From SOCAP21: Financing Climate Justice in the United States
As the climate crisis accelerates, its effects are falling hardest among some of the world’s most vulnerable communities. Addressing these two systemic challenges at once — social and environmental — will require innovative solutions that are adaptable for local needs but also scalable.
It’s an important and difficult era of challenge as well as opportunity, as Doug Sims, Senior Director, Resilient Communities Division, People & Communities Program, Natural Resources Defense Council, said during the SOCAP21 session on Financing Climate Justice in the United States. The session featured Sims and leading financial intermediaries paving the way for climate justice who discussed topics including the importance and potential impact of green banks as well as ways to dramatically increase the scale of capital focused on clean energy and energy efficiency for low- and moderate-income communities.
“You cannot access climate justice from the top down; it must be bottom up,” Sims said. “We need aligned developers to bring projects, and they need a clear understanding of the communities they’re trying to serve.”
Sims said one potential tool to provide the capital and expertise needed to drive commitment at scale and in an appropriate timeline for climate and communities is part of President Biden’s Justice40 Initiative, which would deliver at least 40% of the overall benefits from federal investments in climate and clean energy to disadvantaged communities. As part of that initiative, he highlighted the $20 billion Clean Energy and Sustainability Accelerator, which would create a revolving financing structure for emissions-reducing projects across the country and target 40% of investments —or $8 billion — in disadvantaged communities.
“It would be a huge insertion of capital into the market … and it’s a great mix of public-private partnership,” Sims said, noting that the proposal has bipartisan support because it would create jobs and other opportunities. “One thing we know is that without having the right kind of capital, we won’t be able to deliver climate justice to communities.”
One institution looking to deliver that capital — and act for climate justice — is Inclusive Prosperity Capital, a not-for-profit, private intermediary. CEO Kerry O’Neill said the “boundary-less green bank” works at the intersection of community development, clean energy finance, and climate impact.
“There is demand everywhere, from communities all across the country who have not traditionally been part of the clean energy revolution and transition,” she said. “They want climate solutions, they want resilience, and we see an opportunity to standardize approaches to better serve these communities.”
But these communities have unique needs that create financing challenges, O’Neill said, including getting the right cost of capital at scale — one issue that the accelerator could help resolve.
Inclusiv President/CEO Cathie Mahon said it has a 40-year history of focusing on financial inclusion and equity through its network of community development credit unions, which often serve lower-income communities that have historically lacked access to capital. She said Inclusiv has seen growing interest in the design of resiliency solutions as these communities are increasingly affected by climate events.
“We are really leaning into (asking) how do we use our capital, as a community institution, to drive solutions around clean energy, around climate action,” she said. “This is a critical defining set of challenges for our communities. And it’s something that our credit unions really want to understand better and be able to use their capital to address the challenges … when you’re thinking about that intersection between racial equity, finance inclusion, and climate action.”
At Sunwealth Power Inc., CFO Omar Blayton said the mission-driven, for-profit entity has a similar goal but takes a different approach to catalyze investments in areas that have traditionally been overlooked by large institutions. With a focus on the solar market, Sunwealth works with small businesses, not-for-profits, and communities with low- to moderate-income residents who may not have the credit rating to qualify for more traditional financing
“To really drive investment in that area, we have to kind of upend the traditional proxies and things that are used in order to deploy large capital from the major banks,” Blayton said. “We have done about 500 projects so far … partnering with local developers in order to kind of proliferate, democratize the benefits that solar can provide now at the community level.”
Watch or Read Financing Climate Justice
Because of some audio difficulties with a portion of the session, a transcript is also provided below.
Doug Sims, Senior Director, Resilient Communities Division, People & Communities Program, Natural Resources Defense Council
Omar Blayton, CFO, Sunwealth Power Inc.
Kerry O’Neill, CEO, Inclusive Prosperity Capital
Cathie Mahon, President/CEO, Inclusiv
Doug Sims: Okay, good morning, everyone. My name is Doug Sims, I’m with Natural Resources Defense Council and I’m really happy to be here this morning with an exciting panel about Climate Justice.
