Earth, Wind, and Fire: PACE Plays a Vital ESG Role

Abstract

Interest in environmental, social, and governance–focused investments has been on the rise as investors look to address critical issues such as climate change, diversity, human rights, and company stewardship, to name a few. At the same time, sustainable investing is at an inflection point. As attention shifts away from how people invest, the focus is migrating to the outcomes of those decisions, such as thinking proactively about how our actions affect the environment. Initially, environmental concerns were addressed primarily through exclusionary practices and avoidance of investments in industries that were deemed harmful to the planet. However, the dialogue has evolved to include more proactive measures with outcomes, including reduction in greenhouse gas emissions, water conservation, and air quality improvement. As property owners look to make building upgrades addressing energy efficiency, renewable energy, water conservation, HVAC concerns, and resiliency measures, property assessed clean energy programs can play a vital role in financing such initiatives.

TOPICS: ESG investing, real assets/alternative investments/private equity, legal/regulatory/public policy

Key Findings

• ▪ Two main catalysts are driving momentum in the property assessed clean energy (PACE) sector. Legislation is a major force behind the growth seen in PACE. Second, increased focus on environmental, social, and governance initiatives, for both entities and investors, is another driving factor.

• ▪ Commercial PACE has picked up momentum as more property owners become aware of PACE and find it to be an attractive addition to the capital stack for financing qualified building improvements aimed at addressing climate change and natural disaster concerns.

• ▪ Interest in new construction and gut rehabilitation commercial PACE has been rising. Four components encapsulate DBRS Morningstar’s risk analysis for commercial real estate projects: environmental, construction progress, strength of the sponsor, and the first mortgage lender.