This article is sponsored by Goldman Sachs Asset Management.
Environmental, social and governance, or ESG, has been rising on the agenda for institutional and individual investors. Our clients have become increasingly focused on finding investment solutions where their impact and financial goals are met and these outcomes are both aligned and measurable. To address this growing demand from clients and to treat ESG with the rigour and care it deserves, Goldman Sachs Asset Management (GSAM) acquired one of the largest dedicated ESG and impact investment advisors, Imprint Capital, in 2015.
Democratising access to clean energy
Arcadia Power is a nationwide energy choice platform that integrates with utilities to make it easy for customers to sign up for clean energy.
Most customers continue to source energy from their local grid and Arcadia offsets their usage by purchasing an equivalent amount of renewable power from wind projects; other customers are subscribed to community solar gardens or enrolled in energy efficiency measures.
Arcadia also provides its customers with easy online billing options via a modern user interface, creating a higher quality digital experience than most utility offerings. By making national demand for renewables cheaper and easier, Arcadia is democratising access to clean alternatives and making the grid’s overall energy mix cleaner.
In 2018, Arcadia’s customer base of 266,905 connected accounts used 680,000 megawatts of clean energy, avoiding 530,060 metric tonnes of greenhouse gas emissions.
The acquisition brought together the breadth of GSAM’s institutional resources with the depth of Imprint’s almost 10 years of experience and thematic expertise in ESG and impact investing. This powerful combination has enabled ESG to be fully integrated into GSAM’s own core investment processes and into the strategies offered to clients.
The shift in power generation
Clean energy is one of our largest and most active investment themes. Across clean energy, we invest in enterprises helping to develop new clean energy technologies and assets or projects deploying clean energy technologies. Renewable energy infrastructure has become a large market given future expected shifts in new power generation globally.
More than an estimated $11 trillion is expected to be invested in new power generation capacity globally by 2050, of which nearly three-quarters is expected to new wind or solar farms. This translates to an average of over $250 billion of capital invested in renewable energy assets each year through 2050, according to Bloomberg New Energy Finance.
Wind and solar costs continue to decline, making renewables economically competitive with fossil fuels. Once installed, these technologies are not subject to the same price volatility that is associated with fossil fuel sources. In some regions with high electricity prices, clean energy is already cost-competitive with conventional sources. Although renewables are typically more expensive than fossil fuel plants on an upfront per-megawatt basis, a lack of input costs makes them the cheapest marginal producer of power once installed. Investors can participate at different points along the renewable energy infrastructure development lifecycle, from the earliest stage of asset development to assets under construction or fully operational generation units. Operating and construction-stage assets in the US and Europe are relatively stable, well understood and efficiently priced.
Revenues are largely fixed by 20-year energy offtake contracts and operating costs are low, offering bond-like yields. Such operating projects are thus most suitable for investors with an appetite for long-lived assets and current income.
To target attractive risk-adjusted returns, there are a number of strategies investors may consider including focusing on specific geographies, looking to enter the asset during earlier stages of development, or focusing on more niche market segments with higher risk counterparties such as community solar.
A community approach
Solar has ranked first or second in new electric capacity additions in each of the last six years, despite being a small part of the overall electricity mix today. During the first quarter of 2019, the US installed 2.7 gigawatts of new solar photovoltaics, representing 51 percent of total new electric capacity additions. The US now has 67GW of total installed PV capacity and this is expected to more than double over the next five years, according to the Solar Energy Industries Association.
Solar at a discount
True Green Capital is a developer and owner of community solar projects in New York State.
Over 50 percent of US households are unable to host a solar system due to renting, insufficient roof space or shading.
Community solar is a local solar facility that is shared by multiple community subscribers who receive credit on their electricity bills for their share of the power produced. This enables homeowners, renters, and businesses equal access to the economic and environmental benefits of solar power generation, while also building a stronger, distributed, and more resilient grid.
True Green’s distributed sun portfolio in New York generates clean, renewable energy into the local grid and provides its customers a discount to utilities electricity rates.
At the end of Q3 2019, the portfolio comprised four operating community solar projects that generated 11 megawatts of clean energy and had 10 projects in construction that equated to 109 megawatts. A single megawatt of solar powers 164 homes.
