The Green Finance Podcast Ep. 12: How do we make investments green, without going into the red?

When it comes to investing in sustainable projects, there are still many unknowns. There is a lot of interest these days, especially considering the recent geopolitical turbulence surrounding energy. Plus, there's the whole ESG debate – no one can deny the surge in demand for ESG funds, which theoretically are supposed to serve as a proxy for sustainable investments, but in practice, that's still to be determined.

So demand from investors is growing, but it's not consistent across the board, and connecting it to the supply side remains challenging. Project financiers usually take less technical risks on more mature technologies, and when it comes to sustainability, many technologies are new.

We need tools that enable project financiers to get comfortable with exploring and entering new markets. Increasing efficiencies in areas like solar and energy efficiency while freeing up funding capacity will allow investors to allocate more time towards exploring new areas like green hydrogen and carbon capture.

It will be interesting to see how the new Inflation Reduction Act will help on this front, and we are chatting about this today with Amanda Li, Co-Founder and COO of Banyan Infrastructure.

Banyan is an investment facilitator for sustainable infrastructure headquartered in San Francisco – a business on a mission to unlock capital for the financing of green infrastructure projects of all sizes in a profitable way.

Amanda has over ten years' experience in engineering for sustainable development, and is passionate about opening financial doors for green infrastructure projects. We had a real fun conversation, so let's dive right in.

Hi Amanda, thank you for joining us on today's episode. It's always lovely to chat with you, and I'd like to start our conversation by getting your thoughts on what the sustainable infrastructure financing ecosystem looks like right now. Investors are looking to come into the space, so what opportunities do they have at the moment?

Yeah, for sure. So I think one, sustainable infrastructure now is a much broader category. If you look back 10 years ago, you think, okay, it's solar investing. And when the major categories of analysis include everything from those two, energy efficiency, the three more mature ones to geothermal, anaerobic digesters, and everything within waste, a lot of transportations, electric vehicles, the charters for that. 

And basically, everything in the law, all of how we interact with food, water, transport, getting ourselves around getting electricity, all these basic commodities, all need their systems, re vitalize and therefore reinvested in to meet this climate transition. So the range of it is really broad, and the market is growing not just from an energy perspective, but from a categories perspective. 

So overall, the market is growing. Also, in particular, there's a lot of places for growth in specific segments, right? You have traditional infrastructure investors who have been there from the past, who have been involved and invested in power and utilities, they have been used to invest in not only solar and wind, but the coals or the bridges and the large scale infrastructure assets . Those funds have been around for a while, and are very experienced, 

But what's really emerging is all these new technologies and these more distributed systems as well. They're the chance for new types of investors to come in. If you're looking at these growing new markets, we see funds popping up. It seems like every other quarter, brand new large funds are trying to chase this space. I think it's still very under-invested, we'll talk to some developers with these projects, and they're like, 'Hey, we still need more capital'. 

That being said, you asked about tooling, and sometimes it feels like there is a hurdle to get into the space, where you need to understand how to do more structured finance and project finance. And not only that, but across a larger breadth of technologies now, and also smaller assets. As we think around making an investment, and you having a billion dollars, let's say, to allocate. Before that maybe went to a single billion dollar coal plant, and now you're trying to allocate to 1000 million dollar solar facilities, and that's a lot more volume and with emerging the different types of investing in different types of tools, like software's needs to be used to handle that sort of scale. 

I actually do, because I imagine that it must be quite challenging to connect all these dots considering how broad the market is. How difficult is it to serve this segment given the high volume that's coming into the market right now?

I think you definitely need to have tooling. So as we think about FinTech in general, how we've managed to create low cost of capital and high velocity, high liquidity in every other asset class. Even 10 years ago, I was helping with that when I was a consultant, I felt like in sort of the first web 1.0 transformations. Or if I try to get a loan, or if you are a small business, and you want to get certain types of financial products, there are all these tools now that helps me be more streamlined, that help assess risks, so that the financiers understand how to make the decisions quickly, even if it's a cross a large number of different type of small businesses or different types of retail investors or different types of hard assets, like auto loans or whatnot, there were tools to help gather the information, assess risk. And then later on, manage those risks, so you can have a low risk and highly liquid portfolio. 

We didn't have that in project finance, again, probably because it was such large assets and smaller markets. And now we see the distinct need for that. And so if you want to handle high volume, you want to handle more modular types of investments where you need to be able to quickly exchange one type of risk and an understanding for another. We think it's mission critical to be able to have software to help you out with that. And that was sort of the genesis of my company Banyan, which was to be able to help with that full lifecycle, right with origination, servicing securitization of project finance, and all infrastructure assets.

Wonderful. Tell us a little bit about the demand that you're seeing for investors coming into the space. There is interest to try out new markets and new technologies, but this also comes with understanding the risks that come with it. Plus, there's the new Inflation Reduction Act (IRA) – what impact do you think this will have on the market?

We see huge demand in general. When you go and talk to a banker or fund in the space and we say, Okay, what is the opportunity? How fast do you want to grow? The answer is, let's grow very fast. Even before the inflation Reduction Act, there was an eye on growth, right? Okay, we have a $100 million fund today, I want to be $500 million in two years, or I have a billion dollar fund. I want to double that right? 

We saw growth there with the IRA. That seems to be even more expedited. It feels like there's a land grab to be had and we can get the details of where exactly but it's extremely exciting. People are thinking growth and when you are trying to pull on that growth lever, it means that you need more capacity, you need more ability to transact at speed without compromising the performance of your portfolio. 

A traditional investor would just hire 1000 analysts or infinitely more people to throw against this growing market, and that is a very difficult proposition. Sometimes, there's actually a little bit of a talent shortage in the market in certain areas. It's expensive. And it's slow. And also many times if you're hiring people to do this really manual labor – to copy and paste each of those Excel into a bigger Excel. A terrible use of your money and their time, and they're going to want to go find maybe a different job, because that's not what they are wanting to do with their career. 

