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Welcome to Week 14 of Be the Change!
This week I discuss the need to reward the right kind of ambition--that is, ideas and policies that are broadly beneficial to the planet. I then share a particular idea I'm working on for a model that enables low and moderate-income families to save money, nearly eliminate greenhouse gas emissions, and make their homes healthier and safer. Lastly, I share a poem about my son, Richard, playing in the mud.
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Every day, moneyed interests invest millions of dollars into companies whose societal value ranges from zero to extremely harmful. There are well-known examples, like "Juicero, the infamous maker of an overpriced and overhyped juice squeezer...which raised more than $100 million from Silicon Valley venture capitalists" before shutting down. But for every Juicero, there are 100 quiet examples of bad / useless ideas--gadgets and gizmos and apps--that raise millions of dollars from investors seeking double and triple-digit returns.
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The last part is key: if one's goal is to make as much money as possible, one will invest in any idea, regardless of its value to people or the planet, so long as there is a profitable exit strategy. As a result, our economic system rewards the wrong kind of ambition: money tends not to flow to ideas that create the right kind of value because, as I often note, it is rarely possible to do well and do good. That is, if I want to start a venture that addresses homelessness, say, I can't also make myself and other people rich in the process.
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Yes, this is the system that has given us iPhones and Google Maps and Teslas and mRNA vaccines, but it has also brought about a climate emergency, global poverty, and a viciously unequal rollout of COVID19- vaccines. A kinder and gentler version of the venture capital / private equity model of capitalizing ventures is a bit of a joke to the billions of people dying and suffering from these outcomes.
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Fundamentally, there are two failures here. The first is of public policy, and the second is of moral imagination. With respect to policy, let's consider taxation. As a nation, we have decided that income from capital is more important than income from labor. If I am wealthy, invest my money in a startup, and then realize a significant return--known as a capital gain--that profit will be taxed at anywhere from 0% to 20% (assuming it's a long-term capital gain). However, the actual tax rate is almost always much lower, because the wealthy have dozens of loopholes in the tax code that they can take advantage of.
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Stunningly, the taxes the wealthy pay on capital gains are similar to what lower-income workers pay on income from their labor. In fact, as a result of the Republican-passed 2017 tax reform, "ultra-wealthy households pay a total rate of about 23%, with 24.2% for the bottom half of households." Think about that: we now live in a country where the rich pay LESS in taxes than the non-rich, even though a capital gain requires minimal work: an investment is, aside from some due diligence, a matter of writing a check.
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Consider also that teachers make less than hedge fund managers, public defenders less than white shoe attorneys who defend Big Oil, legislative staffers less than lobbyists. Yes, this is partly due to the way the labor market works, but we have also chosen to underpay government employees and others who are essential to a vibrant and healthy democracy. And these are merely a handful of countless examples of where public policy rewards the wrong thing (by the "right thing" I mean what's broadly beneficial to people and the planet.)
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Our failure of moral imagination is perhaps more insidious, for we have sold ourselves--and been sold on--the notion that it is naive to expect people to not maximize profits, to choose lower returns in exchange for positive impact. The do well / do good mantra I referenced earlier means that we will only solve those issues that happen to be profitable to solve, and even then, we are not equitably solving them. COVID-19 vaccines are an excellent example. Rich governments promised to buy billions of dollars worth of any vaccines that were developed; this guarantee helped spur companies like Pfizer to put significant resources behind the vaccine. The result? The pandemic is nearing an end in America, yes, but residents of non-wealthy countries, unable to access the vaccine, are dying in drives: well over 3,000 a day in India, nearly 1,000 in Brazil, etc. At the same time, "the vaccine brought in $3.5 billion in revenue in the first three months of this year, nearly a quarter of total revenue."
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Yet from the vantage point of those who believe that business is the solution to everything, Pfizer's profits and America's successful vaccine rollout show that things are working as they should be. And that's because of the aforementioned failure of moral imagination.
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So here we are, facing an interlocking series of crises that threaten democracy, freedom, and life on Earth. Where once it was possible to dismiss as unrealistic ideas to tackle these problems because the ideas required significant grant subsidy and below-market-rate returns, it is now unrealistic NOT to do something. We must immediately begin to reward, through good policy and a reframing of our expectations about risk and financial return, the right kind of ambition: ideas, policies, and business models that urgently foster a better world.
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In the next post I share a particular idea for dealing with climate change and inequality through a bold business model. Check out that post here. As always, I welcome your feedback!
