While we have seen environmental, social, and governance (ESG) concerns rise to the forefront in investing over the last few years, last year the conversation took a negative turn, with anti-ESG backlash entering the dialogue. Part of the backlash stems from not recognizing that there are two components to examining impact through the ESG lens: the effect that an organization’s actions have on the world versus the world’s effect on an organization. Politically driven narratives will continue to be a challenge in 2023, but the more meaningful conversations that we have around ESG will help to support awareness of ESG-related programs and the benefits they offer. For example, property assessed clean energy (PACE) programs can help property developers and owners directly address both ESG components by making such building enhancements more affordable and accessible.
PACE can be used to help finance property upgrades dedicated to reducing a building’s greenhouse gas emissions by incorporating renewable energy features. At the same time, building owners can use PACE to fortify their properties’ resiliency to withstand extreme weather events, including earthquakes, hurricanes, and tornadoes. With President Biden’s signing of the $737 billion Inflation Reduction Act of 2022 (IRA) into law in August, PACE may get an additional boost as efforts to improve affordability of clean energy and strengthen resiliency to climate change become front and center. While a total of $369 billion in federal monies is dedicated to these climate-driven initiatives through the IRA, the increased focus may accelerate interest in PACE as property owners explore other financing options to augment this aid and address climate goals.
In addition, legislative advances across the country at different levels of government will provide uplift to the commercial PACE (C-PACE) sector. Hawaii, Pennsylvania, Alaska, Massachusetts, Connecticut, Wisconsin, and Virginia were among the states that enacted legislation to enable or expand C-PACE in 2022. Meanwhile, Alaska, Georgia, and Tennessee saw their first C-PACE transactions executed. Both New Jersey and Maine are in the latter stages of planning their C-PACE programs. Further, we expect to see property owners take advantage of New York City’s Accelerator PACE Financing Program, which allows for retroactive C-PACE, facilitating financing for projects three years after construction completion. New construction guidance is expected to be forthcoming sometime later this year.
On the capital markets side, DBRS Morningstar has a stable outlook for both C-PACE and residential PACE (R-PACE) securitizations. To date, we have observed low delinquencies and losses on the underlying assessments and expect this trend to continue in 2023. Nonacceleration of debt upon nonpayment is a key distinction because only the overdue amount must be repaid, not the entire PACE balance. Although origination volume across R-PACE is expected to be mixed, we do anticipate seeing continued momentum across C-PACE. The legislative advances offer support for program expansion, especially for the cities, states, and companies working to reduce their carbon footprints while ensuring they are prepared for challenges ahead.
The future of PACE is bright. Let’s keep talking.