AS AN EQUIPMENT FINANCE PROFESSIONAL, you know your company plays a major role in the U.S. economy by enabling businesses to acquire the equipment they need. What you may not know, however, is that huge opportunities exist in a rapidly developing market called “climate financing,” and that by participating in it, your company can help the planet.
Climate financing is the financing of equipment or projects that reduce carbon emissions or remove carbon from the environment. As the world warms largely because of carbon output, hundreds of nations around the globe are committing to cutting their production and emissions of greenhouse gases. The U.S. is one of them, having rejoined the Paris Climate Agreement in 2021. And the opportunities for equipment finance companies to capitalize on this trend is nothing short of mind-boggling.
Razi Amin, Partner at ELFA-member company ASPEN Capital Solutions LLC, a New York City based climate finance consulting firm, elaborates. “The Glasgow Financial Alliance for Net Zero, or GFANZ, is a global coalition of some 200 leading financial institutions committed to accelerating the decarbonization of the economy. GFANZ estimates that to reach the widely adopted target of net-zero emissions by 2050, we’ll need to invest an estimated $32 trillion globally in equipment that reduces or removes carbon by 2030. That’s less than eight years from now. If we estimate that 60% of that investment will be financed through debt, that’s still nearly $18 trillion of climate-focused equipment to be financed between now and 2030.”
Equipment needed to reduce or remove carbon from the environment ranges from wind turbines and solar energy systems to microgrids, storage facilities for lithium-iron and hydrogen batteries, and electric vehicles, and that’s just the start, since energy-efficiency options are advancing at a lightning pace. Amin provides relatable examples: “Some ELFA members may decide to finance equipment used to produce electric vehicles,” he says. “Others may decide to finance the acquisition and use of those vehicles. The point is that climate financing is needed by both manufacturers and end-users.”
A special session at the 2022 ELFA Annual Convention, “Climate Financing - A Massive Growth Opportunity,” will delve into this topic (see box). Read on for a sneak peek at why this hot market warrants a closer look.
“We believe this market could dwarf some of the other opportunities we’ve identified to advance equipment finance while also addressing the climate issue.”
Tom Meredith, DLL
Ahead of the Curve
Despite its relatively new label and the growing interest in it, climate financing is not entirely new. In 2001, Cisco launched Cisco’s pre-owned equipment business that is now branded as Cisco Refresh. This line of business offers fully remanufactured, certified Cisco products that are returned by customers to Cisco for any reason, including at the end of the lease term. Cisco continues to refine how its products are sourced, produced and packaged to make circularity easier, and Cisco Refresh is part of that commitment. “We are fully committed to all aspects of the circular economy,” says Linda D’Amico, General Manager of Cisco Refresh. “Customers have access to some of the most sustainable, advanced equipment Cisco offers, and once returned to Cisco the equipment will enter the circular economy. Cisco remanufactured products are easier on the customer’s budget, serviced and warrantied like new products, require lower emissions to remanufacture, and in like-new condition because we do not compromise on quality.”
D’Amico says Cisco customers are enthusiastic about the company’s remanufactured products. “Historically, customers were interested in the cost benefits and availability of remanufactured products,” she says. “Today, our customers are quite sophisticated, and they better understand the remanufacturing process, which offers lower emissions output. Purchasing these items can help customers meet their Environmental, Social and Governmental (ESG) goals.” D’Amico notes studies by the Ellen MacArthur Foundation, which say the circular economy can reduce up to 45% of the global greenhouse gas emissions that can’t be resolved by transitioning to renewable energy alone.
DLL, a subsidiary of Netherlands-based Rabobank, has participated in the circular economy since 2012. In the company’s Life-Cycle Asset Management program, both manufacturer and dealer take responsibility for managing of the lifecycle of an asset from production to disposal.
Talk with Tom Meredith, however, and you understand that while DLL has been providing climate financing to sectors such as electric material handling and solar panels for years, the company has recently taken a more focused approach to this market. “We’ve done a lot of analysis and had help from outside consultants to look at opportunities in what’s being called ‘the energy transition sector,’ and we believe this market could dwarf some of the other opportunities we’ve identified to advance equipment finance while also addressing the climate issue,” says Meredith, Chief Commercial Officer at DLL. “There are so many new classes of equipment being introduced to the market to lower emissions or remove carbon, and we want to be a part of it,” he adds. “The electrification of transportation and delivery equipment alone will lead to tremendous opportunity.”
“The markets involved in climate finance are growing more than any other markets right now.”
Jeff Elliott, Huntington Equipment Finance
More About Net Zero
Net Zero is a state in which the greenhouse gases going into the atmosphere are balanced by the removal of these gases out of the atmosphere. According to the International Renewable Energy Agency (IRENA), “the energy transition” is a term used to describe the pathway toward global transformation from fossil-based energy to other energy sources that achieve net-zero carbon emissions. Assessments by IRENA have found that renewable energy and energy-efficiency measures can potentially achieve 90% of the carbon reductions required to meet this target.
“ELFA members need to determine which equipment markets will experience the highest growth and present the least amount of risk.”
Razi Amin, ASPEN Capital Solutions LLC
As governments commit to achieving net-zero, they pressure companies doing business within their boundaries to do the same. So, too, do shareholders and other institutional investors. Jeff Elliott, President of Huntington Equipment Finance, says that in the U.S., the Federal Reserve Bank is now focusing on the amount of climate risk in bank customers’ portfolios. “Equipment finance companies can be the solution for these customers, because we can finance projects that reduce and/or remove carbon,” he says. “This is where the money is going, and the opportunities can’t be overstated,” he adds. “Energy-efficiency projects are part of companies’ ESG goals, and most of the opportunities are equipment-related. The markets involved in climate finance are growing more than any other markets right now.”
