus pointed how how scarce incentives really are. Their approach included training their own staff in the benchmarking process.

Both of these comments are very close to what we cover in our Competitive Edge Green Finance Workshops, where we teach how to develop a green building business case. I also think that, given the level of  inefficiency “trapped” in so many of our buildings, the upside in energy efficiency is actually in retrofitting the building and obtaining better performance and higher value, as opposed to cashing in incentives.

Tougher regulations - Attorney Lawrence Schnapf talked about a pathway of tougher policy and regulation, such as tougher building codes and ordinances, which will simply force investors and financiers to deal with lower energy assets, “like it or not”.

This scenario has already been presumed by so many green building advocates, that you might be tempted to skip it, but don’t. It’s still significant because you cannot simply assume one particular market action in isolation. My investment and lending experience has shown me that most surprises come in two’s or three’s. That is, you have to be able to think about the impact of tougher building energy regulations happening at the same time as other tough scenarios, such as a long-term lack of credit and/or even greater water shortages.

Or, all of the above

Actually, the above approaches should not be viewed as an “either / or” type of choice. Based upon our view of the market, all of the above will have to be interacting together for a sufficient duration, in order for us to see a liquid, fairly-priced market for energy efficiency financial products supporting U.S. real estate.

Your thoughts?

Let’s meet at Tulane’s Green Finance Conference, 10-11 March 2011

Two Reasons to Attend ‘Strengthening the Green Foundation’

I want to make sure that you have the latest on Strengthening the Green Foundation, an exciting green finance conference that’s taking place at Tulane University, in New Orleans, this Spring.

Tulane University’s new Master in Sustainable Real Estate Development Program and the Federal Reserve Bank of Atlanta invite researchers, industry practitioners, and policymakers to participate in a conference to advance the understanding of and improve the practice of green development and finance.

1. Set the Agenda: Advance the Study and Practice of Green Building Finance

Core research tracks include the development and finance industry structure, green valuation, and portfolio management. Practice and policy tracks include green underwriting, green measurement and certification issues, and green leasing.

Read the complete call for papers, which includes details of the conference tracks, the abstract submission process, and deadlines, as well as a link to the online abstract submission site.

2. Leverage Time: Meet Me, Other Practitioners, Policymakers and Green Finance Specialists

This will be a great use of your time spent on understanding the green finance space. I have the honor of being among the speakers and am excited about the great list of practitioners, researchers and policymakers who are scheduled to present.

If you are attending, please drop me a line at and let me know.  This is a breakout year for green finance and I’m sure this event will be filled with thought-provoking insights you can’t miss!

What will change everything in 2011 and beyond?

A few 2010 events either changed or reinforced perceptions enough to influence sustainable finance in 2011 and beyond:

1. Positive Green Building Momentum & Performance

Confirming year-end data reinforces the value of building environmental certification.

• LEED-certified buildings have reached a footprint of 1 billion square feet worldwide, with another six billion square feet of registered projects in the pipeline.

• In the The Economics of Green Building, researchers demonstrate that green building economic performance was not affected by recent market volatility, that the economic premiums in the green properties studies remain substantial and energy efficiency does contribute to higher rents and values.

2. Quantified Credit Risk for Environmental Irresponsibility

• If your lender shrugs when you tell them that building environmental certification benefits them, too, send them a copy of Corporate Environmental Management & Credit Risk. Rob Bauer and Daniel Hann’s prize-winning study that demonstrated how US companies engaged in environmentally risky activities paid a premium for their bond debt of up to 64 bps per annum.

3. Innovative Structure Straddles Real Estate & Energy

• We covered Hunt Power’s use of the REIT structure to offer up to $2.1 billion in energy infrastructure finance via joint ventures, purchase and leasing. There are several energy and technology sectors that urgently need better ways to access capital than the market can provide. Look out for more novel, hybrid investment structures that bring commercial solutions to financing sustainability across buildings and other domains.

4. Regulatory Ramp Up Continues

• Carbon cap and trade has arrived in California, joining building energy disclosure requirements and Cal Green. Under new regulations adopted 20 December, greenhouse gas emissions of large industrial plants will be capped from 2012 forward. Given California’s legal requirement to reduce emissions by 15% from today’s levels by 2020, we will continue to see heavy action both within California, as well as California’s experience influencing how these issues are handled in other states and even within the Federal Government.

5. PACE: New Tools Equal New Perceptions

• We dedicated substantial coverage last year to tax-lien financing for energy efficiency. Professionals from diverse sectors joined forces to cheer on property-assessed clean energy’s brave fight…and boo the regulators as they killed most residential programs. New tools equal new perceptions. PACE’s major success has been how it helped build awareness and shape positive perceptions. Now practitioners realize that such structures are possible and urgently needed. That’s kicked off a lot more interest in getting green finance right from now on.  Policy makers are working on various versions of PACE 2.0 or other PACE-like enabling legislation. It’s hard to tell what progress they’ll make, but PACE’s potential helped focus commercial real estate and government on the market need for such structures in a way not seen before.

