Demand Soars for Green Bonds

As noted in my last post on green bonds, there has been a recent dramatic growth in green bond issuance. Supply is responding to a burgeoning demand. Quite simply, investors are snapping up these debt instruments that are linked to an environmental benefit. Three recent transactions highlight this seemingly insatiable appetite:

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(Source: eProGuide)

  • Massachusetts’ sale of $350 million in green bonds in September attracted more than $1 billion in demand from retail investors and institutions. This — the state’s second green bond issuance — will fund clean water, energy efficiency, open space protection and river preservation projects.
  • The order book for the Nordic Investment Bank’s $500 million green bond issue quickly climbed to $800 million, with more than a third of investors being new to NIB. This bond will funnel proceeds to climate-friendly projects in Nordic countries, such as renewables, energy efficiency, green transportation and wastewater treatment.
  • In September, the World Bank tripled the size of its planned structured green bond to $30 million in response to investor demand, raising more than expected for climate projects, such as energy and forestry initiatives. Since its first green issuance in 2008, the World Bank reports raising more than $7 billion from 77 bonds in 17 currencies.

These data points back up the buzz I’ve heard among market players. At the recent Associated Grant Makers fossil fuel divestment panel, Sonia Kowal of Zevin Asset Management talked about the tremendous interest Zevin has seen from clients for buying green bonds. Read more

The Business-Policy Nexus: Clean Power Plan Offers Opportunity for Companies

Namrita Kapur

In our inaugural post on the business-policy nexus, Tom Murray highlighted the implementation of President Obama’s Clean Power Plan as an opportunity for companies to be leaders. Why should companies be motivated to get involved? Because they care about having access to competitive, clean energy and tools and incentives for smart energy management, which will help them meet their sustainability and carbon goals while cutting costs.

The decisions being made in the coming months on the Clean Power Plan proposal can help accelerate the transition to a cleaner energy economy for years to come, expanding the demand and market for renewable energy and energy efficiency. Any sustainability officer who has tried to price green power on the market or build the business case for an energy efficiency program has a stake in the outcome.

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Impact Investing: Green Bonds 101

Prior to joining EDF, I worked in a variety of finance-related roles, from building the alternative energy franchise at an investment bank to pioneering investment in rural communities in the developing world at Root Capital. As part of my work at EDF, I’m investigating what financing mechanisms can drive investment in projects with big environmental returns, as well as financial ones. This post is the start of a new series looking at the green bond market, and in the future, I’ll be delving into other areas of impact investing.

Namrita Kapur

Eighteen months ago, you might have never heard of a green bond. The market averaged less than $3 billion per year, but that is quickly changing.  $14 billion in green bonds were issued in 2013 and Bloomberg New Energy Finance projects as much as $45 billion to be issued this year. One expert even sees the market climbing to $100 billion in 2015.

Flexible financing for sustainability projects

So what are green bonds, and what is driving this market growth? Simply put, they’re a debt instrument that can be linked to an environmental benefit. One compelling aspect of green bonds is their flexibility. While some may be tied to energy efficiency and renewable energy projects, others are used for projects around climate resiliency, water infrastructure and a growing list of other high-priority sustainability areas.

As countries experience the mounting impacts of climate change, there is an increasing global demand for capital in these critical infrastructure categories. At the same time, funds that are integrating environmental, social and governance criteria in their investment decisions are looking for these types of instruments to add to their portfolios.

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In New Report, KKR Deepens Commitment to Tackling ESG Concerns

Too often, environmental performance gets labeled as the responsibility of one team within a company – whether that of a dedicated sustainability staff, external or public affairs, legal or compliance, etc. As a result, a company’s staff can often think of environmental and social governance (ESG) issues as what Douglas Adams once famously termed an SEP – Somebody Else’s Problem.

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With the release of its 2013 ESG and Citizenship Report, private equity firm Kravis Kohlberg & Roberts (KKR) shows it’s taking a different approach:  KKR has adopted a new global policy that makes identifying and addressing ESG risks in both the pre-investment and investment phases, for its staff, everyone’s problem.

Notably, KKR’s private equity investment professionals are being integrated into the ESG risk assessment process: first, in assessing risks during the diligence phase, and second, working with portfolio companies, consultants and subject matter experts to set performance goals and measure against them during the typical five to seven years a company remains part of its portfolio.

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The 2014 Skoll World Forum: Always Act

Skoll World Forum logoSe hace camino al andar – the road is made by walking,” said Yves Moury of Fundacion Capital, quoting Spanish poet Antonio Machado. He went on to explain that the poet was telling us to find new ways to think and to act. “Always act,” he exhorted, “the road is made by walking.”

