When a Great Impact Opportunity Just Doesn’t Make Financial Sense

August 2018 | ESG investing

Picture a large office building in your nearest city. At night, there are usually a handful of lights on in various rooms and offices which you notice from miles away. Now picture that same building during the day with every light on and consider the amount of energy that is being pulled from the grid to provide that illumination.


Approximately 30% to 40% of an office building’s total energy consumption is lighting. Over the past decade, initiatives for replacing fluorescent tube lighting with low-energy LED lights, sometimes combined with rooftop solar panels, have gained popularity. But how can a building owner raise the millions of dollars necessary for upgrades on that scale?

PACE, or Property Assessed Clean Energy, is a financing structure that allows commercial, residential, and industrial property owners to finance upgrades involving energy efficiency, renewable energy, and water conservation. Common examples include solar and battery technology, cool roofs, and even something as simple as added insulation. The financing comes in the form of loans or bonds which can be issued by municipalities or private finance companies.


While combing through investment opportunities that contribute to positive environmental and social outcomes, we recently looked at a commercial PACE deal. The deal was offered to a small number of investors. Our due diligence included speaking with the company where we requested additional information be disclosed for us to feel comfortable with the issuance. While the positive impact and environmental benefits of the deal were clear and measurable, the financial characteristics did not pass our rigorous investment requirements. Our two-prong investment approach requires every bond to pass both financial and impact/ESG mandates in order to be considered for inclusion in our portfolio.

For example, the ability of an underlying property to consistently pay back a loan is of critical importance. When underwriting potential commercial real estate deals, we must be completely comfortable with the data that is used for compiling key metrics such as a property’s debt service coverage ratio (DSCR). This is the same way a mortgage lender would look at someone’s income and their ability to make the monthly mortgage payments. If the borrower can’t provide clear proof of sustainable income, a good lender will likely decline the mortgage, regardless of their background story.

Going forward, we will continue to subject every potential new purchase to our strict dual mandate with the goal of ensuring all impact/ESG opportunities also make financial sense.  




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