31 March 2011 – The federal government’s Australian Carbon Trust is targeting Australia’s $1.2 trillion superannuation sector for partnership funding. If it succeeds, it will potentially create an enormous funding pool for sustainable building around Australia.

The Carbon Trust was set up in March last year as an independent company with $100 million of seed funding to provide finance and advice to business and the wider community and encourage investment in, take-up and use of energy-efficient technologies.

Its initial focus is on achieving energy efficiency improvements in the buildings sector through retrofits. It is looking at the existing non-residential buildings across Australia. These include offices, food and non-food retail, education, community, health and hotels. It plans to fund commercial property energy efficiency projects for up to $200 million over the next two years.

The finance for these projects will primarily come through revolving funds for loans. It is not a grant vehicle.

What makes the carbon trust unusual is that it is co-investing with the private sector. Any loan for energy efficiency therefore needs to have a very strong investment case. In November last year, the Carbon Trust signed a memorandum of understanding with the National Australia Bank and sustainability-focused funds manager Eureka Funds Management. Under the arrangements, the NAB is the senior debt provider. Eureka Funds Management is the funding vehicle’s trustee.

If the super funds come on board, it will be a significant boost for the Carbon Trust. Support from the superannuation sector would significantly boost its capacity to finance retrofits around the country. Potentially, it creates a massive funding source. Locking the super funds in would also ensure that Australia’s largest and most powerful financial services sector was funding sustainability in the property sector.

Meg McDonald

Carbon Trust chief executive officer Meg McDonald says the Carbon Trust is “talking to a number of other financial institutions already, thinking about our next round of products, both about different types of energy efficiency loan products, as well as other products.

“We are talking to super funds, we are talking to the property trusts, we are also talking to a range of other financial institutions,’’ McDonald says.

The fundamental issue, however, is that super funds have a very different approach to investments. For super funds, it’s not about providing loans but about setting up investments that generate income. The Carbon Trust would have to modify its model to accommodate that.

“Ultimately what they are interested in is getting securitized packaged-up income streams and delivering that through the establishment of various funding vehicles which are loaning out to building owners who are then repaying it over a period. That’s the kind of income stream that the super funds and others are interested in,” she says.

Is the Carbon Trust in a position to develop those securitised income streams for super funds?  “We have a remit which allow us to do that,’’ McDonald says.

She says she expects the Carbon Trust will be spelling out some details about these new arrangements soon. “We are expecting a string of announcements over the next six months,’’ she says.

Niall McCarthy

Niall McCarthy, executive director of Eureka Funds Management, says the super funds would be “an obvious candidate”.  “What we hope to do in time to source some super fund capital alongside National Australia bank senior debt,’’ McCarthy says.

At this stage, the initiative is working off legislation passed by the NSW parliament last November that enables loans to property for environmental purposes to be repaid through council charges, and secured ahead of mortgages. This follows a similar initiative put in place by Melbourne City Council.

The MCC’s “1200 Buildings Program” is a 10-year plan to retrofit 1200 privately owned commercial buildings, or two-thirds of the city’s commercial office blocks, at an estimated cost of $1.3 billion.

The NSW Local Government Amendment (Environmental Upgrade Agreements) Act 2010 applies to all local government areas in NSW which means that any local council in NSW can avail itself of the scheme. In reality, this is expected to be limited to the commercial centres of Sydney, Parramatta, Ryde, Chatswood, Newcastle and Wollongong – where most of the business activity is.

Under the Carbon Trust model, applicants would be referred to a funding vehicle. The Carbon Trust and the NAB have capital in that vehicle.

McCarthy says loans are not flowing yet because everyone is waiting for the regulations around the NSW legislation and the Melbourne City Council initiative to be bedded down. In NSW, it would require the government to develop the regulations with each council. “At this point in time, we are in the documentation phase,’’ McCarthy says. “We will hopefully be lending later in the year but at this point in time we are not able to.”

Eureka Funds Management is an active player in the sustainability space. “We have been active in putting together a clean energy fund,’’ McCarthy says. “We have some wind farm assets that we have been trying to develop over the last number of years. We are across a number of other  parts of the low carbon economy but our primary focus in on real estate energy efficiency and distributed energy.

“We are also active members of the Investor Group on Climate Change in particular so we are active in advocacy on policy and on getting a carbon price into the economy as quickly as possible.”

Split incentives

Melbourne

One of the key issues that the Carbon Trust is looking at is the landlord-tenant split incentive. As McDonald says, this is a significant impediment because it discourages landlords from spending millions of dollars retrofitting their buildings.  “If a landlord invests in something that will reduce the energy bill across the whole building, the landlord can’t recoup that from the tenant so the tenants get the benefits of lower outgoings but they don’t contribute to the capital costs unless that was built into the lease,’’ she says.

“This is a very important barrier. The key financial products that we set out to negotiate were with some of the financial institutions to see if we could find ways of financing energy efficiency which overcame this.”

The environmental upgrades initiatives in NSW and Victoria help address this. “It is repaid via a council charge and that becomes an outgoing which is able to be split between the landlord and the tenant,” she says.

This could well become the model for other parts of Australia, which would give the energy efficiency retrofit industry a massive boost.

The Carbon Trust has also signed a memorandum of understanding with equipment leasing specialist Alleasing. The Energy Efficiency Equipment Lease aims to enable property owners, businesses and public sector organisations to fund the acquisition of energy efficient equipment as easily as they can finance IT and other specialist equipment.  It seeks to provide 100 per cent of the acquisition costs.

Equipment that can be leased would include heating, ventilation, airconditioning, lighting, building management systems, computer equipment, communications and general office equipment and cogeneration and tri-generation equipment.

Under the deal, the Carbon Trust puts up $6 million and Alleasing $94 million, creating a $100 million funding pool.

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