Environmental justice investors: It’s the demand-side, stupid!

Many of us want to see clean energy, energy efficiency, climate resiliency and sustainability take root in communities of color and low-wealth communities.

We could get there quickly if the Biden administration, the Environmental Protection Agency (EPA) and the Greenhouse Gas Reduction Fund invest as much in project readiness as in direct financing.

The Biden administration’s EPA aims to reduce greenhouse gas pollution through the Justice40 initiative, which is focused on communities they define as marginalized, underserved and overburdened by pollution.

Two grant programs totaling $27 billion, both part of the Greenhouse Gas Reduction Fund, will launch later this year. And guidance from the EPA this week confirms that these same communities will be priorities for this significant federal funding.

But that funding will go underutilized, and we will fail to fully leverage this historical investment, without significant attention to two barriers to adoption and scale of greenhouse gas-reducing efforts in Justice40 communities.

First, organizations need access to knowledge and technical advice from trusted sources who aren’t selling products. Second, they need a modest amount of cash equity to put into projects. These barriers fall under the umbrella of “project readiness,” and they are what stop many community-based organizations from installing rooftop solar or heat pump, or from conducting energy efficiency retrofits.

To explain how these barriers work, let’s look at common scenario.

Say a Justice40-aligned nonprofit organization wants to install solar panels on its building to reduce energy costs and become more climate resilient. It reaches out to a solar installation company from outside the community to talk.

In the first meeting, the company talks about building assessments, new technologies and a complicated financing scheme. It sounds like it has merits, but people in Justice40 communities are understandably distrustful of complicated financial arrangements. They can’t say for sure if this is the right path forward.

The organization is also told it will need to put cash equal to about 10 percent of total costs into the project.

The organization’s leadership hits the pause button. They realize they need to better understand the technology and the financing options to be sure they are charting a productive path.

But when they look around for technical advice, the places they find it are other companies selling similar services and equipment. How can they trust them as fair and unbiased messengers any more than the company they’re already talking with?

And the 10 percent equity requirement is no small ask. Let’s assume that a typical project for a community-serving nonprofit is $400,000; this means they need $40,000 upfront. The organization might have that, but it also has several needs competing for limited resources. So, it puts off the greenhouse gas reduction investment.

This is the scenario we can — and must — change. We must improve access in Justice40 communities to information and professional advice from entities that aren’t selling or financing the products and we must provide equity to put into projects. 

These things are robustly available to people and organizations in more affluent communities, where greater financial resources circulate and networks of educated professionals help their daycare centers, community groups, schools, churches and employers leverage federal tax and other subsidies for greenhouse gas reduction investments. 

My back-of-the-envelope estimate says by earmarking $12 billion, less than half of its $27 billion pot, to scale a trusted project advising infrastructure and to provide 10 percent project equity grants, the EPA could ensure more than 150,000 projects in Justice40 communities are made ready.

That’s enough to ensure that greenhouse gas reduction technology is available to every community health center, every housing or mixed-use project currently financed by federal low-income or new markets tax credits, 10,000 community and senior centers, every Head Start program and tens of thousands of other community-serving organizations. 

With convincing evidence of financeable demand, investors will come running. The truth is that many corporate and institutional investors ache to invest in projects that will meet climate and equity goals. We don’t have an awareness-building issue anymore, and we don’t really have a financing issue.

When I talk to community-focused lenders about why they are not investing more in Justice40 communities, they tell me that the transactions are really hard; the deals don’t “pencil out” because there isn’t any equity in the project. Or they say organizations aren’t ready. We can change this dynamic.

Building financeable demand is the ticket. It involves removing the barriers to reaching project readiness that Justice40-aligned organizations face. That’s important work that often goes underfunded and overlooked, leading the immense sums of available financing to go underutilized and misdirected.

We can’t afford this same status quo outcome now. The EPA, applicants to the Greenhouse Gas Reduction Fund and all of us who care about this issue have the opportunity to get it right with this once-in-a-lifetime opportunity.

Joe Evans is the portfolio director and a social investment officer at The Kresge Foundation.