Innovative investment strategies to advance climate equity

Many of the technologies that will be critical to the achievement of global climate goals remain out of reach for many low-to-moderate income consumers. Cost is a major barrier, but many climate solutions also have yet to be tailored to the needs of low-to-moderate income households:

• Though the cost of electric vehicles is declining, most buyers in the U.S. have been wealthy homeowners.² Not surprisingly, the nation’s still-nascent charging infrastructure is concentrated in wealthy neighborhoods. Even if renters in low-to-moderate income areas, who are disproportionately people of color,³ have the resources to acquire an electric vehicle, the lack of local charging infrastructure disincentivizes them from making a purchase.⁴
• Rooftop solar panels are among the most direct ways households can access the benefits of renewable energy. But rooftop solar adoption has similarly been concentrated among wealthy homeowners living in neighborhoods with higher-than-average credit scores.⁵ The high up-front costs of solar panels make financing a critical enabler of adoption. Low-and-moderate income homeowners tend to have lower-than-average credit scores,⁶ which makes it more difficult to qualify for rooftop solar financing.
• According to research conducted by the National Renewable Energy Laboratory (NREL), 62% to 95% of American households would “see a drop in their energy bills by using a heat pump.”⁷ Heat pumps use the same basic technology as an air conditioner, but can operate in reverse, heating a home during cold weather. They offer substantial climate benefits, especially when they replace fossil fuel-powered furnaces, but they are currently cost prohibitive for many households. In 2023, the median cost to install a new heat pump was $16,025 after incentives, roughly equivalent to 21% of the median household income in 2022.⁸

Accelerating the push toward affordability

Nearly every new technology follows a downward cost curve and electric vehicles, heat pumps, rooftop solar, and other climate technologies are all gradually becoming affordable to a broader range of households. But those cost curves may not be steep enough to match the pace of climate change. Given the history of environmental injustices in the U.S.,⁹ there is also a strong moral argument that low-to-moderate income and majority-minority communities should not have to wait.

Policy certainly has an important role to play in accelerating progress towards affordability. In January 2021, President Biden announced his administration’s Justice40 Initiative, which mandates that at least 40% of the benefits of federal climate investments must flow to “disadvantaged communities.” The Infrastructure Investment and Jobs Act and the Inflation Reduction Act, passed in 2021 and 2022, respectively, also included provisions that steer tens of billions of dollars towards environmental justice programs. These measures are all designed to ensure that low-to-moderate income and other underserved communities are not left behind in the energy transition.

Opportunities exist for the business community as well. In 2018, for instance, the National Renewable Energy Laboratory estimated that low-to-moderate income households represented 42% of the total U.S. rooftop solar potential.¹⁰ Further afield, the International Finance Corporation identified $23 trillion of “climate-smart” investment opportunities across 21 emerging markets between 2016 and 2030.¹¹ These are just two of several large markets open to profit-seeking private capital.

Fiduciary Trust International’s sustainable investing team works with clients who have expressed a commitment to advancing climate equity even as they pursue broader investment objectives. We scour the landscape for investment opportunities, looking for entrepreneurs and investment fund managers that are repurposing Pralahad and Stuart’s call for business model innovation for the goal of advancing climate equity. We have been successful in several areas, including the following private market investment opportunities:

• In 2020, one of our growth stage investment managers invested in a rooftop solar leasing company that targets customers in low-to-moderate income communities. The company does not require its lessees to meet minimum credit score requirements, choosing instead to take the risk that budget-conscious customers will prioritize lease payments on a system that reduces their net utility costs. The company has also managed to keep customer acquisition costs, a key determinant of profitability, low by partnering with community groups that can help spread their message.
• In another case, an early growth stage fund manager invested in the largest battery swapping network in India serving three-wheeled vehicles. In 2022, over half of new three-wheeled vehicle registrations in India were electric and today they account for the vast majority of electric vehicles in the country.¹² But a lack of charging infrastructure continues to constrain growth. The battery swapping model substantially reduces the cost of purchasing three-wheeled vehicles, making it more accessible to low-income households, and helps eliminate the “range anxiety” that can accompany electric vehicles.
• Finally, our clients have invested with an investment fund manager that preserves multifamily affordable housing and makes “greening” a strategic priority. The firm has a goal of reducing the carbon emissions and energy intensity of its buildings by 20% post-acquisition, as well as reducing water intensity and waste streams by 15%. The firm also works with community partners to make climate solutions, such as community solar, available to its residents. While many of these measures help reduce the firm’s operating costs, they also lead to improved quality of life for residents, most of which earn less than 80% of the local area median income.

The climate consequences of carbon-intensive consumption

According to the International Energy Agency, the average North American emitted 11 times more energy-related CO2 in 2021 than the average African.¹³ Low-to-moderate income households in Africa and around the world are justified in their pursuit of higher living standards and it is in everyone’s interest to help them succeed. But if they adopt the same carbon intensive consumption patterns as today’s middle and upper classes in countries like the United States, the consequences for the climate would be devastating.

This dilemma presents an exciting opportunity to deploy new business models that promote sustainable economic development and improve people’s lives while also mitigating climate change.