Hannon Armstrong focuses solely on climate solutions in your infrastructure project investments. When did this become a mandatory criterion for the company and why?
We’ve invested in climate solutions like energy efficiency and solar since my earliest stint with the company in the 1980s, but the real shift to a dedicated and complete focus on financing sustainable infrastructure projects occurred when I returned to the company in 1999. We decided at that time to only invest in assets that are neutral to negative on incremental carbon emissions.
I am proud of how much we have accomplished since the turn of the century. Our vision is that every investment should improve our climate future, and I think that our unique heritage, combined with a pioneering spirit and dedication to investing on the right side of the climate change line still drives how we do business today.
How have you seen the market change over the last five years, and are companies moving toward a green economy as quickly as we need them to?
U.S. companies are moving much faster to accelerate the clean energy transition, which you really felt from the business community’s response to the former U.S. President's egregious withdrawal from the Paris Climate Agreement five years ago. That was a point when I saw corporations declare that they could no longer rely on the U.S. government to drive the clean economy – they understood then that they needed to lean into climate action and the energy transition. Our clients, such as ENGIE and Schneider Electric, are on the forefront developing a broad range of climate solutions. At the same time, major corporate energy users such as Microsoft, Google, and Amazon to name just a few, have also decided to take matters into their own hands when it comes to deep decarbonization plans. There is a general sense that the world is off-track; recent heat waves can be directly attributed to global climate change and they serve as a preview of what the future will feel like. Whether government policies are supportive or not, companies are not going backwards.
Many of your peers around the world expressed the belief that governments do not need to hand out money, but they do need to create a regulatory framework that allows for change. How can businesses move forward in the absence of supportive policy?
We have 50 states in America, and the good news is that many of the largest emitting states have been able to sustain and increase supportive policy measures for clean energy. Of course, that was before President Biden signed the Inflation Reduction Act in August 2022, which is by far the most significant climate policy we have ever had at the federal level.
There is no doubt in my mind that the climate and energy policies in this landmark legislation will supercharge sustainable infrastructure deployment, which will in turn significantly reduce carbon emissions, cut consumer costs, and strengthen energy security.
There are also other positive policy backdrops in the EU and the UK – but it must be said that clean energy already makes economic sense in most parts of the world, even without subsidies.
The question here really comes down to pace. The climate solutions marketplace will continue to grow because we have the capital, and we have the technology.
Still, long term and stable policy support is essential if we are going to do make this transition at the speed scientists tell us it required to avert climate catastrophe.
What attracts Hannon Armstrong to a business opportunity? What kind of returns are you hoping to get?
Our investment thesis is that we will make better risk-adjusted returns by investing on the right side of climate change. As I mentioned earlier, that means we are only targeting investments in projects that are neutral or negative in terms of greenhouse gas emissions.
After that screen, it essentially comes down to an assessment of two things. One, is this a mature technology? and two, do we have large sponsors with the experience and expertise to get the job done at scale? What we want to do is avoid risks and aim for financial returns that are stable over the long term.
What are the major bottlenecks you see in this transition?
I do not believe that there are a lot of major bottlenecks that cannot be overcome given the momentum we have right now. Newer climate technologies, particularly green hydrogen and energy storage are at our disposal. We see a tremendous amount of capital pouring into them much faster than I anticipated.
Of course, there are issues with supply chains in our current environment. American companies cannot really claim to be ESG-compliant if they use solar panels made with slave labor - but I trust this will be resolved in the coming years. Then there is the issue of an ancient electric transmission system in the U.S. with 50 states and the federal government in charge of managing the grid. Today, the states and the federal government don’t work as well together as they should. We will eventually find a solution, but it is going to be difficult to change our transmission system as rapidly as we need to absorb all the clean energy that is getting built.
Do you have a final message for our global audience?
We have a tool our company created in 2013 called CarbonCount® - it is a very straightforward ratio we use to measure and report the efficiency with which our capital investments are reducing emissions.
We all know that carbon really does count when we are talking about the climate challenge. And because capital is scarce, we all should be prioritizing the most impactful investments for mitigating climate change.
I wanted to highlight this point for your readers because decarbonization of our industrial sectors will be extremely costly and challenging, and we must focus on the efficiency with which we tackle the problem. Not every green technology has the same impact even if it seems that way on a surface level. So that is my message, focus on carbon above all and make the most efficient and timely investments that eliminate emissions.
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