So what we’re going to do is we’re going to be talking to three illustrious leaders which I’ll introduce in a moment. We’ll run through a quick discussion that I’ll give about the overall topic and the updates on the federal, what’s called the Clean Energy Accelerator Program. Then we’ll have questions from each of our panelists, to each of our panelists. And at the end we’ll have questions from the audience. So please feel free to use the chat for any questions or the Q or comments in the Q&A. I’ll be monitoring both of them.
So let’s just get started. So thanks for coming everybody and thanks to the SOCAP team for putting this panel together. So our general topic is, how do we finance climate justice in this really important and difficult era of opportunity and also crisis? So we have here is three illustrious guests. We have Kerry O’Neill who is CEO of Inclusive Prosperity Capital, and also was recently named the Environmental Financial Advisory Board of USCPA. Bravo Kerry. We have Cathie Mahon, the CEO and President of Inclusiv, a network of CDFI Credit Unions. Well, CDCUs, excuse me. And also itself a CDFI. And we have Omar Blayton who’s CFO at Sunwealth. The bios of the speakers are actually, are in the chat so if you want to get more details, please go there. I won’t go into any of their illustrious backgrounds, but you can get them there.
So general topic, intermediaries of various kinds are key in delivering on climate justice. And climate justice and intermediaries come in different formats. They can be public like green banks or development banks. They can be nonprofits like Inclusive Prosperity Capital, nonprofit, private nonprofit. They can be cooperatives, like credit unions. They can be private for-profit companies like Sunwealth. All these are critical for moving the commitments of the finance to realities on the ground in communities. All seek to scale through creating innovative and tailored products and platforms and developing project pipelines and critically, all need a supply of the right kind of capital. Need to blend different kinds of capital, concessional, non-concessional capital. And more importantly need credibility on the ground in communities. You cannot access climate justice from top-down, must be bottom-up. Need aligned developers to bring projects. Need a clear understanding of what communities, of the communities they’re trying to serve.
As background for this discussion, there are two key things that are happening right now. One is the Justice40 initiative, which is a whole government approach that the Biden Administration have launched to work with states and communities to make good on Biden’s promise to deliver at least 40% of the overall benefits through federal investments in clean energy and climate to disadvantaged communities. This is a critical commitment, but again, it’s a commitment, it’s not implementation. So one key possible tool to provide the kind of capital and expertise that will be needed to really drive this commitment at scale and in a timeframe that is consistent with the need for climate and communities. It is something that’s called Clean Energy and Sustainability Accelerator. This is a proposal that I’ve been involved with for a very long time with NRDC, for essentially a federal green bank which would provide long term, low-cost capital, both to these green banks, which are specialized intermediaries designed for climate and clean energy, but also the community of community development, those institutions, MDIs, and other mission-driven lenders and investors.
This is a really exciting proposal. It’s actually, I just checked it over last night, it’s actually right now in reconciliation, still at the $20 billion level. And of that $20 billion, 40% or $8 billion is required to go to disadvantaged communities. So it would be a huge insertion of capital into the market. What we’re hearing that also is that it’s not a program that we expect senators who are driving their feet on climate to resist, because it actually creates a lot of jobs and opportunities all around the country and it’s a great mix of public-private partnership. So we think that senators of all kinds will be behind this proposal and it should survive. This process should be successful. Just a couple of details on it, the House has passed this legislation three times in the past 16 months. The general concept is that the federal government will deposit funds in an independent nonprofit called the accelerator.
The president endorsed the concept himself early in his administration at a $27 billion level, it’s been scaled back a little bit over the past few months with the reconciliation, there have been some changes to the program through reconciliation. So the program, instead of being, creating a new nonprofit, it must be created through existing programs. So existing programs that are being used under the current legislation is called the Greenhouse Gas Reduction Fund. And that fund would allow the EPA to make grants, to fund nonprofits, to fulfill this role. There’s also a separate $7 billion fund for Alquimi solar, separate from this other program. What’s really exciting about this program is that this money can flow long-term, low-cost capital, both to the network of existing green banks around the country, which is growing, and also directly to CDFIs and other community lenders. So very exciting.
