Last week I wrote about the “green finance gap“, where investments in green technology suffer from a lack of financial resources and less attractive risk-return expectations compared to other investments. There are however other possibilities to implement green technologies or sustainability where different sources of capital are being used and/or better financial metrics can apply also in a degrowth scenario (see also my blog Degrowth is more than an oxymoron?), where profitability is aligned with decreasing consumption.
As discussed earlier there are alternatives to invest in green technologies in a supply chain. In this blog I would like to discuss the concept of “shared savings” also known as pay as you save. In this financial concept the beneficiary of the implementation of green technologies or sustainability does not have to invest or make an upfront payment for such a project. The supplier finances the project and shares its savings with the beneficiary (user, customer) in a way that the beneficiary always has a positive cash flow at any stage of the project.
Examples of the shared savings concept are often energy related (e.g. heating, power, lighting) and can be found in different sectors such as: industry, transportation (Schinas & Metzger, 2019) and real estate (Wrigley & Crawford, 2017).
In the closing the green finance gap, the shared savings concept can contribute positively to the earlier mentioned constraints.
- Availability of financial resources
Investments are made by the supplier of the green technologies or sustainability measures (such as insulation) and they are compensated by a share of the savings. This means that this type of finance is also available to the consumer who has a lack of capital (debt or equity), lacks technical expertise and/or is uncertain about long term occupancy beyond the payback period.
- Risk-return attractiveness
From a risk-return persective the consumer only has positive cash flows as no financial investment needs to be made. As already mentioned, during the payback period, there can be a liquidity issue. There also needs to be an independent judgement about the technology being used as well as a sound analysis of the incurred costs.
I hope this blog contributes to the debate on closing the green finance gap. If you have other great examples how to close the green finance gap, please give your comments.
Schinas, O., & Metzger, D. (2019). A pay-as-you-save model for the promotion of greening technologies in shipping. Transportation Research Part D: Transport and Environment, 69, 184-195.
Wrigley, K., & Crawford, R. H. (2017). Identifying policy solutions for improving the energy efficiency of rental properties. Energy Policy, 108, 369-378.
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2 thoughts on “Green finance through shared savings”
We are doing this when it comes to upgrading LED lighting in the warehouses. Our tenants do not have to make the large capital investment.
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Jamie, thanks for sharing. LED is sometimes also financed by the producer.