Climate Lenders With $20 Billion in Grants Weigh Risk and Reward

The recipients of $20 billion in White House awards to fight climate change say they’re prepared to bulk up the nation’s clean financing capacity without taking on undue risk.

It’s a delicate balance because, on one hand, the Biden administration wants Greenhouse Gas Reduction Fund awardees to aggressively invest in projects that decarbonize the economy. The fund is meant to create a national financing network for clean energy projects and other climate solutions.

On the other hand, doing so will involve some risk, and congressional Republicans are primed to pounce on any investments that fail—or even look like they’ve failed because their benefits aren’t primarily financial.

“Republicans will be eager to jump on the politicization narrative, even if it’s not a cut-and-dried financial lack of return, or failure,” predicted Sophie Purdom, managing partner at Planeteer Capital, which specializes in climate tech investing.

“The bar is pretty low for making this into a political touchpoint, even if there are only one, two, or three individual cases of risks that were underwritten that ended up not panning out,” Purdom said.

The $20 billion released under the fund could coax up to $150 billion of private investment off the sidelines and into a vast range of projects, according to the Environmental Protection Agency.

But the fund’s basic objectives are to cut greenhouse gas emissions, prioritize benefits to low-income and disadvantaged communities, and mobilize private financing to stimulate more green project buildouts—not necessarily to deliver strong financial returns.

Climate United Fund CEO Beth Bafford—whose $6.97 billion grant was the most of any of the eight awardees—said she feels well positioned to manage risk, because her organization has 30 years of experience in understanding the difference between real risk and perceived risk, and knows how to structure financial transactions to address the former.

“We will take calculated risks. We need to, to accelerate the activity and get to net zero, but we know we can do it within a sustainable financial institution, because that’s what all three partners have done for decades,” said Bafford, referring not only to the Climate United Fund but also to the Coalition for Green Capital and Power Forward Communities, which received the same type of award under the program. “That’s a balance we’re used to striking.”

Real Versus Perceived Risk

Moreover, some reasonable risks only look serious to the uninitiated, Bafford said.

“A lot of it is perceived risk for us, particularly when you think about the size and perceived credit quality of people like low income families or small businesses or health clinics,” she said. “These are organizations that we’ve financed for decades. We know their ability and willingness to repay. We know this is going to provide them with an economic benefit that helps with that equation.”

The Climate United Fund says it has raised and deployed more than $30 billion in markets such as on-site solar and building decarbonization. The group has said it wants to use the EPA award to deploy more clean energy, make buildings more efficient, and bring electric vehicles to underserved places.

Lenwood Long, board chair of the Justice Climate Fund, which received a $940 million award, compared the Greenhouse Gas Reduction Fund to the Paycheck Protection Program, which sent out some $800 billion to keep small businesses afloat during the coronavirus pandemic.

“When America needed to get capital on Main Street, and when banks couldn’t move it,” they went to community development financial institutions (CDFIs), Long said. “And the record would show that the risk of loss and vulnerability to CDFIs deploying those dollars were minimal compared to other programs. So I’m optimistic that these funds will be used prudently.”

Still, as much as 10% of the Paycheck Protection Program funds were stolen, in addition to billions more that were pilfered from the larger Covid unemployment relief program. The White House on April 9 publicly supported a Democratic-backed Senate bill that would crack down on fraudsters who stole pandemic relief funds.

To Jessie Buendia, vice president of sustainability at Dream.org, two quick fixes would be for the EPA to bring on more staff who can help lenders assess and navigate around risk, and also to educate program participants on how to use blended capital to build infrastructure projects, especially in disadvantaged communities.

Dream.org helped write parts of the Coalition for Green Capital’s successful application. The group ended up getting a $5 billion award.

Seasoned climate investors are used to assessing and pricing risk, Purdom said. But that’s easier said than done because risk can come in so many forms, including the science, the engineering, the technology readiness, and the shape of the market both now and in the future, she said.

Andrew Chang, managing director at Activate New York, a not-for-profit that helps entrepreneurs take their ideas to market, said most of the technologies that would be funded under the greenhouse gas reduction plan are mature, such as home retrofits, meaning the technical payback has been thoroughly demonstrated.

That doesn’t mean the risk is gone, because project execution poses its own set of risks, said Chang, a former staffer at the Department of Energy’s Office of Energy Efficiency and Renewable Energy.

Even so, “you can cut the data in any way and look at any project and it may not look good, but that ignores the other 100 projects that may look great,” Chang said. “There might be a couple of failures, but there will be a broad portfolio of successes.”

Republican Opposition

Congressional Republicans have firmly pushed back against the plan. The House passed a measure (H.R. 1023) in March, sponsored by Rep. Gary Palmer (R-Ala.), that would essentially slash the Greenhouse Gas Reduction Fund. President Joe Biden has said he will veto the bill if it reaches his desk.

The day the funding announcement was made, Rep. Cathy McMorris Rodgers (R-Wash.), chair of the House Energy and Commerce Committee, said the EPA is “giving away $20 billion in taxpayer funding to left wing special interests and other groups, but has yet to explain how it will prevent those funds from further enriching China, which dominates the supply chains for renewables and electric vehicles.”

GOP committee leaders also sent a letter to the EPA last year voicing their concerns about the fund, including possible conflicts of interest with funding recipients and the potential for waste, fraud, and abuse.

Buendia said she hopes the program helps Democrats and Republicans find even a tiny patch of common ground, especially if a decent share of the benefits flows to red states.

“Both parties care about healthy, thriving, clean communities where there are opportunities,” she said. “What could differentiate this moment is that government is saying, ‘Hey, the government isn’t going to solve all of the problems. We need the private sector, because what we’re looking for is not to distribute some loans and distribute some grants—we’re looking for total market transformation.”