This is an important topic as background for this discussion, because one thing we know is that without having the right kind of capital we won’t be able to deliver climate justice to communities. So I’m going to, I should say one more thing about this. It’s really a critical element of President Biden’s Justice40 commitment. It’s hard to see how he’s going to be able to get this through without something like this that really catalyzes the market in a profound and comprehensive way. It’s also a big part of delivering on Paris Agreement commitments.
I’m going to turn to the intermediaries now for some Q&A about their different perspectives on the market and the accelerator opportunity. So I’m going to start with a question for all of you. So we’ll go through what, why and how in our question. So this is the first, this is the what question. So for each of you, private nonprofit green bank like Kerry who has also worked at Connecticut Green Bank, it’s a credit union and a private impact-focused solar development in a financing firm. What role do you seek to play in the market to advance climate and equity? What opportunities do you see? What challenges do you face? Let’s start with Kerry on this first question.
Kerry O’Neill: Great. Thanks Doug. And thanks SOCAP, great to be here in conversation on this great topic. So the role that Inclusive Prosperity Capital plays, as Doug said, we’re a not-for-profit, private intermediary. Think of us as a boundary-less green bank. We actually spun out of the Connecticut Green Bank and we work at the intersection of community development and clean energy finance and climate impact. And we work through partners on the ground who need the kind of financing solutions that we can bring to the table that are made possible by mission-aligned investors who are investing on us and want to drive capital into these communities.
We really are looking to take some of the innovations we did at the Connecticut Green Bank and learning from others and bring scaled solutions into the communities that need it most as you’ve been talking about, Doug. Those that have traditionally been left behind and not a focus of clean energy and clean energy finance. So in terms of opportunities, as we spun of Connecticut and our roots in New England, we have just been struck by how there is demand everywhere from communities all across the country who have not traditionally been part of the clean energy revolution and transition. They want climate solutions, they want resilience, and we see an opportunity to standardized approaches to better serve these communities. Which kind of speaks to the challenges.
These are communities that before the pandemic were stretched before the recent economic upheaval and Cathie can speak so eloquently to this, I’ll let you speak to it even more. But we need to recognize that it’s challenging to serve these communities. They have a lot of needs, not just climate needs. And so how do we help them and bring these solutions to bear? And then from our intermediary perspective, another challenge that we see is getting the right cost of capital at scale so that the accelerator would be amazing if it gets passed. That would be transformative, we think. And another challenge for us is just the investment in product development that needs to happen to address these markets
Cathie Mahon: Great. Thanks. Hi. So Inclusiv has a 40-plus year history focusing on financial inclusion and equity through our network of community development credit unions. And just real quick, community development credit units are financial cooperatives, and they’re community development because they have a primary mission of community development and are generally organized sort of by, for and of low-income people and communities that have historically lacked access to capital. So we kind of come at it from kind of a slightly different vantage point as from IPC, but met in the middle, so to speak. Because in recent years, as our members have been increasingly experiencing in their communities the impacts, the negative impacts of climate events, there’s been a real interest, a real growing interest in sort of designing initially sort of resiliency solutions and now kind of really leaning into how do we use our capital as a community and a community institution to it be driving solutions around clean energy, around climate action.
And so, in that way we’ve sort of come from the equity space and move toward, this is a critical defining set of challenges for our communities. And it’s something that our credit unions really want to understand better and be able to use their capital to address the challenges. And Kerry touches on them so well, there are a lot of challenges and opportunities when you’re thinking about that intersection between racial equity, between finance inclusion, and climate action. You want to think about, when you’re thinking about the types of products that you want to design, you really need to think about kind of the existing way in which borrowers in those communities can manage debt and manage credit, right? So you have to think about the structuring of the terms around clean energy, financing tools really need to be adapt to what the needs of the community is and the needs of the members are the needs of the residents.
There’s a lot of really trying to figure out with the community, with the membership, with the target market, how do we think about structuring these loan products so that people can, for example, be able to purchase electric vehicles? So that people can be able to look at doing energy efficiency up retrofits on their home homes. They can be thinking about solar on their homes. They can be thinking about different ways that they could be investing in energy efficiency and for their homes, their businesses, and in their communities. And a lot of that is really thinking about how you structure the terms. So I know we’ll get into a lot of that, but it’s going to be longer terms. It’s going to be a heavy focus on energy burden and understanding the current energy burden and helping people really think about kind of the way in which this could be a solution for their own pocketbook, as well as for, as well as sort of good for the community and good for the globe.
