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PACE Financing Shows How ESG Is Not Sustainability, but Still Useful

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By James P. Cargas
December 22, 2023

Environment, social and governance (ESG) standards are under attack in states like Texas because they are not “sustainable.” This may be a legitimate critique, but it is no reason to abandon the value of tracking environmental benefits with tools like ESG.

The original definition of sustainable development, from the 1987 Brundtland Commission, provides: “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The three main pillars of sustainable development have come to include economic growth, environmental protection and social equality.

Thirty-four years later, the European Commission (EC) put forth its Corporate Sustainability Reporting Directive aimed at increasing the scope of reporting requirements on non-financial material data. This directive created for the first time environmental, social and governance standards to guide corporate reporting. ESG standards were quickly adopted globally, especially by the largest companies, with about 90 percent setting carbon emission standards, according to the Harvard Law School Forum on Corporate Governance.

However, ESG standards omit the first pillar of sustainability: economic growth. Perhaps this is because the EC already had financial reporting requirements. Regardless of the reason, it has led to ESG decisions often being divorced from the real-world need for ongoing economic growth and corporate profitability.

The success of sustainability for nearly four decades has been its destruction of the environment versus economy dichotomy. When an action is sustainable, it simultaneously advances environmental health and economic strength in a manner that is equitable.

A great example of a sustainable program, is the emergence of Property Assessed Clean Energy (PACE) financing. For anyone unfamiliar with PACE financing, there is an excellent introduction in the March edition of PA Times. In sum, private property owners borrow from private lenders to make energy and water efficiency improvements, and to install onsite generation. There are now PACE programs in 38 states, and DC.

At the heart of PACE are the private and public economic benefits.

A unique feature of PACE loans is that the debt remains with the property, like a tax assessment. Thus, a new property owner takes possession subject to the PACE assessment and lien. After all, the improvements are attachments that also transfer to the new owner. Having energy and water efficiency features, and a lower operating cost, makes the property more valuable—a benefit to the private owner. The increase valuation often means an increased property tax assessment—a public benefit.

Climate change has resulted in increased weather risks resulting in aggressive increases in insurance premiums. Energy and water efficiency, and especially onsite generation, give a building greater resilience to severe weather. The property owner should see a lower insurance premium as a result.

When a PACE financed property has a savings to investment ratio (SIR) of one or greater, then the estimated savings will be sufficient to cover the loan payments. A cash-flow-positive SIR is a requirement in only a few states, including New York and Texas. Too often, improvements to energy and water efficiency are deferred maintenance. When a business can borrow 100 percent of its needs for such capital improvements, and the money saved will cover the cost of the loan, the business can use its capital for other needs, including additional labor that helps the business grow. This is one way PACE financing creates jobs. Of course, the installation of the improvements creates jobs too for construction, retrofitting, installation and engineering companies.

While economic development may lead, environmental protection and equity are also important to a sustainable future.

PACE Nation, the national organization of PACE market participants, estimates that PACE financing has reduced carbon dioxide emissions by 14 million metric tons, and resulted in 53 billion kilowatt hours of energy savings.PACE financing has resulted in the creation of 214,000 jobs nationally. Some states measure and track even more detailed environmental benefits. Here is where ESG tracking helps companies monitor whether their sustainability projects fulfill their environmental and equity projections.

Communities like the City of San Antonio, Texas, track PACE financing’s environmental benefits as a means of meeting National Ambient Air Quality Standards (NAAQS). “The PACE program supports the City’s goal of reaching attainment again, by allowing properties to reduce energy consumption and demand for power, which lowers overall emissions from power plants.”

When used alone, ESG standards are incomplete. When used to track sustainability progress, ESG standards serve an important accountability role.

Author: James Cargas has dedicated his career to implementing smart, sustainable, and renewable energy. Prior to founding Green Energy Law, LLC, James served at the Houston City Attorney’s Office, Department of Energy, Clinton-Gore White House, Federal Energy Regulatory Commission, and U.S. Congress. He is a graduate of University of Michigan and Washington College of Law. James is licensed in Texas, DC, Michigan, and West Virginia. Email: [email protected] Twitter: @TxPACEAuthority

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