Huntington Equipment Finance currently engages in climate finance primarily through solar projects. “We’re now in the process of financing several large and small projects, some on a utility scale, some in commercial and others in municipal, on the ground and on rooftops,” says Elliott. The company recently financed solar panels on 88 schools in New York City, producing cheaper power for the schools and allowing students to learn how solar works. “Teachers take students up to the roof to see the equipment and talk about what it does,” Elliott says.
The company is also involved in a California geothermal project begun in the 1960s. “The project collects heat produced by the earth and runs it through turbines to create electricity,” Elliott explains. “We recently participated in a $2 billion deal to refinance the facilities.”
What to Do Now
How can you participate or increase your company’s involvement in climate finance? “Make it a targeted percentage of your business origination,” advises Elliott. “Study the markets to decide where you want to play, and examine how your company is set up. Until recently, market players have mostly been utilities, banks and larger investment companies. But soon there will be a need to provide climate financing for smaller companies, and there are so many areas. Once you define a niche, seek out and hire personnel who know the market, because the tax situation is complex. Tax incentives are associated with many of these projects, so you’ll need to hire or arrange a third party to help with this.”
If you’re still skeptical, consider these recent developments:
- In July, a privately-backed company known as CapturePoint LLC submitted an application to build a carbon-capture storage facility about 90 miles north of Lafayette, Louisiana. At least three other companies have proposed building carbon-capture storage installations in Louisiana, where the facilities would take emissions from refineries and other industrial facilities and store them underground.
- In August, Australia’s pension fund sold all its holdings in oil and gas companies, worth $133 million, as part of its an effort to achieve a portfolio with net zero carbon emissions by 2030.
- Also in August, DLL announced a partnership with ConnectBike, an Amsterdam-based company specializing in mobility concepts. ConnectBike develops electric bikes for various market segments, focusing on last-mile delivery. Initially focusing on small companies for meal deliveries, the company has since attracted much larger customers that use its carbon-free delivery in exchange for a fixed monthly sum. The company now has international ambitions, and DLL will be there to finance them.
Challenges
None of this is to say climate financing is easy. Amin says much of the technology behind equipment that reduces or removes carbon is relatively new. “ELFA members need to determine which equipment markets will experience the highest growth and present the least amount of risk,” he says. “In addition to credit risk and residual risk is affordability risk, because climate-focused equipment is generally more expensive.”
Amin and Meredith also say many of the manufacturers of this type of equipment are new. “That means traditional risk parameters don’t necessarily fit for this sector,” says Meredith. “Not only are the companies newer and less established than our traditional vendors; even the equipment they’re selling is new and sometimes unproven in the marketplace.”
“All of our customers have fantastic opportunities ahead of them, and we want to be sure we’re there to meet every one of them.”
Linda D’Amico, Cisco Refresh
Another risk is “green-washing,” the falsification or exaggeration of information about climate-focused products or projects. “Financial institutions have to be very careful that companies offering these things are truly offering what they describe,” Meredith says. “I do think as regulators become more focused on this type of activity, it will become more important to really be careful about what and how you’re selling these products” he adds.
The upshot: as with so many lucrative markets, climate financing is challenging but packed with potential. “This is a whole new world for all of us,” summarizes Meredith. “You have to have a very open mind and truly understand the customer’s value proposition and what the vendor is providing. Look at it from the perspective of the end-user to help ensure that you’re picking customers who can weather the storm of vendor or asset changes and still service the debt.”
Elliott says part of due diligence is monitoring the cost of various projects versus the cost of what they’re replacing. “Solar began to be competitively priced with coal about 10 years ago, and each year, it improves,” he says. “Look at pricing curves to see the most opportunity. You can decide to enter a market early, and do deals at the highest price, knowing that later, the market will normalize. Today’s newest markets include hydrogen energy and carbon capture and storage. Each market will have its own revenue stream, and understanding and monitoring them are key to timing your entrance into them. You might decide to enter some markets right away and wait on others to become more bankable.”
D’Amico mentions another challenge: keeping up with demand. “The use cases have come through, where we’ve invested and properly scoped the idea of how our products can continue their life cycle and how our partners in our supply chain subscribe to the same principles to refine and optimize,” she explains. “So our challenge would only be how quickly we can continue to work. All of our customers have fantastic opportunities ahead of them, and we want to be sure we’re there to meet every one of them.”
A Closer Look
For more on this topic, attend the breakout session at the ELFA Annual Convention, “Climate Financing - A Massive Growth Opportunity,” on Tues, Oct. 11 at 2:30pm. The session will examine how equipment finance companies can deploy profitable climate change solutions today and the challenges and opportunities across the equipment finance ecosystem in doing so. See examples of profitable climate financing solutions offered by ELFA members today and discuss the challenges and opportunities presented to deliver such solutions in the future. The panel discussion will conclude by engaging the audience in a brief discussion about the need for and potential interest in the formation of an ELFA Climate Finance Interest Group. Learn more at www.elfaonline.org/ac. In addition, don’t miss the Equipment Leasing & Finance Foundation study, “The ESG Imperative: Understanding the Opportunities for the Equipment Leasing and Finance Industry,” available at www.store.leasefoundation.org.
