EATING ONE’S CAKE

I have been of the opinion for quite some time that it is possible to achieve substantial social and/or environmental impact alongside market rates of return.  To have one’s fairtrade cake and eat it, so to speak.  Not in all situations for sure, but certainly in some areas.  And why not?  As a society we are quite happy for companies – and indeed ourselves (take a look at your pension) – to make profit from things that kill people, tie them to a life of addiction or simply exploit them.  But make a profit from doing something good and helpful?  Tut tut…  Well, we’ve just done our first truly, 100% gen-u-ine, bone fide market rate transaction to add to the growing weight of evidence that will hopefully lay the impact-return argument to rest very soon.  (And it looks almost as good as our Sarah’s now-infamous Victoria-sponge-plus-chocolate-cake-with-white-chocolate-and-raspberry icing concoction, which is really saying something).

Our client, Empower Community, has just bought a portfolio of solar panels on the roofs of over 2,300 social houses in Sunderland owned by the Gentoo housing association.  These panels were installed for free by Gentoo to give their tenants free power and substantial help with the fuel poverty that many of them were and are facing.  Our estimates suggest total annual benefits of £0.5-1m in energy bill reductions alongside a saving of 3,000 tonnes of CO2 emissions.  The tenants we spoke to were certainly delighted with them.  Gentoo will use the money from the refinancing to install panels on another 3,000 or so homes, enabling yet more families to benefit from free energy.

The £10m raised for this transaction came from a large, institutional UK pension fund that demanded market standard terms and conditions.  Given their mandate and fiduciary duties this is perfectly reasonable.  (OK, yes, I do long for and am working towards the day when all investors want or are required to truly consider the impact of their investments and actively seek transactions like this; but we’re not there yet so the pragmatist in me prefers to roll up the sleeves and work from where we are rather than just wait for nirvana to be delivered by someone else).  This deal therefore pays a market rate of inflation-linked return, with strong cash flow covenants, cash buffers, insurance and full security.  No subsidies or cut-corners there.  We’ve also created a financial and legal template for future deals of which, hopefully, there will be many.  The investor likes the social impact of the project and hopefully will feel this is an asset that they can be proud of, but ultimately they bought it because it matches their liability profile and generates the right level of return for the risk.  Just imagine if, one day, we could finance the trillions of pounds of pension liabilities with assets that produced similar impacts to this one?  It’s one of my happy places…

Did the transaction rely on pro bono support?  Nope.  Lawyers, advisors and technical specialists were all paid reasonable fees for their work.

Ah yes, the Loxodonta africana in the room.  The debt is being repaid through the feed-in-tariffs which are themselves a form of subsidy.  So the deal is subsidised, right?  Again, no.  The oil & gas, automotive and steel industries (to name a few) all receive huge government subsidies in different ways around the globe, but no one considers the returns of BP or ArcelorMittal to be anything other than ‘market’.  Feed-in-tariffs were introduced to encourage the necessary switch to cleaner forms of energy.  Whether one likes this or not is a moot point – they are the cash flows which currently define this particular market so they are what the pragmatist has to work with.  You and I are contributing to them through our energy bills and, personally, I would rather see them going towards a transaction like this than lining the pocket of a private developer.

Which brings me to the final point – the sharing of the profits.  During the life of the transaction, over 80% of the profits flow back to the local community – on current estimates that’s over £5.5m – either directly through a local community foundation or indirectly via Gentoo (itself a not for profit organisation).  This is on top of the free energy and will target further reductions in fuel poverty as well as issues such as education, training and employment in the community.

And that’s the cherry on top of the white-chocolate-and-raspberry icing.

By Martin Rich, Sales Director at Social Finance

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