So increased capacity should definitely also have a digital component to it. Right? How can we leverage technology to move faster? To do without risk to recycle capital? 

And so that translates into when we come in, we can say, 'hey, let's we can make you more efficient'. We can use this to build a more efficient marketplace, it resonates very high, where we understand we can't do this just with Excel as we go from, you know, a one to five to $10 trillion market.

It's true, there are implications here when it comes to technological development and truly digitizing the financial services industry as a whole. We've talked a lot on this podcast about the need for more cohesive, transparent and efficient data and systems in order to clear away that cloud of doubt, and just trust the numbers.

But that's just one piece of the puzzle, right? Now we also have government actions in the form of the Inflation Reduction Act, which will accelerate the interest in sustainable infrastructure. Consumers are also exercising pressure on this front, and it has started to trickle down throughout the financial sector. Considering all these moving pieces, how do you think about sustainable infrastructure going forward?

Some of that feels like there's a lot of moving pieces, so how do you take advantage of this opportunity? Obviously, as managers of capital, we need to be risk averse in some ways. One cannot take capital that needs to be invested responsibly, and make really fast leaps and whatnot, but the opportunity is definitely there. And the risk is lower if you can understand it. 

The goal is to get the right people on board and get the right systems so that you can really understand that and then move quickly. As opposed to, sometimes it feels like there's a lot of analysis paralysis. We see some investments and funds interested in the space, interested in ESG broadly, getting their ESG team to look at everything under the sun, and then maybe making an investment like here or there with the innovation team. And then maybe next year, ramp things up. 

You're definitely not gonna do anything wrong if you don't do anything, but you may miss the opportunity. So there is a chance for those who are more aggressive. Trusting experts, pairing with partners who understand how to do things - that's been really powerful for us as a technology provider. 

At Banyan, we've really looked at how you build a lot of insights into a tool so you can share it more. But even without tooling, sharing information. In general, a lot of developers and other banks and financiers want to partner because there you can have many, many financial, many banks and funds in a single capital stack. We need multiple players and take multiple portions of risk. If funds make broader ambitions and make a leap into infrastructure, there will be something there to catch. And so we're all like, let's move faster. 

The example I love to give is that, when I was previously an investor at a company called Generate Capital, I was investing in energy storage, let's say eight years ago. It looked like that year, it was going to take off and be a really exciting investment class and really be as big as any of the other verticals. Now we talked to some banks and funds, and they're still seeing energy storage as an emerging class. Maybe they'll dabble there, they haven't quite figured it out yet, we still need to test and think and see. I get the funds who have understood how that involves investment, they've got great returns and invested lots of capital, and everyone else has moved slowly. And we can't do that for the next few technologies, because everything that's coming out of the venture space right now is becoming mature faster. And there's an opportunity for those who figure it out more quickly, to take more to get more returns and make a lot of impact.

I'd like to talk a little bit about the Inflation Reduction Act – what are the concrete implications for investors looking to deploy capital in sustainable infrastructure? The legislation includes tax credits awarded to consumers for electric vehicles and alternative energy sources, but what does it do for investors?

Some major, major portions that are more on the consumer side, both the tax credits for the ITC. Maybe it's not as direct and still needs a lot of participants and tax equity providers, but it still means at the end of the day, to simplify for people who don't want to do the tax minutia, it just means project projects are cheaper, because there is credit there, and that's gonna make more projects investable. 

Previously, projects that may have been in the red are now more profitable, and therefore can be invested in. That is, in general, very exciting. There's going to be a crowd and more developers who want to be really examining what can be really profitable. And so all those projects will be moving relatively quickly.

Separately, there's a smaller portion of it that we're really excited about. I'm blanking on the blanking on the name of it, but effectively a national green accelerator, there's $27 billion set aside to help. It's basically a large federal Green Bank, either directly investing in projects, or investing in the local greenbacks to invest in projects. 

The great thing around green banks is that Green Bank has a mandate to invest in projects that may not have been easy to invest in as a traditional merchant bank, and then to prove to commercial banks that it's possible or to recycle capital upwards. So now you have this, you know, in many ways catalytic capital coming in. And what we see often is that there's a 10x return, right? For every billion dollars you put into one of these catalytic instruments, that means there's $10 billion that gets recycled upwards as you bundle it and go forwards. So that's also very exciting, where we have people take more aggressive risks structurally, while still trying to prove out that it will have good returns. That part is a direct investment in infrastructure, and where at least I personally feel like it's easy to see higher returns.

Yeah, for sure. However, the conversation on profitability is still ongoing, and this aspect deters many investors from jumping on the green bandwagon. What do you think about this? Can you give us more insights on the profitability of sustainable infrastructure projects? 

In general, if you're doing one to one with traditional types of infrastructure, especially in the power and energy space, often the cheapest type is the most profitable type of investment. Should I invest in solar or coal? What is going to make more money? It's going to be solar and wind. And increasingly now in all geographies. Maybe a decade ago, in many geographies, that wasn't the case, it would have been more so natural gas.

Increasingly, now, it is just the more sensible investment to make, even without tax incentives. It is just a more profitable investment to make and you see banks and funds following that.  Even if you didn't care about impacting climate at all, you will see funds transitioning over for these newer spaces, let's say new technologies.

The answer is often that if you can understand the existing risk mitigators, it can be extremely profitable. If you're a bank and have the need to write a $500 million check on a utility scale solar project, that's a great place to invest in. But it's definitely less crowded than if you want to write a million dollar check. And in solar energy efficiency or a new technology, there's a lot of white space, which means that there's alpha to be had right for those who can figure it out.