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How private debt is helping fight climate change

How private debt is helping fight climate change

Commercial banks have largely abandoned traditional forms of lending due to bank capital ratio reforms following the Global Financial Crisis. The result is that many sectors have been starved of capital. This has created a big opportunity for private debt. Private debt growth is now outpacing that of private equity funds and might well be compared to that of hedge funds in their pioneering days. More specifically, it is leading to renewable energy innovation in the agricultural sector.

Private debt offers huge potential in renewable energy

In many ways, private lenders are simply stepping into the shoes of the banks. They often employ commercial finance teams (from leading banks and finance organisations) and follow similar risk management and approval procedures that the banks used to. However, there is one key difference: these private lenders are also creating investment opportunities.

This is where private lending is playing a role in fighting climate change. Take the UK government’s commitment to the Paris Agreement on Climate Change, for example. The government must get businesses and investors on board with renewable energy objectives, and private debt investment is showing significant potential in the development of the UK’s clean energy infrastructure.

The Alternative Credit Council projects that private debt AUM will pass US$1 trillion by 2020. But given private lending’s growing role, there are still relatively few dedicated lending strategies with a significant renewable energy component.

The more ubiquitous ESG screenings are rarely strict or specific enough. And even with the Global Sustainable Investment Alliance, the asset management industry has largely responded by screening out non-compliant investments – rather than engaging with renewable energy proactively. Yet more and more investors want to see their products as part of the solution to the climate crisis.

Meanwhile, the UK farming community faces a continued lack of financing given the restrictions from traditional lenders – while costs of electricity and waste disposal is rising. Alternative energy sources represent a viable solution and Prestige is very much leading the way through private lending.

The growth of anaerobic digestors

Prestige provides debt finance for on-farm green energy projects. One key area of focus for us is in the construction and maintenance of anaerobic digestion (AD) plants. AD plants consume farm waste and generate clean electricity, and according to the industry trade body (the Anaerobic Digestion & Biogas Association) they now power 1.2 million British homes.

There are over 300 agricultural plants operational in the UK with another 50 biomethane plants planned to come online in the next two years. Biogas heat generated and paid for under the RHI (Renewable Heat Incentive) were projected to reach 600 gigawatts by the end of last year – a 20% year on year growth rate.

Much of this proliferation of AD plants in the UK is being funded through private debt. This not only offers a solution to farmers, but it is an attractive opportunity for impact-minded investors too.

Prestige has financed over 50 such projects in the UK to date. Our centre of in-house expertise goes way beyond simply providing finance. We take a consultative approach, working actively with farmers to ensure their projects come online smoothly and are able to generate power for their requirements – while also re-selling power back into the national grid.

Win-win: investment returns which make an impact

Many of Prestige’s investors have been institutional, ranging from sovereign wealth funds to pensions and private banks. But there is also growing interest in private lending as an alternative asset class for retail investors, as demonstrated by the success of peer-to-peer lending platforms.

As such, we are now partnering on the launch of UK project-linked retail investment products. Retail investors are becoming increasingly concerned how their money is put to use and want to see it helping the planet and going some way to achieving environmental targets – while also making a return. We partnered on the launch of two retail bond products in the UK in the last year alone, both of which are eligible for both ISA and SIPP structures.

In conclusion, private lending has come a long way since the Global Financial Crisis. It has created a much needed source of finance for jobs and businesses at a time when the banks have been withdrawing from many types of active lending.

In this respect, private debt is playing an important and strategic economic role. But as demonstrated by the growth of AD plants, the role it can play towards helping reduce carbon emissions is of equal value. And the fact that the opportunity is attracting interest from a much broader spectrum of investors gives an insight into the future potential.