There’s a lot of, sort of a culture shift that’s starting to happen that needs to be accelerated around … It’s very easy to see solar or energy efficiency, clean energy, green products as kind of a luxury item, a boutique product, so to speak. So even our members who have, early adopters of clean and green products, they found that it was their higher-income members that were taking advantage of that. And so I think really matching it up to what the solutions are for individuals. And that’s where CDFIs really come in, because we kind of know how to tweak and manage and revamp products to be as useful as possible for the population. And I’ll just say, it’s never going to be one product because everybody comes in with different sets of needs. And so you really need to be thinking in terms of suites of products, a whole range of interventions that a household, a business, or a local organization might be needing to use. So I’ll turn it back to you, Doug.
Omar Blayton: Sunwealth is purely a for-profit entity, but a mission-driven one. And so very similar to Kerry and Cathie, I think what we look to do is catalyze investments in areas that have been traditionally overlooked by large institutions in capital. And the way that we do that, however, is we’re really trying to shine a light on the perceived risk in these areas and kind of bring into your proper alignment, kind of the risk-adjusted returns that we’re really talking about. So we focus on solar market and we focus on the small commercial scale. So we put products on small businesses, not for profits, as well as in communities with low-, moderate-income residents.
All these places have plenty of credit-worthy customers, but they’re just not credit rated. And so in order to really drive investment in that area, we have to kind of upend the traditional proxies and things that are used in order to deploy large capital from the major banks. And so we have done about 500 projects so far to date almost, and still kind of fundamentally underwriting at a local level, partnering with local developers in order to kind of proliferate, democratize the benefits that solar can provide now at the community level.
Doug Sims: That’s really exciting. Great first round of who you are and what you’re doing. Let’s pivot over to … I think a lot of folks here are looking at both financial returns and social and environmental returns. So let’s talk about, what kind of returns you’re generating in terms of social and environmental returns? And why are these communities the right place for mission-driven investors to focus on, to invest through your platforms? What are the impacts you’re tracking or seeking to impact with your work that would be to investors trying to generate impact and returns, potential returns? Let’s start with Omar this time.
Omar Blayton: Sure. So on the impact level, obviously we track carbon reduction as well as job years and job creation. We want to make sure that we are creating local jobs through our projects. And then of course, savings to our customers. So the economic benefits and how they’re being spread to customers and then as well as to the local developers. On the investment side, we’re tracking the rate of return, we’re proud of the fact that we feel we don’t necessarily need concessionary capital, but obviously market rate capital given the proper risk assessment, not the perceived market rate capital. And as well as our payments. So we’ve been around since 2014, we’ve had zero defaults on our payments, have met all of our targeted returns to all of our investors. And we’re proving out a track record. Like I said before, we have a number of projects at this point and a number of fund vantages that are coming to maturity. So we hope to kind of keep proving this out to go forward. But that’s what we present.
Doug Sims: Thanks, Omar. Cathie, what your perspective?
Cathie Mahon: Yeah, I would say, I love how all this complements each other. In terms of impacts, I think our starting point is really around vulnerability and around energy burden. And when our movement kind of got started, shifting into climate action as a result of natural disasters … And we have a large membership segment from Puerto Rico and that really brought Inclusiv into this space. Starting immediately following Hurricane Maria when the grid in Puerto Rico went down, there was an immediate recognition that there needed to be rebuilding with resiliency and that included solar and that included solar on our branches, right? So the network of credit unions needed to have, they need to be up and running. Within 48 hours of Hurricane Maria hitting, every single cooperate on the island of Puerto Rico was up and running, they were handing out cash to keep people basically, being able to meet basic needs. And they were doing that without power.