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Net Zero Energy: A Plan to Electrify Low to Moderate-Income Homes
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The Challenge
Tackling the climate crisis will require an economy-wide approach, reaching every business, every home, and every family. The good news is that we have the technological know-how to foster a carbon-neutral future: solar, wind, and other renewable sources, combined with battery and other storage technologies, can power an “electrified” economy, with more and more appliances, vehicles, HVAC systems, cooktops, and other equipment running on green electricity. Unfortunately, climate change mirrors other injustices in America and around the world: environmental degradation disproportionately impacts communities of color, women, immigrants, and Indigenous peoples. Absent a deliberate and thoughtful plan, these communities will be left behind—unable to benefit from the upsides of a greener economy while continuing to suffer from the old, dirty system.
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A 2019 study found that “census tracts that are over 50 percent black or Hispanic have ‘significantly less’ rooftop solar installations than census tracts with no majority or that are majority white.” At the same time, homeowners who are of color and / or low to moderate-income (“LMI”) are more likely to suffer from poor indoor air quality; to live in unsafe conditions due to asbestos, mold, knob-and-tube wiring, and other hazards; and to pay a higher percentage of income on utilities as a result of inefficient HVAC systems, appliances, and building envelopes. LMI families looking to make green improvements in their homes face several barriers, including:
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1. An inability to access affordable loans due to poor credit, mistrust of the financial system, racism, a lack of home equity, lenders being uninterested in financing small projects, etc.
2. A lack of reasonably priced contractors who specialize in all facets of electrification forces homeowners to become experts in green technology
3. The difficulty of understanding the universe of options—solar PV, solar hot water, heat pumps, high-efficiency boilers, geothermal—for going green.
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The Opportunity
A well-designed electrification program can, at scale, enable millions of homeowners to save money, increase the value of their homes, and improve indoor air quality and safety. In fact, according to a recent report by Rewiring America and the Coalition for Green Capital, a national electrification program “has the potential between now and 2030 to secure energy bill savings of up to $750 per year for nearly 12 million American households (75 percent of which are LMI), while at the same time creating over 700,000 jobs and driving down household greenhouse gas emissions by nearly 40 million metric tons a year.”
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A lack of access to affordable capital, combined with redlining, de facto segregation, and other historical and ongoing injustices, has resulted in a lower-quality housing stock for LMI families and made it harder for these families to finance needed improvements. To create a Net Zero program—which we define as an initiative that strives to get household emissions as close to zero as possible while structuring the financing so that the monthly savings is equal to or greater than the debt service—several elements are essential:
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1. Financing must be made available to LMI borrowers at low rates and with long terms, so that the energy savings outweigh the debt service cost. For example, if an average family spends $2,500 per year on heating and cooling and the average electrification project costs $35,000 (net of rebates and tax credits), then a Net Zero loan would need to carry a maximum APR of 3.5% and a term of roughly 20 years.
2. To offer Net Zero loans at 3.5% for 20 years, the lender must secure flexible, long-term capital at a blended cost-of-funds of roughly 1.88% (assuming a 1.5% net charge-off rate)
3. A robust network of contractors must stand ready to do the work. These contractors must:
a. Offer a turnkey solution, so that homeowners needn’t interface with a separate solar, HVAC, water heater, and insulation installer / contractor
b. Have an understanding of the community so as to build trust, reach families, and explain the benefits of electrification
c. Create a simple, easy-to-understand, frictionless, and user-friendly experience, from inquiry through to project completion
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The Proposal
Capital Good Fund (“Good Fund”), a nonprofit, U.S. Treasury-certified Community Development Financial Institution that specializes in small-dollar personal loans for LMI families, seeks to launch two entities to run a $100 million pilot program that will electrify 2,800 homes. This program will be closely aligned with Good Fund’s mission to create pathways out of poverty and advance a green economy through inclusive financial services: we have always worked at the intersection of economic and racial injustice, climate change, and predatory lending. Since our founding in 2009, we have closed 7,300 loans for $14.7 million (with a 95% repayment rate), of which 535 loans for $4.5 million have been specifically for energy-efficiency upgrades (with a 99.4% repayment rate).
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The first entity, the Green New Deal Fund (“GNDF”) will raise $100 million in low-cost, long-term capital to finance the 2,800 projects; Good Fund will use this capital to issue financing to homeowners for the electrification work. The second entity, Net Zero Energy (“Net Zero”), will be a for-profit subsidiary to Good Fund that will provide turnkey electrification services to homeowners ranging from solar PV and battery backup system installation, to heat pump-driven HVAC and water heaters, home EV charging stations, induction cooktops, insulation, and home health and safety measures. Exhibit A illustrates the relationship between GNDF, Net Zero, and Good Fund.