I identified with this call to action as the unofficial theme of the 2014 Skoll World Forum. The presentations, the side conversations and even the general spirit of the Forum underlined this. Here is a sampling of some of the more provocative actions and articulations I heard:

  • In the opening plenary, Sir Richard Branson, founder of the Virgin Group, argued that the world needs more CEOs to stand up to their shareholders.
  • Also in the opening plenary, Arif Naqvi, founder of private equity firm The Abraaj Group, emphasized the importance of a broad definition of stakeholder engagement because as he put it, “you can’t have islands of excellence in an ocean of turbulence.”
  • Jason Saul of Mission Measurement presented a framework that promotes deriving a cost/outcome across what he deems is 132 outcomes in the world.
  • Jeff Bradach of Bridgespan Group raised not only organization-centric pathways to scale, but also field-centric ones that would argue for strengthening a constellation of organizations.
  • Feike Sijbesma, chairman and CEO of Royal DSM, emphasized that more than shareholders have to be a company’s priority in “future-proofing a business” as he traced the company’s transition from a coal mining company to a chemical company to its current framing as a life sciences company.
  • Mike Barry of Marks & Spencer shared in a side conversation that in 10 years their most important strategic partner might be a healthcare company as they think about a frame of wellness rather than products.
Malala Yousafzai

Malala Yousafzai

Finally, as a tour de force at the Forum were the words of Malala, the 16-year-old Pakistani girl who survived a Taliban assassination attempt as she advocated for education for girls. She spoke passionately and eloquently with a poise way beyond her years as she proclaimed, “Education is more powerful than any weapon.” Although she was specifically speaking about education for girls, her message is really universal whether speaking about individuals, investors or companies.

As I reflect back on the Forum, I’m inspired to continue challenging companies to always act, innovating to protect the planet.

The benefits of tying executive compensation to sustainability

Aligning incentives – this is why executive compensation is linked to financial performance. Corporate America wants to promote financial performance, so it compensates its executives directly for it. With the increasing risk that natural resource scarcity and climate change poses to businesses, what about aligning compensation to sustainability performance?

A  2012 Glass Lewis report states that 42 percent of publically traded companies interviewed across 11 major markets across the world disclosed a link between compensation and sustainability. Last year Ceres found that only about 10 percent of S&P 100 companies have reportedly incorporated sustainability into their bonus structures.

These statistics point not only to an emerging trend, but also to the varying degrees of transparency and rigor with which corporations are linking executive compensation to sustainability goals and results.

On one end of the spectrum, some companies mention a sustainability-compensation link in their CSR reports, yet do not provide further details.  On the other end, there are companies that clearly articulate the connection. Alcoa, for example, in 2010 started tying 5 percent of executives’ annual bonus to the company’s CO2 emissions reduction goals. Intel is another example—since 2008 it has tied 3 percent of all its employees’ annual bonuses to specific company-wide sustainability goals (in 2012 the focus being energy efficiency in the company’s operations and products).

On the exemplary side, Xcel Energy ties one-third of its’ CEO’s annual bonus to renewable energy, emission reduction, energy efficiency, and clean technology goals.

What is driving those companies that are aggressively linking executive compensation to sustainability?

A 2012 Conference Board report notes two factors:

  1. Financial benefits: Given the inchoate nature of the field, there is little data yet to show the correlation between this practice and better long-term financial profitability. But, EDF in its 20+ years of corporate partnerships has numerous case studies of how environmental innovation can save companies millions of dollars, and be a critical component of long term value creation. In our Green Returns work alone, we have seen a sustainability lens lead to $650 million in financial benefits while avoiding 1 million metric tons of GHG emissions, 3.4 million tons of waste, and 13.2 million cubic meters of water use across 38 portfolio companies.
  2. Reputation and culture benefits: Linking compensation to sustainability is a powerful marker of a company’s environmental leadership—the Conference Board found that such leading companies were more likely to link their compensation than others.  Additionally, this practice can serve as a powerful tool to increase accountability and promote action around environmental goals, a sentiment echoed in Intel’s 2012 CSR report, and articulated by Tom King, president of National Grid U.S.—who notes: “linking executive pay and climate change deliverables has increased accountability and positively impacted our culture. Employees across the company are increasingly incentivized to put sustainability at the heart of the way we do business.”

If you want to learn more about linking executive compensation to sustainability, the Conference Board report is a good place to start.  As everything from water scarcity to carbon constraints start impinging on your company’s growth, now is a good time to think about implementing such a powerful tool to position your company for success in this new environment (pun intended).