And now there was an immediate pivot to say, we need to at least have solar operation, solar capabilities so that we can be managing our branch operations and serving our community as we go through these kinds of events. And then it kind of grew from there that we want to make sure that our members are rebuilding their homes and their structures with as energy efficiently as possible and with solar capability, right? And same is true with our members now in Southeast Louisiana and along the Gulf Coast. Right? Because as those areas are increasingly targeted, there’s a recognition that we have to be kind of focusing in on that vulnerability focus. That’s our starting point.
And then really, and tracking that. Are we getting, are we doing better during some of these hardest climate events in being able to make sure that service remains, that people are able to get access to their cash and able to get access to small loans and be able to keep their basic needs of their households going? And then from there, how do we help people to really think about reducing, looking at, understanding, analyzing some of that energy burden that they’re carrying and really understanding that as part of a broader conversation around financial counsel and coaching in which we really help them think about this is also a budget impact? So how do we kind of track the ability for people to be able to be better off in their household budgets as a result? So that’s sort of the space that we’re moving in, in the climate impact, and then hoping that the additional impact benefits could be tracked as we go.
And then on financial returns, these are actually … As CDFIs who are always taking risk and always sort of pushing the envelope and trying to dig deeper into our markets and dig deeper in our communities to make sure we’re reaching people who need it. These are actually really good, these are good loans. And I know Kerry can talk a lot more about that in terms of the data that she’s been able to amass, but these are solid. And these are loans that repay very, very well. These are loans in which people actually can benefit from syncing up the energy reduction and be able to sync up their repayments to that. So not only are they good returns for the financial institution, but they’re really good returns on the household budget.
Kerry O’Neill: Yeah. So I’ll just say yes to all of what Omar and Cathie are saying. Coming out of the Connecticut Green Bank and at IPC, we are data hounds so we do a tremendous amount of tracking. But maybe stepping back into that broader, like the why of what we’re tracking. These are communities that are having outsized, disparate impacts from climate change. EPA in September, put out a really, really terrific report that I’ll drop a link into the chat in a moment about on the outsize impacts … Climate change will impact everybody, but it’s going to have greater impact on a set of communities that are low income, that are frontline that have had, you know, suffered through environmental degradation due to where we’re placing our power systems and what have you.
And so a part of the tracking too is thinking about where are the ancillary benefits around health outcomes, like asthma because of indoor and outdoor air quality issues? And where, of course jobs is a big one and the economic development and the energy burden reduction, the ability to change the dynamic of your pocketbook or your church’s pocketbook, or your social services pocketbook, or your municipalities pocketbook, what have you. That’s a piece of it too. But I think we all have an opportunity to think about the why and the where. So where we’re focused and why we’re focused, are connected. And the financial system has a history, a pretty rotten history, right? Of redlining and racial disparities. And so, as we’re engaged in the financing realm, the opportunity to create solutions that can become part of changing that dynamic on the restorative and the rapid of nature of things is another thing that we can track through lots and lots of different ways that Omar and Cathie talked about.
Doug Sims: Thanks Cathie. Thanks Omar. Thanks Kerry. Great understanding of the impacts. I’m going to move to some specific questions now. I’m going to start with Cathie, again, since we’re thinking about the accelerator, talking to impact investors, we know we need to have a land and cost of capital that works for the borrower, for the member in your case, what, when you think about the capital stack in this space, what is the ideal capital stack from your perspective for these kinds of loans?
Cathie Mahon: Yeah, and I think it’s a great question for a panel at an investor conference because I think one of the most important things for impact investors to be thinking about is, you kind of are always sort of trying to figure out your own risk return, kind of calculations. And one of the things I think when you see the growth of CDFI lending in the climate justice space, it gives you a lot of options around kind of the capital stack and where you want to be with your own investing and lending in that space. So as community development credit unions, so we are a network of community development credit unions. We’re also inclusive as a CDFI intermediary. So a lot of times what we’ll do is we’ll sort of build a capital stack with a number of different diverse investors who have different levels of risk tolerance and different needs for returns.
