In April of this year, the EPA awarded $27 billion to Greenhouse Gas Reduction Fund recipients to finance clean energy projects across the U.S. A primary challenge in deploying this money is the requirement that projects involving public funds meet “the highest standard of care,” according to Colin Harris, the executive director of advisory services for Banyan Infrastructure, a project finance software platform for sustainable infrastructure financing.
Standards to consider include fair use, transparent fund management, and adherence to all applicable rules and regulations. In the case of GGRF funds, expectations run high across key objectives: deliver impact, recycle capital, and bear the risk of loss, which is complicated by frequently complex investment structures.
Billy Briscoe, the CEO of the Clean Energy Fund of Texas, was direct in explaining the stakes: “Nothing on this scale has ever been attempted. And we are all hustling to get the capital deployed where it is most needed.”
Across three programs — the National Clean Investment Fund ($14 billion), the Clean Communities Investment Accelerator ($6 billion), and Solar for All ($7 billion) — the fund is expected to drive $150 billion in public and private investment. The EPA will grant awards to recipients that include community development financial institutions; green banks; NGOs; and state, local, and tribal governments.
The programs are designed to increase the capacity of many lenders, big and small, to support clean energy projects with local community benefits. But many of the fund recipients and subrecipients are new to green lending. Operational excellence and standardization will be vital in ensuring that funds are deployed effectively and with the standard of care needed for public funds.
A new kind of financing
The GGRF aims to ramp up new green lending programs in community, state, tribal, and national organizations, and increase the capacity of existing programs, particularly in low-income and disadvantaged communities that have not benefited equally from prior green finance programs.
But reaching so broadly and deeply into communities presents a formidable challenge. There will be new technologies, new financial products, and new combinations of federal, state, and other incentives to consider. Financing a community solar and battery storage project is fundamentally different from financing an electric car loan. The expectation of both wide and deep expertise is a big ask from lenders who potentially have little, or no, experience with green lending.
To further complicate matters, most of these deals are structured as loans or debt-like products and require ongoing monitoring and reporting. In other words, they’re not one-and-done deals.
Standardize — and record — everything
Establishing best practices is only half the battle.
The market for green lending is complex and lacks standardization across underwriting, due diligence, and investment decisioning — understandable, as standardization is not easy. There’s also a learning curve for understanding a new set of regulations and new types of loan portfolios. That said, working to standardize as much as possible can speed the deployment of capital into the communities that need it most.
Benefits of standardization include:
- Faster investment decision-making
- Faster capital deployment
- Scalability: Reaching broadly and deeply into communities in need
- Risk mitigation: Tuning the processes, systems, and people to work in concert
- Consistency: Ensuring fair use of funds
- Comparability: Measuring success and impact across programs, lenders, and their portfolios
Instilling best practices now will keep GGRF programs running smoothly and prepare them for the critical moment when the last GGRF dollar is deployed: recapitalization.
At the end of the period of fund deployment, community lenders might choose to recapitalize their funds. Doing so will require inspection of the fund’s management practices from inception (now) to that date. Being diligent from the outset will obviate the arduous task of filling in the gaps down the road.
Developing digital infrastructure to support all programs
An effective digital infrastructure strategy can help address these challenges.
While many recipients and subrecipients already have embedded systems, Banyan’s Harris said that relying on the industry’s common practices of old — a myriad of spreadsheets, individual “trackers,” and the many manual tasks to cut, paste, transfer, and transform simple data — simply to close the next deal or meet the next reporting deadline is inherently limiting.
“If you were to run a fund using common desktop applications alone, execution of the many smaller and medium-sized transactions, especially at the community and local levels, will be limited by the velocity of the team,” he said, because the process is highly manual and the information unstructured. “Formulating a cohesive investment thesis and performing portfolio management using all this unstructured information is time-consuming. Not to mention the burden to aggregate reporting of progress and impact back to the EPA.”
Banyan Infrastructure seeks to take that unstructured information and structure it. This could be as simple as developing an intake process for an applicant, or digitizing the workflows and now manual systems to monitor investments.
The GGRF has the potential to be transformative. Realizing that potential will, according to Harris, require coordination from both lenders and community leaders to deploy an unprecedented amount of funding with haste, transparency, and integrity.
The following interview with Colin Harris, Banyan Infrastructure’s executive director of advisory services, has been edited for clarity and brevity.
As fund managers ready themselves for their first GGRF investments, what are the biggest gaps right now among lenders?
Our current understanding is that GGRF funds will be available for deployment as soon as any given awardee has finalized the terms and conditions of their award. At this time, we believe many are still negotiating those terms, especially for the NCIF and CCIA awards. However, we expect that the first wave will complete their negotiations this month. The EPA must obligate the funds no later than September 30, 2024 in order for them to remain available.
In the meantime, many recipients are addressing known gaps to ready themselves, including building capacity by hiring key personnel, priming their business development and origination activities, and setting up operations for their GGRF strategy.
What is different about green lending compared with other sectors local lenders might be familiar with?
We understand that many CDFIs, especially the expected subrecipients of CCIA awards, are already successful community lenders, including in low-income and disadvantaged communities (a key segment for the use of GGRF funds). However, many will be new to green lending and are just starting to ready pipelines of eligible projects and learn technical aspects of green lending, including how to due diligence green energy equipment, underwrite and manage new types of loan portfolios such as construction loans for community solar and battery storage, and follow new regulations including federal audit and reporting requirements.
Why is standardization so important? And what are some examples?
Standardization is key to the overall success of the GGRF program. Standardizing best practices will promote:
- Consistency, which is necessary to ensure fair use of funds and to speed deployment into communities;
- Transparency, which is necessary for portfolio management and evaluation by auditors; and
- Aggregation, which is necessary for stakeholder reporting and eventual recapitalization by a capital markets’ participant.
Where are areas where Wall Street and community lenders need to work together to make the GGRF a success?
Standardization will prepare GGRF awardees to recapitalize their funds via capital markets in the future. Several important areas include contracts, credit boxes, and key financial measurements used to evaluate portfolios.
When a given portfolio is generally well understood by capital markets professionals — because the underlying loans and structures are similar if not the same across an aggregate portfolio — Wall Street can more easily bring portfolios to capital markets through such recapitalization tools as green bond issuances and back-leverage facilities. Further still, standardizing the measures and tools to determine community impact will help Wall Street reach large institutional investors that seek ESG-related investments, an ever-growing investment segment with strong interest in buying these portfolios.
This is partner content, brought to you by Banyan Infrastructure.
