If the 2008 mortgage meltdown did anything to educate Americans about the complicated world of finance, it was to teach them about securitization.
Securitization is the practice of pooling disparate sources of debt and selling it as a package to investors on the secondary market. The practice has grown immensely over the last few decades and has been used for packaging all kinds of debt — mortgages, credit card debt, auto loans and student loans being some of the more notable. And now renewables like solar are starting to reach the scale needed to securitize projects and sell them on the secondary market.
Securitization has been demonized because of the abuses that mortgage-backed securities eventually fueled among lenders and borrowers. But the practice is crucial for improving liquidity and stimulating demand, providing new opportunities for emerging industries like solar by expanding the number of institutional investors that can put money into projects.
The practice could be one of the most effective tools for unlocking the vast potential of energy efficiency as well. And institutional investors — banks, pension funds, mutual funds and insurers — are expressing a lot of interest in efficiency as a pooled asset class.
The problem, according to a new white paper from the sustainable business group Ceres, is that the industry is still too small to make securitization a real option. That’s leaving billions of dollars on the sidelines.
“The scale of investment will be too large for bank balance sheets alone and will therefore require broader capital markets participation, as it has for other forms of consumer and commercial debt,” wrote the report authors. “Thus far, however, opportunities for investment in such pooled vehicles are nearly non-existent for large institutional investors.”
The report materialized after Ceres gathered nearly 30 experts from insurance companies, mutual funds, pension funds and project development companies to talk about the barriers preventing the creation of robust secondary markets in energy efficiency.
“We need to focus on the capital markets,” said Brandon Smithwood, manager of the policy program at Ceres and lead author on the report, in an interview. “Growth will come from getting beyond the typical way of playing in this market — and creating these pools is a great way to do that.”
Securitization typically requires a package of loans worth $100 million or more. That’s still a difficult task in the efficiency space. The problem, said Smithwood, is that there isn’t sufficient project volume to create robust pools of energy efficiency projects. And the project volume is too low in part because large institutional investors aren’t able to leverage those pools.