And one of the things that the sort of equity capital, which is certainly something we will hope to see from the accelerator, the ability of the accelerator to deliver just sort of that basic equity investment into on-the-ground community lenders is going to be really critical. That equity comes in and in the case of community development depository institutions like community development banks and credit unions, that equity comes in. And from that, you can sort of, the institutions can take that what we tend to call in the credit union space, sort of that primary capital. You can take that and leverage some secondary capital, which is usually a subordinated loan. It’s a little bit higher risk loan with a bit, with a significant return and sort of, you can then use that to sort of bring in, you have got a nice primary capital cushion to be in first position before a secondary capital investor who’s willing to take some risk if there are significant losses and is going to get a return to justify that.
And then as depository institutions with that kind of combination of primary and secondary capital, you can go out and raise deposits, whether it’s from your community and your membership, or whether it’s in the investor space with non-member deposits. You can raise up to $10 of deposits for every $1 you’re bringing in, in primary or secondary capital. And so we think a lot about kind of what that appropriate capital stack is. Deposits are, for somebody who’s new to the space and they’re just testing the waters and they’re not quite sure whether this is the right space, a non-member deposit is a perfect instrument because it’s up to $250,000, it’s fully insured by the federal government. Just like FDIC insurance, for credit union it’s called National Credit Union Share Insurance Fund, but it’s federally insured funds.
So you can kind of figure out where you’re going to be. We actually at Inclusiv manage a deposit platform, a social impact deposit platform. So we can work with sort of large investors that come in with say a $10 million deposit where they want to break it up into deposits. And we can, through our platform, have that sort of shaved down to about 40 $250,000 deposits each. So it’s all completely insured going out to multiple different institutions. So that’s kind of an easy way for investors to get started. It’s deposits though, so just look at what your bank’s return is, it’s pretty low. You’re not going to get a significant return on that, but you know that money is safe and it comes from an endowment or an area through something that you’re not able to risk, that’s something you can get started with. And then you kind of see how those kind of overall that kind of reporting works and how that lending goes. And you can get a little bit more flavor for kind of going sort of deeper down into the capital stack.
So this combination of, like for us, the beauty of an accelerator is it’s that kind of initial catalyzing seed investment. There’s other ways to do it too, we have a number of investors who’ve done things like credit enhancements that bring in other type of slightly risk funds that enable us to continue to build up that capital stack. But there’s a lot of great opportunities to be making investments in this area that are really going to reverberate and leveraged tremendous amount of capital on the ground.
Doug Sims: Thank you Cathie. So Omar, this is a bit of a trick question because we had a talk before. So you mentioned a little bit earlier about how Sunwealth has focused on perceived risk. So how does Sunwealth generate returns by investing in the riskiest part of the commercial solar market?
Omar Blayton: Yeah, thanks Doug. So I mean to start, it’s our general approach to the investment, while kind of impact is core to our DNA. We’re not just B Corp certified, we’re B Corp by the Charter and that’s with the state of Delaware, our Corporate Charter, is a B Corp. The capital we seek isn’t necessarily always mission-aligned. We have a lot of mission-aligned investors and we love them, they’re fantastic. But some aren’t. And so them being the lowest common denominators, how do we appeal to them? And there, we have to prove that this is a market where there’s almost an arbitrage opportunity where there’s a perceived risk but that risk is way lower than what you’re actually taking on. And so the way we do that versus is through fundamental underwriting where a lot of institutions, because they have to put so much capital work at one time and we’re dealing with small localized projects, they’re going to use proxies, well proxies aren’t necessarily the best verses. Using a proxy that you use for certain types of projects aren’t going to apply for the projects in a market that you hadn’t tapped before.
And so you really have to kind of be local and very granular about how you look at how these different entities and people fit into these communities. And whether their assessed risk is the same of what the perceived risk is, which again, it usually is not. The second part is using historical data. Like I said, we have almost 500 projects under now, which have been operational from between six months to the last six years or so. And we’re able to really tease out, would’ve been the drivers between any kind of hiccups. We haven’t had any defaults, but delays in payment or things like that. And that allows us to be creative in our structuring and innovative and kind of looking at not just the person paying for the power, but what state and centers are involved. Or what ways you can get site control in order to come up with creative default options in the case of if there is a default.
