From dealflow to a lack of education, this week leaders in social finance addressed some of the key barriers preventing the UK market from flourishing. Last month Antony Bugg-Levine, the chair of the Global Impact Investing Network, told delegates at London’s Critical Mass conference that in the world of social finance there were “hypers, haters and […]Read More ›
Solar Roadways: The First Green Impact Bond?
In the fight against climate change, could social finance be a new tool to pilot green technology?
Innovation is well known to the environmental policy arena, but the focus is nearly always on technological innovation, rather than policy or financial innovations. One key exception is the Green Bonds implemented by both Export Development Canada and TD Bank, a product that provides investors with a vehicle through which to finance sustainable initiatives while offering a rate of return. This type of innovation in finance for environmental goals is the exception, not the rule, in Canada – a country that already suffers from a poor environmental reputation, particularly following a 2013 OECD study in which Canada ranked last for environmental protection.
Social Impact Bonds
A social impact bond (SIB) is not actually a bond. It is a financing tool used by governments to fund social programs that bear an initial cost but promise future cost savings. Here’s how they work: investors agree to fund a service provider to undertake a range of social programs that are targeted at making a social impact. Governments agree to pay investors only if social impacts are attained, and social impact is measured and evaluated based on agreed metrics.
The first social impact bond to be completed was a program to reduce recidivism established in 2010 in the UK. SIBs have since proliferated globally. Saskatchewan recently launched Canada’s first SIB — “Sweet Dreams” – which provides support services to help keep single mothers and children together. Nova Scotia, B.C., Alberta, and Ontario are also planning to establish SIBs.
Environmental Challenges & Green Impact Bonds
Given the quick uptake and success of SIBs, environmental advocates have suggested developing green impact bonds (GIBs), which would use the same structure as a SIB to address environmental challenges.
In addition to being enormously important, environmental challenges are complex and require innovative solutions that carry risk. Green procurement has become a popular way for governments to reduce their ecological footprint, but this is only an option for products with an established track record of success. For the uptake of new green technologies to succeed, innovative financing mechanisms like GIBs are needed to increase the risk threshold for governments.
The Case for A Solar Roadway GIB
Solar roadways are one example of the type of innovative technology that, through traditional funding mechanisms, will find it difficult to obtain a government contract for years, but could be supported now by a GIB.
Solar Roadways, designed by Julie and Scott Brusaw, are hexagonal units that can be installed on a variety of road surfaces. Having concluded their second grant from the US Federal Highway Administration through which they established that the technology works, the inventors have raised over $2 million USD through a crowd-funding initiative to move into manufacturing and pilot implementation. Solar Roadways have the potential to substantially benefit the environment and improve road safety. They also promise other benefits that traditional roads cannot: they produce electricity, can warn drivers about obstacles up ahead, and will provide a well-lit surface free of snow upon which drivers can commute.
Through traditional funding, Solar Roadways would likely be bought privately for small-scale projects like parking lots; the technology would be tailored towards these needs. But if Solar Roadways are successful, they are likely to be bought mainly by governments, who are responsible for maintaining our road infrastructure. Governments should consider developing a Solar Roadways pilot GIB, which would connect socially conscious investors with this new technology in order to develop a project that could potentially transform the way roads are constructed worldwide.
A Solar Roadways GIB is different from the SIBs that have been funded to-date because, rather than scaling up a social intervention that has been implemented by a well-established service provider, it would oversee the implementation of a new technology that has been tested but not piloted anywhere.
Another concern pertains to the uncertain costs of Solar Roadways. Prototype costs will be released in July 2014 as part of a final report in fulfillment of their Federal Highway Administration grant. However, there is reason to believe that Solar Roadways will be more costly to install than asphalt roads. The Economist estimates that Solar Roadways may be 50% to 300% more expensive than traditional roads. Investors will need to carefully consider this before deciding whether to support a Solar Roadways GIB. Nonetheless, a GIB is uniquely suited to incorporate the other benefits that Solar Roadways may provide into cost calculations.
This is because GIBs require that environmental and social outcomes can be measured in a way that demonstrates long-term savings for government. We propose that four impacts could be measured for a Solar Roadways GIB:
- Electricity Generation: Solar Roadways were developed as a way to generate renewable electricity without wasting space; this is a source of cashable savings that a GIB could create for government through the revenue from the electricity produced by Solar Roadways and sold into the electricity market.
- Collision Reductions: In addition to being traumatic for those involved, traffic incidents, especially those involving injury or fatalities, pose social costs such as the cost of: treating injuries, legal proceedings and support by police officers, and traffic delays. One of the major benefits of a solar roadway is increased road safety. Reduced traffic incidents could provide a measurable cash benefit for government. Transport Canada’s recent report outlining the cost of a fatal traffic accident could provide a basis for calculation.
- Reduced Maintenance Costs: It would be possible to calculate whether Solar Roadways produce maintenance savings, using existing costs as a baseline.
- Water Storage: Solar roadways melt snow to keep the solar panels clear for electricity generation, and, in order to prevent this water from damaging the roadway, collect and divert water. This collected water can be stored in tanks or sent directly to water treatment facilities, depending on existing infrastructure, thereby providing additional water for communities. Measuring this social benefit would entail tracking the amount of water collected in underground storage tanks and monetizing this social impact, which might be done by estimating the value provided to users per unit of water.
The Case for an Alberta-based GIB
Alberta is the ideal pioneer for the world’s first GIB. It has the requisite political will to execute innovative projects, particularly innovative social finance projects: the Government of Alberta recently established a $1 billion Social Innovation Endowment fund that is meant to directly support such initiatives. And, as the province with the best solar potential in Canada, the highest rate of population growth and a corresponding need for new road infrastructure, a Solar Roadways GIB would be of particular benefit to Sunny Alberta.
Solar Roadways could constitute a good test case for GIBs, and would give the Government of Alberta much needed experience in developing the capability to undertake future SIBs. It would, further, offer Alberta the opportunity to exhibit global leadership by developing the first green impact bond, thereby supporting an initiative to mitigate climate change. It pays to pioneer.