Data-Driven Water Savings

Affecting more than half the country, this summer’s drought has put water issues front of mind.  As the risk to supply chains and communities where they operate increase, not surprisingly, companies are paying more attention to their water impact.

Notably, this summer Facebook was the first company to ever release water usage effectiveness (WUE) data. WUE is a metric released in 2011 by GreenGrid, which builds upon the success of GreenGrid’s power usage efficiency (PUE) metric, now ubiquitously employed across data centers. As the term suggests, WUE gauges the efficiency of water use in data centers.

Water use?  Why does a data center use water?  Well, the transfer and storage of data generates a great deal of heat, which needs to be removed for the equipment to continue to function smoothly.  That heat removal usually occurs through the use of a water cooling tower, which uses significant amounts of water.  Building cooling, in general constitutes 60 percent of water use in buildings.  Because of the higher intensity of heat generated, data centers use an average of 20 percent more water for cooling than other types of buildings.

In August, Facebook reported that the WUE of its Prineville, Oregon data center was 0.22 L/kWh, which Facebook considered a “great result.” We commend Facebook for releasing the WUE data and nudging others to follow suit. But, it is premature to pass judgment about what is a good, bad, or mediocre WUE. Facebook, itself, acknowledged this – recognizing the importance of benchmarking this metric against other companies and over time.  The company will start disclosing its Prineville WUE data on a monthly basis, and in 2013 it will produce WUE data for a second data center in Prineville and one in Forest City, NC. We hope this will become a slippery slope toward the best practice of comprehensive water reporting and management, and that Facebook as well as other companies such as Google and Microsoft go beyond just showcasing best-practice sites to provide full context for their water usage.

Admittedly, water is more complex than other environmental issues.  Unlike greenhouse gas emissions, which affect our global climate equally no matter where on Earth they take place, water’s geographical use matters a great deal. A company’s water footprint can mean different things based on the regional context in which it’s set.  As a case in point, through our collaboration with AT&T we’ve learned that in water-stressed areas such as the South and Southwest, water consumed for commercial building cooling alone accounts for a hefty 10 percent of total regional water demand.

To get their hands around water impact, companies should embrace comprehensive water reporting. This starts with mapping out their water footprint to identify areas of opportunity. For example, AT&T’s water mapping revealed that 125 AT&T facilities account for approximately half of the business’ total water consumption.  We believe water efficiency efforts should begin there, and indeed they are. As mentioned in this recent blog about our collaboration with AT&T, we are in the midst of piloting practices to reduce water use in building cooling.  Our focus isn’t on a specific type of buildings; we’re looking to develop tools and insights that can generate water efficiency at a variety of facility types across diverse industries. We are exploring three approaches for this reduction:

1) Optimizing free air cooling;
2) Minimizing the amount of water blown down from a cooling tower while maintaining equipment integrity; and
3) Tapping into non-traditional technologies that further minimize water blow down.

We will release our findings in early 2013.

In the meantime, check out the following water disclosure and measurement tools that can help get your business up to speed on sustainable water management, easing pressure on the environment and saving you money:

•    CDP’s water survey
•    CERES’s Aqua Gauge
•    WRI’s Aqueduct
•    GreenGrid’s WUE and WUEsource
•    World Business Council for Sustainable Development’s Global Water Tool
•    Alliance for Water Stewardship’s upcoming water stewardship standard

This content was originally posted on facilitiesnet.

Show me the money: How Energy Efficiency Financing makes dollars and sense

Here’s a quick pop quiz to test your knowledge on financing energy efficiency. True or False: 

1. Energy efficiency financing provides risk-adjusted returns in the mid-to-high “teens.”

Answer: True

2. Energy efficiency is the hot, new asset class with massive amounts of investment capital catalyzing upgrades in building stocks and industrial facilities across the country to realize significant greenhouse gas reductions in the near-term.

Answer: False

As crazy as it may seem, this paradox exists today.  The Conference Board and McKinsey & Co. predict that energy efficiency is a $170 billion per year investment opportunity that can provide an average 17 percent rate of return. At Environmental Defense Fund (EDF) we’ve demonstrated the potential return through our work with leading business partners.  Our EDF Climate Corps program has identified investments to date that can create a whopping $439 million of savings in net operating costs. Another example – our work with Kohlberg Kravis Roberts & Co. (KKR) has yielded over $160 million in energy efficiency savings across seven of KKR’s portfolio companies since the Green Portfolio Program began in 2008. Despite all of the promising research and results, we are currently seeing only a fraction of investment capital needed to realize these benefits. 