And so the recovery, you might have a default where the recovery is going to be three quarters or 80%, and that’s going to be state-backed in some cases. So that’s another way to look at it. And then finally, and this is the most important piece, is we have flexible and opportunistic capital. Like I said, it’s not always mission-aligned, but it always has to be flexible. You can’t put these traditional constraints, particularly around closing costs or you can’t apply the same kind of underwriting criteria to a small commercial deal that’s 50, 150 kilowatts that you do to a yard utility-scale deal, which is like 10 megawatts where you might have 85 advisors looking at a deal. And sure it’s only going to be, it might be $100,000, but on a $10 million, $20 million deal, so what, on a $150,000 deal, it doesn’t happen.
So you have to have capital that’s willing to kind of look at what we’ve done so far and what we have proven out and say, hey, and think about it and just really kind of be contemplative about, what risk are we really taking on? And once we were able to kind of that, we’re able to convince a lot of people that this is a good deal. And especially, once they’ve invested, they tend to reinvest, because again, we keep making our payments on time. So they’re happy about that. So that’s. Now the trick question part is it’s not the riskiest part of the stack, but how do we show that it’s not the riskiest and that’s how we do it.
Doug Sims: Thanks for that detail Omar, that’s great. So we’re going to do one more for Kerry and then we’re going to sort of mix in some audience questions and other questions in the last 10 minutes. So Kerry, I know you were at the green bank and now you’re at IPC, and I just want to explore, you’ve seen sort of the life cycle of some of these companies that have been involved in this space for a while. Can you talk about how in this space, as one of these mission-driven lenders, green banks, you’ve seen companies scale business models, serving these communities and demonstrating the success at different stages of their development?
Kerry O’Neill: Yeah. Yeah. A softball, you let me talk about my favorite success story which is our partnership in Connecticut with PosiGen which is, it’s a for-profit, but mission-oriented company that offers a lease for solar, as well as an energy efficiency package that’s targeted at low to moderate-income homeowners. And the company got started as part of the post-Katrina rebuild down in Louisiana. And as we were looking around in Connecticut, figuring out how do we get more solar into low-income communities? We had done a lot of analysis. We had a lot of low-income homeowners in Connecticut, which was a surprise to us. We didn’t understand that until we looked at the data. And so we looked to attract in PosiGen into the state to really allow us to focus in on this market that was so dramatically underserved.
So the rate of solar penetration back in 2014 in the low- and modern-income census tracks was like 10 times lower than in affluent census tracks. And in Connecticut, income and race correlate so that also meant communities of color, like one to one overlap. And then we brought in PosiGen, we attracted them in through an open RFP process where we said, tell us what you need, all you solar financiers out there focused in residential. And PosiGen came in with a proposal that said, hey, we want to co-grant with you because your credibility as a quasi-public in these communities, government agencies is really important because you know what? This “go solar for no money down” sounds too good to be true and that’s a huge barrier. So that trust is a big issue. And by the way, to come into a new market and to focus on this market, as Omar talked about, the perceived risk is a huge issue. So their capital providers, for them to scale up was going to be inordinately expensive for them to bring in the capital, to come into Connecticut.
So Connecticut Green Bank stepped into the position of being the subordinate debt piece in a broader capital stack that attracted other Connecticut and other outside Connecticut investors to create the initial fund that allowed PosiGen to come into the market. And then we co-branded together municipal-based campaigns. They opened their offices in Bridgeport, a very poor city, one of the poorest cities in America. And to this day, I think Bridgeport across Connecticut probably has that largest number, like sheer number of solar installs in low-income census tracks, which is just phenomenal. And so we did community-based campaigns together, leveraging youth sports leagues and schools and houses of worship and city council members. And all of the things that we know work when you need a trusted messenger. And they hired from within the community, which was also phenomenal. So bringing jobs in.
And we were able to turn around that dynamic in, I think it took us three years to change the dynamic in terms of the rate of penetration. So Connecticut is now a beyond parity state in terms of having on a pro-rata basis, more solar in low-income communities of color than in white and affluent communities on a pro-rata basis. That doesn’t solve all the problems, that’s not helping home renters, but in that little market, it showed how you can use blended capital stack and intermediary strategies to partner with private companies whose business model is to go where nobody else goes. Like Omar’s business model is to go where nobody else goes.
