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How Secured Lending Is Supporting The Battle Against Climate Change

By Craig Reeves, Founder, Prestige Funds

As the Amazon rain forest blazed across headlines this summer, minds within the investment management industry became more focused than ever on how private capital can do something about the looming climate disaster.

The funds industry continues to debate how conventional mutual funds can fulfil ESG (Environmental Social Governance) criteria, potentially by further scrutinising the activities of companies in fund managers’ portfolios. But there are already questions being raised about just how effective this is.

The private lending sector has the capacity to be much more effective and make more of an impact with the way capital is deployed. As lenders, we often have more leverage than equity owners. It gives us more control over the way firms make use of our credit. It allows us to exercise considerable influence.

In addition, direct lending funds like Prestige Funds are active in an important part of the economy that never goes near a stock exchange. We lend to small and medium sized businesses in the UK, privately held operations that are no longer being properly served by commercial banks. They turn to our lending operations for the vital capital they require to continue to develop and grow.

The crisis in the Amazon has also focused attention on the impact farming has on the environment. Deforestation aside, livestock farming is also recognised as a considerable contributor of CO2 gas emissions into the atmosphere (contributing 9% of national emissions in the UK alone). The farming industry still has a critical role to play in feeding the planet’s growing population, however.

This is a critical issue that private debt funds can help to address, while also demonstrating their value in the battle against climate change.

At Prestige we have developed considerable expertise in lending to smaller businesses in the UK farming sector. Many of these face the challenge of making themselves more efficient at a time when electricity prices are rising and the government is imposing more taxes on landfill waste disposal.

On the upside, the UK has also committed itself to meeting the Paris Agreement clean energy objectives and putting considerable economic weight behind these goals, including the way in which it will distribute subsidies to farmers after Brexit.

The country is already home to the world’s largest offshore wind farm and in April broke its record for running for the longest sustained period without recourse to coal – over 90 hours. These are significant steps, but there is still much to be done.

We are lending to farming, food and agribusinesses to help them develop on-farm clean energy from the resources available to them, be they wind, solar or bio-mass. Prestige is now one of the largest private lenders for bio-gas infrastructure in the UK and has developed in-house consulting expertise that is working with biogas providers to help them to make their businesses efficient and sustainable. We want to see the plants we lend to succeed.

Anaerobic digestion, or AD, involves processing farm waste and food waste into energy and fertiliser. The UK is expanding its network of biogas plants and has become a recognised global leader in the provision of this technology to other countries. There are now more than 500 AD plants operational in the UK, delivering more than 861MW to the UK grid, according to the Anaerobic Digestion and Biogas Association (ADBA). These plants can play an important role in helping the UK to achieve its net zero emissions target by 2050.

According to the World Biogas Association, AD and biogas can help reduce global GHG emissions by 10-13% and in some of the hardest sectors to de-carbonise. Currently only 2% of the organic feedstock consumed by these plants is being used.

Private debt is making an immediate and direct impact on the ways farms and their surrounding communities generate and consume energy. Not only this, but many of the projects we are helping to fund are also contributing to the wider efficiency of the UK’s clean energy generating capacity.

In May Prestige closed a GBP 15 million funding deal that is helping to expand the generating capacity of an AD plant in Somerset, England. Not only will the plant be increasing its scope to a 6MW gas to grid facility, but it is also a pioneer project in the UK’s Project CLoCC (Customer Low Cost Connections). This is intended to make it easier for rural biogas producers to feed their energy into the UK National Grid.

At Prestige we are but one firm, but with the support of our clients we have already been able to achieve a considerable positive impact using private capital, lending almost GBP 100 million to the UK’s AD sector in the first nine months of 2019. We can demonstrate to our investors immediate results from the lending activities we have carried out, results that can be measured in MWs of clean energy fed into the grid.

This is not an investment model that relies on passive screening to ensure compliance with ESG criteria, this is an investment model that is actively funding and supporting the change in the UK’s energy generation and waste consumption habits.

The fact that this energy is also originating from the farming industry is, we are certain, helping to make the case for private debt as a leader in ESG investing.

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