CDFIs can make big difference for small businesses investing in clean energy

As financial institutions gain a greater understanding of the carbon impact of their borrowers, they can serve as catalysts for a transition away from fossil fuel and other carbon-intensive sectors. As a Community Development Financial Institution (CDFI) with a focus on making investments in rural and low-income businesses, Coastal Enterprises, Inc. (CIS) recognized this opportunity more than a decade ago when we began making solar loans to small businesses deemed “unbankable” at the time in Maine’s traditional financial system.

Since those first deals, we’ve financed more than 40 solar energy deals in Maine and New England, resulting in more than 30 megawatts of projects developed. Over the past decade, our $25 million direct investment in the solar industry has created a portfolio that generates 38 million kilowatt-hours of power each year: the equivalent of nearly 27,000 metric tons of CO2e avoided. These projects have benefited small businesses, municipalities, schools, and nonprofit organizations, including businesses such as organic farms, auto repair shops, art galleries, and hockey rinks.

“Organic and ethical practices guide our land and livestock management. It is an honor to care for the animals we work with, the land we care for, and the community we serve. The solar power facility was an extension of those values,” said Caitlin Frame and Andy Green, co-owners of the milkman, a dairy farm and dairy. “Our installation offsets the majority of our energy bill and generates about 70,000 kWh per year, which replaces 80 percent of the energy needs of our growing business. Our panels are not only a sound financial investment, but They also serve as a symbol for the community of our values.”

Making Solar Loans Affordable

CDFIs, like CEIs, are mission-driven lenders that invest in specific geographic areas of the United States designated by the federal government as economically disadvantaged. CDFIs often operate on a smaller and more local scale than our traditional banking counterparts and have more flexibility to tailor investments to the needs of each borrower. As more CDFIs become more familiar with the principles of carbon accounting and deepen their understanding of their portfolios, we will be able to become better advisors to the companies we finance. As the old impact investing adage goes, know what you own and know why you own it!

CEI recognized early on that solar energy investments were an area where we could provide direct support to companies looking to “green” their operations. We developed a simple solar loan product, where solar equipment is often the only collateral required, an unusual feature for a standard business loan. This reduced collateral requirement increases flexibility for the business owner, who is generally not required to pledge business assets or property as collateral.

As we work with new and existing borrowers to add solar power to their operations, there are still more ways to expand access to solar power in Maine. This summer, we tested a solar loan with a significantly lower interest rate made possible by philanthropic funding. This model prioritizes businesses located in economically disadvantaged areas or businesses owned by people who represent Black, Indigenous, or Color communities, women, and immigrants and refugees. We hope this model, and others like it, will expand access to solar energy and increase the resilience of our local small business economies.

Measuring Emissions from a Small Business Loan Portfolio

As we learned more from our borrowers about their sustainability goals and needs, we also delved internally. In 2019, CEI worked with several other financial institutions to bring the Association for Carbon Financial Accounting (PCAF) to North America and begin estimating and disclosing greenhouse gas emissions associated with our loan portfolio.

Since PCAF’s inception, more than 300 financial institutions, representing more than $79 trillion in assets, have joined the open access association to measure GHG emissions from their loan and investment portfolios. By measuring and disclosing this information, PCAF institutions aim to align the financial industry with the Paris Agreement and achieve net-zero emissions by 2050.

CEI is among six other CDFIs beginning to estimate and report their financed emissions. The emissions associated with the CEI portfolio as of September 30, 2020 were 12,641 metric tons of greenhouse gases, the equivalent of driving 2,724 gasoline vehicles for one year. This represents the estimated issuances of 343 companies with a total outstanding loan balance of $45.9 million. The highest emission-intensive sectors (measured as tons of CO2e emitted per million dollars invested) were agriculture and food systems, energy, forestry, fishing and aquaculture, and small and medium-sized businesses, such as restaurants and general stores. Read CEI’s full PCAF disclosure online.

Our disclosure established a baseline for us to understand our portfolio and the Maine small business economy, and how we intersect with both as we deepen the impact of our mission to address the climate crisis. By integrating carbon accounting into daily operations, investors and lenders can explore, develop and initiate incentives (such as interest rate rebates) for environmentally responsible practices in the private business sector.

When it comes to climate investing, small is just as important

As we support small businesses that integrate sustainable practices, such as clean energy upgrades, into their operations, CEI recognizes that these projects can create additional and costly debt loads. Here, the flexibility of CDFIs can create models for borrowers with tight cash flows, where loan debt service is equal to or less than the energy savings from clean energy improvements. Responsible lending means being honest with small business owners about their payback periods and educating borrowers about the long-term benefits of these investments, like building capital into their businesses and protecting them from rising fossil fuel prices.

As smaller companies look to decarbonize, CDFIs can step in to provide patient capital and business advice that is tailored to their local industries. Time and time again, CDFIs are proving that you don’t have to be big to make a difference.

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