Investing in Climate and Conservation Financing

Brad Hunter, Senior Business Lender, leads Craft3’s conservation and climate lending. With deep experience in natural resource management and land conservation, as well as familiarity with energy financing, Brad is well equipped to do this important work. He’s also skilled at explaining the complex landscape of financing, incentives, and on-the-ground projects.  

As Brad sees it, the Inflation Reduction Act and the Bipartisan Infrastructure Investment and Jobs Act have created unprecedented opportunities for communities around the Pacific Northwest to make significant investments around climate. There’s also ample opportunity for Craft3’s flexible capital to accelerate this work by bridging temporary funding gaps, financing climate tech and clean energy, and investing in land conservation that also advances climate adaptation. We hope you enjoy this conversation.  

How does Craft3's Strategic Plan set the course for our long-term investments in climate?

Over the past 15 years, our clean energy investments have focused on mitigation — helping communities and businesses reduce greenhouse gas emissions. We’re going to continue to do that work, but we’re also focusing more and more on adaptation. This work is about helping communities adapt to climate change, especially underserved and marginalized communities that are often least able to deal with those changes.

The other essential piece is making sure our climate work focuses on equity. So, if we're investing in solar, for example, are there opportunities to partner with Tribes to do that development? We’re striving to be more focused on the intersection of equity and climate because we want to ensure that the transition to a carbon neutral economy also moves us closer to economic justice. It's incredibly challenging, but it’s also a great opportunity.  

‍How has federal legislation, especially the Inflation Reduction Act, changed the landscape for renewable energy investing?

The relative permanence of the incentives is new and noteworthy. In the past, incentives would typically sunset within just a few years. This would create uncertainty and a feast-or-famine development mentality. The Inflation Reduction Act currently has a 10-year horizon on the tax credits, allowing for longer planning periods and increased certainty.

The other key piece is the Justice40 Initiative, issued by the Environmental Protection Agency, which mandates that 40% of benefits of investments are directed to “disadvantaged communities that are marginalized, underserved, and overburdened by pollution.” (source: https://www.whitehouse.gov/environmentaljustice/justice40/) Aligning incentives with underserved communities is a huge change and a tremendous opportunity.  

Specific rules are still getting written, but they will create a significant incentive to find ways to finance projects that are either owned by or benefit underserved communities. Historically federal tax credits were agnostic to location. So, it didn't matter where the system was located, the incentive was the same. Now, the incentives are actually stacked or enhanced by location. This creates tremendous opportunity for underserved communities and Tribes to benefit from those tax credits and the growth in renewable energy.  

It is also going to create challenges, from a financing perspective, as these are entities that have not traditionally participated in the sector. Craft3, however, is uniquely positioned to work in this space and provide financing because of our traditional focus on underserved communities, nonprofits, and Tribes.

‍What is Craft3’s strategy for investing in climate tech?

We primarily invest in earlier stage companies supporting entrepreneurs that are developing products and services in the climate space. This could be components for solar systems, it could be metering software to reduce water use for commercial buildings. It covers a broad array of businesses. Most of them are smaller, most of them are early stage, and have raised equity, that got them to this point of their growth cycle, and really need some sort of working capital, or in some cases, equipment financing but aren't yet ready for bank financing.

‍What is Craft3's strategy for investing in built infrastructure?

Built infrastructure is a catchall for a number of investments, whether it’s a solar system going in on a rooftop of a nonprofit, a community solar system, energy efficiency upgrades for commercial buildings, or biodigesters to reduce farm waste. It covers a broad asset class, but all of the investments are geared toward either mitigating greenhouse gases by reducing energy use or producing renewable energy, or in some cases, helping communities adapt to climate change. And a good example of that, a recent transaction that we worked on was a food bank that included not only a solar system, but also battery storage, which increases the resilience of the organization, and the broader community it serves.

‍What are some of the challenges of working with communities that have not received financing in the past?

Organizations, often younger organizations, that haven't borrowed before usually don't have that level of capacity to work with lenders. They also often are not able to assess their own risk in borrowing money and their ability to take on and manage debt. These are frequent challenges faced by low-income communities, community-based organizations, tribes, and rural municipalities.

When you couple that with the complexity of energy projects, you have real barriers that can prevent financing from flowing to impactful projects. Craft3 has a long history of working closely and successfully with new borrowers, helping them understand the complexities of financing so they can become borrower-ready.  

‍Can you tell me about one type of project Craft3 is focusing on?

On the commercial side we are focusing on nonprofit building finance — both building acquisition and new building construction. My feeling is that all nonprofit building projects should strongly consider energy efficiency upgrades or solar to reduce their long-term occupancy costs and take advantage of state and federal incentives. These investments are much easier to make when you buy or build out a building.

We think it makes sense for climate investments to essentially ride along with those larger capital investments. We help borrowers understand the benefits which usually include lower utility costs and increased resilience. And incentives make it so that it’s often possible to pay for most of the system through a combination of federal and state grants.    

What is the Conservation Bridge Fund and why is it important in the context of climate adaptation?

The Conservation Bridge Fund provides bridge financing so that land trusts, other conservation organizations, and Tribes, can acquire land ahead of state and federal funding. We’ve managed this fund for 12 years. Historically, the focus has been on traditional land conservation — preserving for wildlife habitat and improving the quality of the natural world.

Our focus is changing, however, in parallel with how land trusts, conservation organizations, and Tribes are changing. Increasingly, these groups also focus on the intersection of land conservation, climate adaptation, and equity. Our strong network of existing partners gives us a great opportunity to do more in this space.

In more and more cases, our borrowers are assessing properties through a climate lens based on the physical characteristics that help species navigate climate change and the natural processes the land supports and which make communities become more resilient in the face of increasing drought, rain, and flood events. We believe that one way to mitigate at least some climate-change induced chaos is by investing in natural systems at scale. When you invest in the health of natural systems at the watershed scale it creates a number of co-benefits. You're not only getting water quality improvements, but also wildlife habitat, open space, and in a lot of cases, increased carbon storage on that landscape.

In addition to capital, what does the Craft3 team bring to its conservation lending work?

We've been doing this work for a long time, and we’ve developed deep institutional knowledge about land conservation, specifically around funding sources in both Washington and Oregon. We understand repayment sources for these loans and can partner with land trusts to help them understand the risks they're taking. We’re also able to be more flexible than traditional banks, structuring loans that provide flexibility in the case of funding delays or other complexities.

‍Any closing thoughts?

I’m an optimistic person. I also realize that when it comes to mitigating the impacts of climate change, time is not on our side. There is great urgency to this work. Flexible capital, like what Craft3 is able to provide, has the potential to significantly accelerate all sorts of climate mitigation and adaptation efforts. That gives me hope and makes me feel like I’m working where I should be.