At GLOBE2014 last week, I participated on a panel for, “Evolution or revolution: innovation in sustainable finance”. For those of you that couldn’t attend, I thought I’d summarize my introductory remarks.
In particular I was drawing on my experience being part of a founding team that is launching a platform for crowd-financing investments in clean energy projects, CoPower.
The problem we are collectively trying to solve–climate change and sustainable development–is massive. The World Economic Forum suggests solutions will require additional investment of approximately $10 trillion (above spending as usual) over the next decades.
Problems that are this big require big solutions. Investments of this scale will have to come from the largest asset managers in the world: the institutional capital managed by pension funds, insurance companies, banks and other large money managers.
Thus, the criteria that we can use to assess whether an ‘evolutionary’ or ‘revolutionary’ investment approach will be useful are:
· Can the approach scale to $100 million of investments and beyond?
· Beyond its own immediate impact, can the approach unlock or catalyze the next $100 million of investments and beyond?
Where are we now?
The clean energy sector is a subset of sustainable finance and it is rolling!
The industry did over $200 billion of projects last year — installing solar on rooftops and putting steel in the ground for wind turbines.
Deutsche Bank (hardly a radical hippy group) projects another 100GW of solar will be installed globally over the next two years, doubling the current total amount. The reason is economics: the cost of clean energy continues to drop with new innovation and economies of scale.
However, to continue reducing the cost for clean energy we’ll need to address the “soft costs” — the cost of financing and other non-hardware costs. The National Renewable Energy Lab reports these soft costs are currently the largest part of total costs for solar installations in the United States.
There are lots of evolutionary solutions we can apply to address the financing questions. These involve adapting financial tools for clean energy that have been developed for other industries such as:
· Securitization of solar assets, like the $54 million residential solar bond from Solar City
· Public market vehicles like Real Estate Investment Trusts (REITs) for clean energy, like Hannon Armstrong
Compared to the approaches I listed above, I think crowdfinancing is a revolutionary instrument. By crowdfinancing, I mean using the Internet to allowing investors to pool their capital and access clean energy project opportunities.
The reason I think this is revolutionary is for three reasons: accessibility, the power of networks, and scale.
i) Access. — There are a paucity of options for investors looking to make impactful clean energy investments. Crowdfinancing lowers the hurdle by implementing smaller minimum investment commitments.
ii) The power of networks. Crowdfinancing allows communities to come together and invest in clean energy projects in their communities. These can be local communities (community solar); membership communities (schools, churches); or clean energy communities across Canada.
iii) Scale. Per my earlier definition of impact, crowdfinancing has demonstrated an incredible ability to scale. This is the key point.
Let’s dive into the point on scale. The most significant type of crowdfinancing today is peer-to-peer lending. Individuals needing a loan go to a platform like Lending Club (the current market leader), submit some information, and are assigned an interest rate. On the other end, individuals select loans they are willing to invest in.
Lending Club’s model of facilitating the flow of money from investors to borrowers in a manner more efficiently than banks has led to origination of over $4 billion of loans.
This $4 billion started largely from retail investors and some high net worth investors, but now is made up substantially from mainstream investors: hedge funds, sovereign wealth funds, and banks like Goldman Sachs.
In this case crowdfinancing has transformed the personal loan sector by both:
· Scaling amounts raised from retail investors to over $100 million
· Unlocking additional investments from mainstream capital sources of $100 million and beyond.
It is my fervent belief that crowdfinancing can do the same for clean energy. It can scale up to attract substantial capital from ‘the crowd’ and also help attract more capital from mainstream investors, drive down financing costs, and contribute to making clean energy the most affordable choice for consumers.