Financing an Eco-Friendly Future

Hannon Armstrong might just save the planet, by harnessing the power of the public markets

    by Scott Alexander

In December 2015, 196 countries came together to sign the Paris Accord, a landmark agreement aimed at cutting greenhouse gas emissions in an effort to keep the ongoing rise in global temperature to 2 degrees Celsius. While eco-warriors around the world cheered, CEOs groaned, envisioning what costly new regulations could do to their bottom lines.

But where many CEOs might see gloom, Jeff Eckel, President and CEO of Hannon Armstrong Sustainable Infrastructure Capital Inc. (NYSE: HASI), sees clear skies. “The rapid adoption of clean energy technology in the face of climate change is every bit as much of a finance problem as it is a technology problem,” he says, noting that the energy markets represent “a very big addressable market that we are able to sell into.”

So if Hannon Armstrong isn’t selling green tech, what is it selling? Money, of course.

“Hannon Armstrong is built to provide the kind of capital necessary for the rapid uptake of clean energy technology,” Eckel explains. Basically, it provides the up-front capital that makes green upgrades possible. “Every asset we finance is either neutral or negative on greenhouse gas emissions,” he notes.

Eckel says that while green energy advocates often tout the pay-for-itself magic of efficiency improvements, the old adage about the cost of lunch applies here. But while there may be no such thing as a free lunch, there is a lunch you can buy on credit and pay back once your crops come in. The trickle of financial windfalls thrown off by green improvements map to the financing model to an almost uncanny degree.

Crucially, Hannon Armstrong is a REIT, a structure that gives it the flexibility that larger financial institutions don’t have, especially in the wake of the changes in the markets after 2008. “As a REIT, we have the ability to do transactions that traditional institutions don’t find attractive,” Eckel explains, referring to the relatively small per transaction size that his company typically deals in. “Most banks want fees the size of our average transaction size.”

“Thus,” he continues, “we exist at the confluence of two very large trends: the decarbonization of the energy sector and the re-regulation of the financial sector.” The addressable market, in other words, is massive, but it’s chopped up into relatively small transactions.

As a veteran of the green markets (the company was founded in 1981), Hannon Armstrong has seen its share of booms, busts and false starts in the sector. But now that technology is at a powerful crossover point, with the yields on solar, wind and other renewables improving, and the opportunities for energy efficiency are growing every day. Beyond simply using more renewable sources like wind and solar, relatively unflashy technologies such as power-sipping LEDs for lighting and variable-speed motors for HVAC systems are having a massive impact. “Energy efficiency is our biggest market,” he says, “but it is the least well understood.”

The key to understanding why energy efficiency is so powerful lies in a single fact, Eckel says: “Efficiency operates 100 percent of the time, whereas solar and wind only operate when the sun shines or the wind blows,” says Eckel. “It’s estimated that 40 percent of greenhouse gases come from the built environment, so it’s a very impactful place to invest. That’s not to say we’re not big fans of solar and wind, but if we’re being rigorous about this, efficiency doesn’t get as much attention as it deserves.”

"We have the ability to do transactions that traditional institutions don’t find attractive. Most banks want fees the size of our average transaction."

Three years ago, the company felt that the culture was maturing at least as fast as the technology when it came to eco-renovations. Without prior knowledge of the Paris climate accord, it made the decision to go public on the NYSE. And it recently celebrated its anniversary with a bell-ringing on the floor. “We’d been doing it for more than three decades but not at scale until we went public,” Eckel says, of the company’s anniversary on the Exchange.

Indeed, clean energy spending was up 4 percent in 2015 to $329 billion. Meanwhile, the world watched as oil prices plunged by two-thirds in 18 months, sending countries overleveraged in oil into restrained, but noticeable panic. In that same period, China’s annual investment in renewables climbed to $110 billion, almost double the $56 billion invested in the United States.

In 2014, Michael Liebreich, CEO of Bloomberg New Energy Finance, estimated that it would take an investment of $500 billion — but $2 trillion might be a better figure — if humans want to seriously address the problem of climate change. Even at the most conservative number, Eckel sees this as good news for his $1 billion company, though he hesitates to speculate why more companies are not rushing into this space. “I look at that as a rather optimistic statistic,” he says. “If a company no one has heard of is providing 1/500th of the solution, what does that tell you about our long-term market potential?”