The key insight behind Climate United’s investment strategy: The shift to domestically produced clean energy is inevitable – but who benefits from the shift is not.
Without intentional intervention, this transition will mostly benefit large financial institutions, large companies, and wealthy customers who already have access to the capital and credit needed to make the switch.
Climate United, a subsidiary of Calvert Impact, is designed to bring the benefits of clean technology to all Americans.
The nearly one-third of the US population that lives in communities that lack access is such capital could miss out on the benefits of this transition. That would mean even higher energy costs and increasing pollution burden for hard working Americans. When a third of the country is locked out of the benefits of clean energy, it means the market is failing.
We can change this market dynamic. To meet the complex needs of broken markets, we need multiple tools in the toolkit – diverse financial products, policy solutions, innovation, and expertise – to bring the right tool at the right time.
My colleague Jenn Pryce recently penned a powerful article focused on the next frontier for impact investors – market shaping.
She made the case for a shift in thinking from doing deals to shaping markets if we’re going to meet the true potential of our industry to make the economy work for working families, not the other way around.
Despite decades of bi-partisan support for public-private market shaping, this line of thinking has recently come under attack.
This call to action is not a reaction to this moment in time – although it couldn’t be more relevant – but the culmination of decades of work across sectors and geographies that has revealed interesting patterns of successes and failures.
Capital markets are organized by asset class. Challenging markets are not. The work of market shapers is to be the bridge between the two to diagnose what’s broken, and deliver targeted solutions.
There are not many programs or sources of capital that afford this flexibility, outside of being an asset owner with billions to manage freely (for most of us, not our fate).
That is why the National Clean Investment Fund of the Greenhouse Gas Reduction Fund is so compelling and well-structured (despite the politically-motivated attacks it has generated).
The program allows four main uses of funds: operational expenses, market development expenses, predevelopment capital, and financial assistance – federal government language for investment capital across the risk-return spectrum.
The three priority sectors are distributed energy generation and storage, building efficiency, and electric transportation – and mandates that every investment must not only reduce greenhouse gases but deliver direct economic benefits to American families while bringing the private markets along.
Taken together, this public-private partnership model asks us to shape and accelerate markets for these clean technologies so that the benefits of cheaper, cleaner, more reliable energy can reach more Americans, quickly.
What does this look like in practice? Take a market that most people don’t pay attention to, but that should be a no-brainer: Electrifying heavy-duty diesel trucks that move Amazon products you order from ports to warehouse facilities.
If these trucks were electric, truck operators would have lower lifetime operating costs – which means that these small businesses would increase their earnings. Air quality around the ports would improve dramatically, reducing respiratory and other health impacts on families nearby, who tend to be lower-income and have some of the worst health outcomes in the country. Tailpipe emissions would go down, chipping away at the transportation sector, which contributes the most to carbon emissions and climate change in the country. And demand for domestically produced batteries and vehicles would increase, creating quality jobs in rural America, where the vast majority of manufacturing plants are located.
The US has spent decades advancing battery technology and we finally have trucks on the road. Why aren’t they flying off the shelves? Even though they cost less to own and operate over their lifetimes, they require more upfront costs than their diesel alternatives but because they are an emerging technology, private markets won’t finance them.
How do we shape this market to change the equation? We bring all the tools to the table:
Take risks where data is lacking. If you’ve ever leased a car, you know that the financing terms are based on the assumed residual value of the vehicle at the end of the term – what the car will be worth in three to five years. Traditional leasing companies are not willing to finance electric trucks right now because there is insufficient data to determine what the trucks will be worth in the future.
|This is the perfect place for us to step in to take market risk that private capital won’t, with the goal of developing data to unlock billions in future flows.
Embrace policy complexity. State and federal incentives can help lower upfront costs, but they tend to be complicated and take time to pay out. We have the patience to understand these incentives and provide capital to bridge them, a barrier that keeps most investors away.
Address all cost drivers. To make these trucks attractive to drivers, we look at the full cost of ownership; Not just the lease, but the cost of maintenance, fuel, and insurance. Because we are aggregating the purchase of trucks (up to 500 trucks to start – the largest order to date in the US), we can negotiate maintenance and warranty packages with the manufacturers, policies with insurers, and cost of electricity with charging partners.
All these inputs are important for the small business operators deciding to make the switch to electric trucks.
Partner across the supply chain. We know that change is hard and even cost-competitive trucks may not be enough to speed up adoption, so we looked at the demand side to identify companies that invest heavily in moving goods to see if they would prioritize electric vehicles to reduce Scope 3 emissions in their supply chain. We started working with corporations that contract with small truck operators and sweetened the deal for the operators who are incentivized by revenue drivers in addition to cost management.
This is what we mean by market shaping. Together these actions can kickstart an electric truck vehicle leasing market. As Jenn describes in her piece, this would be like digging a new trench that would ultimately channel affordable loan capital from the pools of institutional investors who fund leasing companies to the American small business owners who can profit from access to electric trucks.
And while this is a specific case for a certain type of truck, we have seen the same patterns across sectors and geographies over our last thirty years. Examples abound in solar, affordable housing, small business lending, building efficiency, resilient infrastructure, broadband access, and so many more.
Market shaping does not specialize in a sector or a place. It is a specialized function — one that the private markets are not structured or incentivized to do but one that is critical if we are going to make the capital markets work for us and our children.
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