A shift in attitudes has amplified since the COVID crisis: Canadians are demanding more from corporations to address social and environmental crises. As we seek to “build back better,” even capital markets have a role to play by investing in a fair, responsible recovery. With our relatively (very) small fund, TAF has three decades of experience investing in low-carbon projects, including energy efficiency retrofits and efficient new construction. It’s a viable and desirable way for Ontario to generate tens of thousands of jobs and risk-adjusted returns for investors, not to mention the fastest and cheapest way to reduce the carbon pollution necessary to meet local, provincial and national climate targets.
By all accounts there is plenty of capital available, and many lenders are looking for impact along with profit. So, why isn’t the capital flowing? At a high level, there is no established, organized and at-scale energy efficiency “market.” It is a relatively nascent sector that needs strategic development, as outlined in our report Money on the table: Why investors are missing out of the energy efficiency market.
First, energy efficiency is still unfamiliar to investors. When you don’t understand the technologies, what differentiates a good, high-performing project, or who needs to be involved, it’s challenging to properly assess risk and structure financing. Secondly, compared to major infrastructure projects, efficiency retrofits and new green builds are relatively small, which requires project originators and aggregators to assemble enough volume to interest big investors. These are few and far between, which is why TAF incubated the private enterprise Efficiency Capital and launched a campaign to support a one-stop shop for retrofit projects. To take advantage of this potential multi-billion-dollar opportunity and get enough retrofit projects in motion, a big piece of the puzzle is improving capacity in the financial services sector.
For instance, those who are providing capital, including private lenders, utilities, governments, and building owners, need a sophisticated understanding of the business case for efficiency to optimize and take advantage of opportunities. We also need the financial services sector to develop and offer specialized financial products relevant to retrofits and efficient new construction: think cookie-cutter transactions like mortgages and car leases that make it easy to create volume and include performance de-risking. This includes standardizing the business case evaluation of many small, disaggregated projects, which can have a range of short, medium and long payback periods.
But let’s not forget training for the low-carbon buildings workforce, including; filling gaps in the trades (such as airtightness expertise and heat pump installation); construction planning, implementation, and management; building maintenance and re-commissioning; and others. These workers are badly needed in order to put investors’ funds to work at scale, building and renovating the low-carbon homes and businesses of the future.
As investors, both the Ontario and federal governments can help build capacity in this sector and reduce these barriers to carbon reduction and employment. First, they can send a strong market signal by flowing significant stimulus funds into retrofit projects. But how they invest is crucial: public capital must intentionally leverage additional investment rather than crowding out private investors. They must be intentional about maximizing public benefits and be tied to achieving our 2030 climate targets and beyond. They must prioritize healthy, affordable housing, equity, diversity, and communities hardest hit by the pandemic – racialized people and women. And to build and sustain investor confidence in the efficiency market, governments must set the tone through consistent, robust policies for energy (electricity and gas) conservation.
This is one of the reasons TAF is supporting the Workforce 2030 Coalition to advocate for fast-tracking the building workforce. It is in investors’ interest to advocate for governments to invest in developing the low-carbon buildings workforce to grow the efficiency market and deploy capital to earn high-impact ROIs. Resilient low-carbon recovery is a meta-trend — from the European Union commitment to Joe Biden’s proposed climate plan for the US — and energy efficiency is at the top of every plan. When governments put in place policies to drive down energy waste, invest in building the skilled workforce, and help de-risk retrofits and net-zero construction, investors can also do their part. Then, we’ll have lots of good work for people to do.
This article is also posted as part of the Workforce 2030 blog series.