Investing in energy efficiency is important to our goals at EDF to clean up the air we breathe and stabilize our climate, and we set out to better understand how we can catalyze this marketplace.  We reviewed the literature; spoke with investors from firms Sustainable Development Capital LLP, Hudson Clean Energy Partners and GE Capital; and captured lessons learned from our work with leading business partners like KKR and programs like EDF Climate Corps.  We’ve consolidated the results of our research into a new report, “Show Me the Money: Energy Efficiency Financing Opportunities and Barriers,” which explores how organizations can overcome the challenges to energy efficiency financing and maximize the opportunities that are available for business and our planet.  We hope you will utilize the research we’ve collected and join  us in stimulating this marketplace.  Heck, we would be happy even if you by-passed us altogether and went straight to taking advantage of this lucrative asset class.

Bank of America, TIAA-CREF, and CalPERS oh my!

These are just a few of the institutional investors that are proactively focusing on energy efficiency as the market has begun to recognize the lucrative returns in this asset class.  Last week, Bank of America announced a $55 million program that will work with community development finance institutions to promote retrofits of old buildings.

Bank of America’s commitment to consolidate and analyze the data from the retrofits is just as important as the funds that will get the company there.  More data, as we cited in our last energy efficiency financing blog, will bridge that knowledge gap between engineers and investors, reduce perceived risk and thereby promote more capital entering into the energy efficiency arena.

On the heels of the Bank of America announcement, Pensions & Investments magazine released a review of the real estate management industry.  Among others, it cites that TIAA-CREF Global Real Estate reduced energy consumption by 11.5% in its office portfolio and 10.8% in its multifamily portfolio, leading to $12.5 million in annual energy savings.  Not to be outdone, Jones Lang LaSalle cut energy costs by $128 million last year.

The article further emphasizes that an important driver in this activity is the demand from significant institutional investors such as California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTERS).  We believe that CalPERS and CalSTERS recognize what EDF Climate Corps and Green Return projects demonstrate: it makes cents (pun intended) to invest in energy efficiency.

EDF Climate Corps fellows have identified $91 million in investments to date that would yield a whopping $439 million of savings in net operating costs.  Our Green Return project with KKR has yielded $35 million in energy efficiency savings across 7 of KKR’s companies through no or low cost investments, an approach that KKR is now rolling out to its entire portfolio.

We are encouraged by this trend and expect that this is just the beginning as investors increasingly realize the low risk/high return combination provided by energy efficiency.  Don’t be left behind!

We're On the Same Page, Part 2: Energy Efficiency Finance

As Liam Pleven’s Wall Street Journal article “Buy Now, Pay Later” rightly points out, upfront costs– present a persistent stumbling block for the realization of energy efficiency retrofits.  He details several business models that are addressing this issue.  Given that capital flows toward new assets classes where it can turn a profit much like water searching for cracks and crevices to form a new tributary, why, then, aren’t the businesses cited in his article overwhelmed by investors?  The answer is that the perception of risk is still very high in this area.  Without a track record in this space, investors become Jerry Maguire caricatures, sitting on the sidelines demanding, “Show me the money!”

EDF’s response: here you go!  EDF Climate Corps fellows have identified $91 million in investments to date that would yield a whopping  $439 million of savings in net operating costs. Another example – our project with KKR has yielded $35 million in energy efficiency savings across 7 of KKR’s companies through no or low cost investments. In return, KKR is now rolling this approach out to its entire portfolio.

But investors are a skittish bunch, especially of late; they want more confidence in the returns.  As a result, EDF is working to address the knowledge gap between building engineers that prescribe the retrofits and the capital providers that fund them.  Although tools and standards exist today, the application can be somewhat discretionary, making it difficult for financial professionals to become comfortable with their track record.  EDF is facilitating the development and adoption of a consensus approach to the application of these tools and standards to help building engineers clearly communicate to finance professionals that projected savings and expected recurring savings are real.

Lastly, the high transaction costs of identifying pipeline have thwarted financial product developers in aggressively developing and offering energy efficiency investment products for institutional investors.  Essentially, EDF is operating as an aggregator in the short-term to identify pipeline through its myriad of relationships.  Once investors and consumers see the mutual benefit of retrofits, the marketplace will develop a system for the two to find each other and take us out of the equation.  In essence, it is a “crowding in” strategy.

Considering the $170 billion per year investment opportunity that the Conference Board and McKinsey predict can provide an average 17% internal rate of return, the energy efficiency asset class is poised to be a lucrative new asset class that will also have significant benefit on cleaning up the air we breathe and stabilizing our climate.  So investors, to borrow another line from Jerry Maguire – “Help me, help you!”