So, what kind of market do you think you’ll sell into?

With so much momentum already underway, what are the prospects for your building portfolio?  We think successful investors in the coming years will be good at continuously re-imagining and reinventing their businesses, often at highly local levels.

Which of these events carry the most weight for green real estate?

What’s missing from the green finance conversation that you think needs attention?

Photo credit: Muse by Oimax. If you are a fan of urban photography, check out Oimax’s 6,000+ photostream of stunning Tokyo architecture, scenes and objects.

Vet your metrics, avoid wrong investment decisions with these Expert Questions

Metrics are important to green building finance because they can help you prove the green value-add you’re getting from your sustainability or energy efficiency initiatives.  First of all, they’ll drive the project choices that your company makes, which will determine the future state of the green finance or investment program that you’re running. Over time, they’ll teach your company how and where to improve its green investing activities because they’ll point you to the areas to improve in order to reach your business objectives.

There’s a lot riding on your choice of metrics

However, achieving that success depends on choosing the right metrics in the first place. There’s lots of evidence that getting metrics wrong can result in huge problems… once you realize that there’s even a problem in the first place and that it stems from a faulty metric.

Enterprise Group CEO John Mariotti wrote about how the medical establishment continues to accept the “normal” human body temperature of 98.6 F, even it was proven to be 98.25 F many years ago.

There’s also the expensive (and ongoing) example of the losses suffered by governments and investors that relied on the AAA credit ratings on securitized mortgage pools, which touched off a global financial crisis, when the ratings were exposed as inaccurate.

Expert Questions for vetting metrics

We help clients to vet their metrics, so that they make the right decisions about their target environmental, social and economic impacts. I condensed them into shortlist of Expert Questions for Vetting Metrics**, that I taught my grad finance class yesterday. You can use it to locate and assess potential weaknesses in measurements, preventing wrong decisions and expensive problems.

1. Who created the metric or it’s criteria?
2. How do they define value?
3. What do they want to know?
4. What will they do with the data?
5. Does the measurement and any impacts comply with the Four C’s?
6. Are chosen discount rates and sensitivity scenarios well-justified?
7. How does it drive marginal improvement in environmental quality and well-being?
8. What’s the measurement baseline?
9. How is the metric’s range of motion defined?
10. Does the metrics reporting period match the firm’s normal financial reporting period?

There’s only enough time for now to discuss a simple principle that is behind #’s 1-4. It is: forms of social / environmental measurement serve the perspective and objectives of the measurement’s creator.

Most practitioners know that it’s important to use metrics that are comparable across many firms, to get a transparent view and the right context about a company’s or portfolio’s performance.  In green investing, there are various private data collection firms compiling this information, but they may focus their data reporting on a particular sub-sector of clients. The measurements used can be less effective for you if your firm does not fit the profile of this client sub-sector.

I’ll write more on the other vetting questions from time to time, but feel free to use this list to check or recheck your own metrics or the criteria that’s behind them. When you know you’re accurately measuring green investment performance, then you’ll enjoy the benefits of better decision making and impact.

**What are Expert Questions?

Troubleshooting multifamily energy efficiency finance

Yesterday I spoke on a panel put together by the California Public Utilities Commission (CPUC) at a  workshop investigating the barriers to and simplifiers needed for energy efficiency financing for the market rate multifamily sector.

Get mind map and video notes

Play the video to run through the highlights in ~7 minutes or download this interactive mind map to read the detailed notes at your own pace.

Synopsis - Every energy efficiency financing decision requires knowing the green building business case

Throughout the session, we drilled down into landlords and lenders problems with energy efficiency financing. It wasn’t hard to name quite a few.

The CPUC can address these issues once they understand their relative impacts on which parties. To find that out, they have to delve into the green building business case for the market rate apartment sector. That’s something that they’ve only recently focused on.

First of all, energy savings were discussed in isolation from other retrofit benefits — similar to what I observed at yesterday’s commercial building workshop, too much silo thinking.

Retrofitting apartments can translate into higher net operating income and cash flow in a variety of ways. In addition to energy savings, more durable systems last longer, need less maintenance and decrease the amount of funds going to capital expenditures over the lifetime of ownership. On top of that, effective gross income can be improved through tenant retention.

Product design received long overdue attention.  My co-panelists echoed gripes by yesterday’s commercial building panelists about the need for simplified transaction processes and lower costs.

Understanding the landlord’s needs and requirements as a customer (and not a “ratepayer”) will help the regulators to bring financial products to market that can help property owners become more proactive about initiating deeper retrofits.

The notes and video contain more details on the topics covered. It was clear that any future products would be greatly helped by understanding the total value-creation picture (yes, systems thinking again). The green building business case helps them to quantify that and make the connection between the goals of owners and lenders as well as their own.

Tell me what you think

What green or energy efficiency finance programs are you watching these days? How well are they working in your market?  Please share your comments.

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