Interview: ‘We need to demonstrate a business case for sustainability’
The Green Finance Institute’s James Hooton explains how he plans to unlock private capital to fund the green transition. Interview by Nicol Dynes.
As managing director of the Green Finance Institute (GFI) Europe, James Hooton has a rather difficult job.
His task is to find the €275 billion of additional investment in sustainable building renovation and retrofit that is needed every year to reach the EU’s target of reducing greenhouse gas emissions by 55% by 2030.
He has to find ways to unlock private capital at the speed and amount required to increase the renovation and retrofit rates in Europe, which are currently 0.2% but need to reach 3% by 2030, to achieve the EU’s climate goals.
In his first in-depth interview in his new role, Hooton tells Impact about his plans to achieve the GFI’s goals.
How do you plan to tackle the €275 billion finance gap in retrofitting residential and commercial real estate to achieve the ambitions of the European Green Deal?
I used to work at Goldman Sachs, and at the GFI, we are all financial institution professionals. We have the experience and the inside knowledge to overcome that gap. We work at three levels. The first goal is to crowd in private finance.
We work with policymakers and local authorities in the UK and Europe, and we also act on the supply side, with financial institutions, market participants, real estate investors, asset owners, civil society and academia. The goal is to make money move in the economy: our raison d’être is bridging the execution gap between commitment and action.
How do you go about finding more private capital to fund the green transition?
There have been headwinds, like the attack on the ESG agenda in the US and, of course, the cost of capital following interest rate increases. But growing awareness of the problem has helped, as has the emphasis from COP28 on tripling renewable energy and doubling energy efficiency.
The direction of travel is positive. When you look at the cost/return equation for retrofitting, we try to work with market participants, looking at sustainability disclosures, making transition plans and finding ways of financing them.
One market mechanism is linking debt to property, as the US does with the Pace (Property Assessed Clean Energy) model. This has enabled the investment of over $13 billion in making homes and commercial buildings greener and more resilient.
“Radical collaboration is what is needed. Private finance needs to show how we’d bridge the finance gap, then policymakers can be more ambitious.”
James Hooton, Green Finance Institute Europe
Introducing property-linked finance to the UK and across Europe could have the same effect, enabling property owners to fund up to 100% of energy-efficiency upgrades upfront. The finance is linked to the property rather than to the owner, and the payment obligations transfer to the new owner when it is sold.
A big part of your job is to build relationships with key public- and private-sector stakeholders. How important is the role of public-private partnerships in delivering net zero, and what are the challenges?
Public-private partnerships play an absolutely crucial role. Radical collaboration is what is needed. If you look at the EPBD [the EU’s Energy performance of Buildings Directive], its new approach unveiled last year is not ambitious enough to meet the pace and scale of demand.
If we are collaborative, then we can aim higher. But private finance needs to show how we’d bridge the finance gap, then policymakers can be more ambitious.
How important is innovation? What new financial solutions are being found?
Innovation is a key part of what we need, along with collaboration, because market barriers exist outside of policy.
For example, we’re looking at an interesting mechanism in Seattle in the US, called MEETS (Metered Energy Efficiency Transaction Structure) that addresses the split incentive market failure [when the benefits of a transaction pass to someone other than the party paying the cost]. This often hinders efficiency improvements to commercial buildings.
It’s a financing solution that allows customers to implement efficiency projects with no upfront capital expenditure. The provider pays for project development, construction and maintenance costs. They’re able to price energy efficiency. The utility company signs a power purchase agreement with asset owners of large commercial buildings, so the cashflow goes into a renovation plan and it’s paid for.
You were appointed last year to lead the GFI’s European expansion. What is happening on that front?
We believe we need to work together: we want to learn from our EU counterparts and vice versa – we go further and faster if we go together.
We looked across the 27 EU countries at who was being active and who had the most ambitious policies. Where is the green finance agenda fairly well progressed?
Spain came out on top, and Denmark is also ahead in terms of building renovation. So, last year, we expanded our presence to those two countries. These are excellent places to start, with institutional investors that have capital to deploy and are owners of real estate.
A great example is the appetite for innovation. We are starting a project in Denmark on retrofitting buildings with a whole-life carbon approach, using bio-based materials, such as straw, as insulation material. Carbon credits give an extra financial incentive.
Supply-chain innovation goes hand in hand with financial innovation.
We also work closely with eight cities in Spain that have signed up to the EU mission, and support their transition to climate neutrality. A big chunk of the €140 billion in recovery and resiliency funding they got is stuck at the autonomous-region level. How do we go past this gridlock and unlock this capital to decarbonise these cities?
We focus on project implementation: assess if the projects are bankable, find new mechanisms to assess cashflow, and make the projects ready and investable. Doing the detailed analysis and hard work is where we add value.
What’s on your to-do list for 2024 and how optimistic are you?
We want to interact and work more closely with EU policymakers to make the transition financeable. Our plan is to open an office in Brussels this year.
There are worries: there are elections ahead, and the polls indicate a shift to the right in the European Parliament. What will this mean for the Green Deal 2.0; is it under threat? We need to demonstrate a business case for sustainability and unlock private finance. We will support sustainable finance initiatives in different countries, because some just look at green finance, rather than financing green [developments].
We’re also rolling out green leases with CBRE in Spain, working on the MEETS initiative to price energy efficiency and create cashflow.
We’ll work on materials: green concrete and green steel are still more expensive. We could find a way of making lower-carbon materials cheaper by committing large companies to buy pre-determined quantities.
We’ll continue to work on education in green finance, which is crucial work. We still haven’t shown policymakers how finance can fill the gap and we haven’t shown consumers all the benefits of the transition, which they still see as a cost.
Will we act in time? There is a lot to do, but I am really optimistic.
About the Green Finance Institute
The Green Finance Institute (GFI) is an independent organisation that focuses on accelerating the transition towards an environmentally sustainable and resilient economy by catalysing investment in net zero and nature-positive outcomes.
Established in the UK in 2019, the GFI is expanding in Europe with an initial focus on channelling more capital into decarbonising the built environment. The GFI is the UK and Europe’s principal forum for innovation in green finance.