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 fuels and other carbon-intensive sectors. As a community development financial institution (CDFI) with a focus on making investments to under-resourced and rural businesses, Coastal Enterprises, Inc. (CEI) recognized this opportunity more than a decade ago when we started making solar loans to small businesses considered "unbankable" at the time in Maine’s traditional financial system.
Since those first deals, we’ve financed over 40 solar deals across Maine and New England, resulting in over 30 megawatts of developed projects. Over the last decade, our direct investment of $25 million into the solar industry has built a portfolio that generates 38 million kilowatt-hours of power each year — the equivalent of almost 27,000 metric tons of avoided CO2e. These projects have benefited small businesses, municipalities, schools and nonprofits, including businesses such as organic farms, auto mechanic 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 steward, and the community we serve. Installing solar was an extension of those values," said Caitlin Frame and Andy Green, co-owners of The Milkhouse, a dairy farm and creamery. "Our installation offsets most of our power bill and generates around 70,000 kWhs annually, which replaces 80 percent of the energy needs of our growing business. Our panels are not only a sound financial investment, they also serve as a symbol to the community of our values."
Making solar loans accessible
CDFIs, such as CEI, are mission-driven lenders that invest in specific geographies across the United States federally designated as economically disadvantaged. CDFIs often operate on a smaller and more local scale than our traditional bank counterparts and have more flexibility to tailor investments to each borrower’s needs. As more CDFIs become familiar with the principles of carbon accounting and deepen their understanding of their portfolios, we can become better advisors to the businesses that we finance. As the old impact investing adage goes, know what you own and know why you own it!
CEI recognized early that solar investments were an area where we could lend direct support to businesses looking to "green" their operations. We developed a straightforward solar loan product, where the solar equipment is typically the only required collateral — an unusual characteristic for a standard business loan. This reduced collateral requirement increases flexibility for the business owner, who isn’t generally required to pledge business assets or property as collateral.
As we work with new and existing borrowers to add solar to their operations, there are still more ways to expand access to solar in Maine. This summer, we piloted a solar loan with a significantly lower interest rate that was made possible through philanthropic funding. This model gives priority to businesses located in economically disadvantaged areas or companies owned by individuals representing Black, Indigenous or people of color communities, women and immigrants and refugees. We hope that this model, and others like it, will expand access to solar and increase the resilience of our local small business economies.
Measuring the emissions of a small business lending portfolio
As we learned more from our borrowers about their sustainability goals and needs, we dug deeper internally as well. In 2019, CEI worked with several other financial institutions to bring the Partnership for Carbon Accounting Financials (PCAF) to North America and begin to estimate and disclose the greenhouse gas emissions associated with our loan portfolio.
Since PCAF’s inception, over 300 financial institutions, representing more than $79 trillion in assets, have joined the open-access partnership to measure the GHG emissions of their loan and investment portfolios. By measuring and disclosing this information, PCAF institutions aim to align the financial industry with the Paris Agreement and reach net-zero emissions by 2050.
CEI is among six other CDFIs to start estimating and reporting their financed emissions. The emissions associated with CEI’s portfolio as of Sept. 30, 2020, were 12,641 metric tons of greenhouse gasses, the equivalent of driving 2,724 gasoline-powered vehicles for a year. This represents estimated emissions across 343 companies with a total outstanding loan balance of $45.9 million. The highest emission intensive sectors (measured as tons of CO2e emitted per $1 million invested) were agriculture and food systems, energy, forestry, fisheries and aquaculture, and small and medium enterprises, 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 Maine’s small-business economy, and how we intersect with both as we deepen our mission impact to address the climate crisis. By integrating carbon accounting into daily operations, investors and lenders can better explore, develop, and initiate incentives (such as interest rate deductions) for environmentally responsible practices in the private business sector.
When it comes to climate investments, small is just as important
As we support small businesses integrating sustainable practices, such as clean energy improvements, into their operations, CEI recognizes these projects can create additional, and expensive, debt burdens. Here, the flexibility of CDFIs can create models for borrowers with tight cash flows, where the debt service on the loan is equal to or less than the energy savings from the clean energy improvements. Responsible lending means being upfront with small-business owners about their payback periods and educating borrowers on the long-term benefits of these investments, such as building equity in their business and insulation from the escalating price of fossil fuels.
As smaller businesses look to decarbonize, CDFIs can step in to provide patient capital and business advice that is tailored to their local industries. Again and again, CDFIs are proving you don’t need to be big to make a difference.