Of the 10.6GW of solar PV installed in the US in 2018, 23 percent of new additions came from residential solar, compared with 20 percent from non-residential and 58 percent from utility scale projects.
Seventy-seven percent of US households are prevented from installing rooftop solar panels due to low credit scores, roof shading, or because they don’t own their home, according to greentechmedia.com. Given these limitations, the adoption of residential solar has been highly unequal and skewed towards higher income homeowners.
Community solar helps broaden the population of beneficiaries of solar by allowing both homeowners and renters to access solar energy and savings without having to physically install solar panels on their rooftop. Instead, a cluster of solar panels are installed in a neighbourhood site, allowing dozens or even hundreds of community members to subscribe to the project. Clean energy generated from the site is then fed into the local power grid and the community project subscribers receive their share of solar credits through their utility, typically resulting in a reduced monthly utility bill. This also makes it easier for the local utility to manage the integration of the additional solar energy, reducing physical stress on the grid.
Community solar has grown rapidly since 2015, reaching 1.4GW of cumulative installed capacity by year-end 2018, according to the Solar Energy Industries Association. There are 43 states in the US with at least one community solar project online and 19 states have recognised the benefits of shared renewables by encouraging their growth through policy and programmes.
Community solar has enjoyed rapid adoption across the US and is poised for strong growth due to size of the addressable market. However, the development of community solar projects has lagged demand due to a lack of financing options. Lenders and investors have been hesitant to finance due to the relatively new and unfamiliar nature of the projects. Additionally, the small size of community solar projects makes them less attractive to big institutional investors and requires financiers and developers with regional expertise. Investors able to navigate these market dynamics will help democratise access to residential clean energy by providing an affordable clean energy option to the previously excluded 77 percent of US residents.
March of the millennials
Taylor Jordan was co-founder of impact investing firm Imprint Capital which Goldman Sachs acquired in 2015. Here he explains the allure of a responsible approach.
Impact investing is clearly on a growth trajectory. What is driving this in your view?
There are two main drivers. First, we now have a broad set of investors that want to leverage their assets to create tangible impact. That has expanded from foundations, which were among the earlier adopters, to family offices and now institutional investors. We’ll continue to see growth in impact strategies as wealth transfers to younger generations that naturally embed their values into both their purchase and investment decisions.
So what’s the second driver?
Impact themes are benefitting from a broad set of macro tailwinds. Take clean energy: early investors catalysed billions into the sector which enabled a significant drop in the cost of installing and generating power; positioning renewables to become the dominant form of new power installation going forward.
Before joining Goldman Sachs, you co-founded Imprint Capital. Why did you team up with Goldman Sachs?
I’ve been involved with impact investing for over 15 years, starting out at a nonprofit – RSF Social Finance, based in San Francisco. While there, I helped build an impact portfolio in the early 2000s before the term was coined and there was mainstream interest in the topic. I learned a lot from that experience that I felt could benefit other investors. So, together with my co-founder, John Goldstein, we established Imprint Capital, which started out creating tailored impact portfolios for foundations but broadened out to help financial institutions build ESG and impact portfolios for their clients. As the business developed, we felt the need to scale our work. Goldman Sachs acquired our business in 2015 and gave us resources and reach to work with more and larger clients.
Where are you currently finding environmental opportunities?
In clean energy, power generation has been largely played out at utility scale, but we see pockets of opportunities in commercial and industrial solar, battery storage and grid services. In sustainable transit, we see the continued evolution of connected vehicles, electric vehicles, and eventually autonomous vehicles and we’re looking at opportunities beyond cars, such as buses and motorcycles. In food and agriculture, there are opportunities in agriculture technologies that improve efficiency and yield and take advantage of changing consumer preferences in areas such as alternative proteins. We are also seeing interesting businesses in waste and materials in areas such as bioplastics.
Our eight core impact themes
Pover generation; Grid services; Energy efficiency
Electric; Connected; Autonomous
K-12 Education; Higher Education; Continuing/adult education
Healthcare services; Devices and diagnostics; Life sciences
Financial technology; Lending
FOOD AND AGRICULTURE
Agricultural production; Processing and distribution; Consumer goods
WASTE & MATERIALS
Efficiency; Sustainable materials; Waste management
Forests; Habitat; Carbon
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