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Green New Deal Fund
While the structure is still to be determined, there are several possible approaches. Two options that stand out are:
1. A traditional debt fund, into which investors make loans. These notes could be offered via a nonprofit private placement, such as a 506c offering that allows the notes to be marketed in all 50 states (albeit limited to accredited investors). Under this structure, Good Fund would be engaged to originate, underwrite, and service a pool of loans for GNDF
2. A Limited Partnership or Limited Liability Limited Partnership into which investors make equity investments. Under this structure, investors would come in as limited partners and Good Fund would be the general partner.
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Regardless of the legal structure of the fund, to secure a blended cost of funds of 1.8%, GNDF will use an integrated capital approach. For example, under a traditional debt fund there could be three tranches of capital:
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• An entity like the Community Guarantee Investment Pool, or another foundation / donor (or combination of funders), would guarantee the first 5% of losses ($5 million)
• Investors in a second-loss position (after the guarantee pool), would earn a rate of 3.5%. $35 million would be issued at this rate
• Investors in a third-loss position would earn a rate of 1%; we would issue $65 million at this rate. In order for these investors to have any principal at risk, the overall net charge-off rate would have to be 40%. Therefore, in exchange for almost zero risk, the investor would earn a more modest return
• This model yields a blended cost of funds of 1.88%
• A simplified financial model can be found in Exhibit A
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Net Zero Energy
Net Zero will be a for-profit subsidiary to Good Fund, with the nonprofit having the majority of voting shares so as to retain control over the mission. Net Zero will seek certification as a B Corp and incorporate equity into every aspect of its operations. A primary focus will be diversity—from the Board to senior management and frontline workers—as well as offering generous salary and benefits, excellent working conditions, and a means by which employees can obtain shares or profit-interests in the company. Investors in Net Zero will receive a limited return on their investment, with the understanding that generating market-rate returns is incompatible with a mission-first entity that serves marginalized communities, hires from those communities, and creates good-paying, upwardly mobile employment opportunities. Determining the specific rate of return for investors in Net Zero will require further modeling, which we hope an Advisory Board will help us with (see “Next Steps” below).
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While Net Zero’s CEO will be Capital Good Fund’s Founder and CEO, Andy Posner, day-to-day operations and management will be led by a person with deep experience in the solar, HVAC, and / or weatherization field, along with an experienced team of marketers, web and database developers, customer service representatives, and installers.
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Fundamentally, the idea is to allow for vertical integration, with the combined family of entities—Capital Good Fund, Green New Deal Fund, and Net Zero Energy—controlling every aspect of the electrification process, from raising capital, to marketing, financing, installation, and customer follow-up. This vertical integration, occurring under the aegis of a Community Development Financial Institution with a twelve-year track record, ensures that the mission of the initiative—to address climate change while reversing economic and racial inequality—is protected and indeed remains front and center. We are unaware of another model such as this, and, after a successful first deployment of $100 million in projects, the program could scale to $1 billion and beyond. Given the scope of the climate crisis, the need and potential for the program is orders-of-magnitude greater.
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Next Steps
We are seeking to create a top-notch Advisory Board to assist with the creation of a business plan for Net Zero Energy, identifying potential investors in both Net Zero and the Green New Deal Fund, and determining the best structure for GNDF. Given the urgency of the moment, we are looking to complete a draft business plan by September 1. Concurrently, we will begin to reach out to potential investors, funders, board members, and partners—including municipalities, community colleges, job training providers, solar and HVAC manufacturers, community groups, and other key stakeholders. We wish to be ready to begin our first electrification project in January / February 2022.
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Exhibit A: Simple Financial Model for Loan Fund
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Exhibit B: Relationship Between Entities
The following illustrates the relationship between the nonprofit lender, the issuer of low-cost debt, and the provider of turnkey electrification work:
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Mom once told me that in the Soviet Union
parents wouldn’t let their children play in the mud
because they were poor and the washing was hard,
and I think about how even in America and not-poor
she wouldn’t let me, either; how I want to pull my son
from the muck, rinse him off, put him in a fresh diaper;
how his laughter is as pure as the near-summer birds
rinsing in the puddles, as the blades of grass
shaking themselves dry in the gentle breeze.
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Whatever the purpose of childhood beyond learning
to read and count, to say please and thank you,
it is this: to persist in playing long after Dada says
it’s time to go home, until, cold, wet, and hungry,
you throw a tantrum you’ll have long forgotten by the
time you are warm and clean, happily eating lunch.
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