The next round of this is BlocPower. BlocPower’s doing this with heat pumps and other clean energy in the urban core. Similarly, mispriced risk from the capital provider side of things. And IPC was the first credit provider to BlocPower, they stood up a heat pump leasing product. And behind that came other capital that said, oh, wait, OK, now I see there’s an opportunity here. So intermediaries like all of us pay a really critical role to help these companies who are trying to be part of the solution, get going.
Doug Sims: Thank you Kerry. So I think it looks like the questions in the chat have been addressed. So I’m going to, there’s a question about grants, I think Kerry, you addressed that. There’s a question about preserving and creating new affordable housing. Can someone address the affordable housing question?
Kerry O’Neill: Yeah. I did briefly in the chat. So, totally agree that affordable housing and climate justice are … That this goes to the redlining issue. This goes to where the disparate impacts are. I will just say though, it is complex. The capital stacks are complex. The variety of building types is complex. So the solutions you need for affordable housing for two to four units and five to nine units is very different than your 50-plus unit buildings. And so, and the capital stacks are different and the owner profiles and their own is different.
And so it’s a complex space, one in which we all have so much work to do. It is an opportunity to do a lot more work on the standardization and productization side of things. And that somebody asks where philanthropy can help? Philanthropy helping to fund the product development, because we’re all small organizations, this is hard work to do the product development. But also that early catalytic capital to test out strategies where … Because we’re not always going to get it right the first time. We know that from Connecticut Green Bank, I launched in my team 11 products in five years and we had three bombs, and we learned from that, and then the next time around you do better.
Doug Sims: That’s super helpful. So we got about, I think three minutes left, I think that is correct. So let’s do, if you can squeeze in a lightning round. Well, I’m going to do, I think we kind of covered some of the questions about hurdle rate and proxy. So let’s go to the question about technology. How important are digital platforms or fintech generally to your businesses, financial inclusion, and climate justice? And what opportunities does digitization of decision-making in finance hold for investors? Let’s do a lightning round, keep your comments to about 45 seconds. Let’s start with Cathie.
Cathie Mahon: OK. Just overarching, scaling requires sort of a movement or technology and platforms and digitization just across the board in all community development lending. We have a really critical moment happening right now where the more that institutions are automating, if we don’t have automated solutions and algorithms that understand a low-income consumer and marketplace, we’re going to be shifting our institutions away from our market. So it’s critical that that investment is not in sort of off-the-shelf solutions. It requires additional investment because we have to be building it from the algorithms and designing our own algorithms based on the history of community development lending. So real quick, we’re super excited about a partnership we’re doing with IPC in expanding their Smart E-Loan Program, which is a platform that can enable us to build in products that are tried and true in the community development landscape and be able to have some of those automating procedures, processes at least enable us to standardize for the right marketplace.
Doug Sims: Thanks, Cathie. Omar, give us a quick take.
Omar Blayton: Yeah, no, I got to agree with Cathie. So there are two parts of it. So it’s one from a marketing outreach, it can be fantastic, but then you have to make sure that the people you’re trying to reach have adequate access to that technology or bandwidth to even see it. So that’s one piece. And the other end is using algorithms to enhance and speed up your time around underwriting or products. But like any model, it’s garbage in, garbage out. So if you make the wrong assumptions or you’re using insufficient data points and outside of the communities that you’re focusing on, your answers you’re going to get, the recommendations are not going to be useful. So I think those are, yeah, that’s two things you got to keep in mind. But on the surface, obviously technology, you’re going to always need to improve the technology and kind of think of ways to apply that.
Kerry O’Neill: Yeah. And I would just, to build on that, say really quickly that these communities that we’re serving, the transaction size tends to be lower and transaction costs are higher. And so as opposed to being focused on automating the underwriting, we’re very focused on streamlining the entire process of technology-enabled digitization of the document collection, the underwriting package, and what have you, so that we can be as efficient as possible and scale because these transaction sizes are smaller. So there’s a huge role and we’ve invested a lot in that.
Doug Sims: Well, I want to thank the panelists, this has been a really great session, got locked on at 45 minutes. Thanks for joining and reach out if you want to have any discussions either for the panelists or myself. Thanks so much.