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Equipment Finance Industry – Well-positioned to Lead in Growing Climate Equipment Market

Date: Sep 25, 2023 @ 07:00 AM
Filed Under: Industry Insights

In this final installment of a three-part series by The Alta Group on climate equipment finance, we examine ways in which the industry is already well-positioned to lead equipment users toward more sustainable practices by leaning into circular economies and “as-a-service” models. The authors also suggest ways to participate in this tremendous market opportunity toward a more sustainable future.

The financing of climate equipment is a market segment that is predicted to explode in coming years. In the U.S. alone, annual capital investment in climate-focused equipment is expected to grow from around $1.4 trillion to $4.3 trillion in the years to come, and the federal government has earmarked significant funds toward decarbonization through the $369 billion Inflation Reduction Act. The Glasgow Finance Alliance for Net Zero, which represents 450 financial institutions controlling over $130 trillion in assets, projects that on a global scale, $32 trillion in investment will be required by 2030 to stay on track for the Alliance’s goal of a zero-emissions economy by 2050.

The appetite for sustainability practices and investment is only projected to grow. The International Energy Agency expects renewables to continue to hold the top spot in the power sector category for investment.

“Governments, companies and consumers are pushing for greater electrification of the economy and acceleration of clean energy transitions,” the IEA stated in its World Energy Investment 2022 report.

Renewables, electricity grids and battery storage have accounted for more than 80% of total power sector investment since 2019, the report said.
Meanwhile, corporate sustainability goals and higher fuel prices are driving increased demand in the U.S. and Canada for commercial electric vehicles (EVs), including construction equipment.

Seven major automakers, including General Motors and Honda, announced a joint venture to build a North American EV charging network with 30,000 charging points. The multibillion-dollar investment, which seeks funding help from the Bipartisan Infrastructure Law, is expected to accelerate the adoption of EVs.

With such a heavy focus on a clean-energy economy, climate equipment is being developed and manufactured at a rapid rate. Future capital investment is estimated to be in the trillions.

This presents an opportunity for equipment leasing and finance professionals to grow their business, both by helping customers achieve their sustainability goals and by introducing new revenue streams made possible by the circular economy.

The equipment finance and leasing industry has a long history with one of the central tenets of today’s drive toward a more sustainable industrial system – the circular economy. In contrast to the linear economy—where products get created, used and then discarded—the circular economy focuses on the reuse of assets over a much longer life cycle.

Our industry was following circular economy practices long before this term became part of the green economy lexicon. As a fundamental tenet of equipment leasing, asset management has driven a keen awareness of the importance of extending the life cycles of equipment, priming secondary markets and having a keen understanding of what such customers want and need. The industry has also developed expertise at crystalizing the value proposition of circular economic practices to customers through its capacity to take on residual-value risk and manage the asset through the lifecycle of its primary and secondary uses. This capability has taken on new relevance as corporate customers and governing bodies around the world implement new policies aimed at reducing global carbon emissions.

Think about it: Keeping equipment circulating in the economy helps to preserve energy, labor and raw materials. It also introduces new potential revenue streams, including a market for second- and third-life equipment, and a market for service and maintenance. The extension of the equipment life cycle is an important piece of the quickly evolving climate-focused equipment market. The concept is also important to the management of climate-related assets, as many of these equipment types—for example, solar panels and wind turbines—have expected usable lives that are far longer than the typical tenors of many equipment leases. By taking a proactive approach to lifecycle management and its promotion, our industry is helping educate the broader public as to the fundamental benefits of leasing and is helping to convert former cash customers.

Second Life is a Sustainability Play
With the growing appetite for sustainability investment, we have observed a paradigm shift in practices and policies by vendors and manufacturers alike. This is driven not only by market dynamics, but also by customer demands.
For example, when an EV battery reaches the end of its road-worthy life, it is still suitable for use in the growing grid storage industry. The Wall Street Journal has reported that roughly 1.7 million retired EV batteries will be available for reuse in 2030, with a combined value of $5.1 billion, and automakers including Nissan Motor Corp and Renault SA are launching new programs to put retired batteries into second-life use. The remanufacturing or recycling of batteries is also attracting large capital investments right now. Reuters reported in July that at least 80 companies across the globe are working on EV recycling, with more than 50 startups attracting at least $2.7 billion within the last six years.

In other instances, firms are finding that they can serve a more diverse array of customers by actively marketing second-life equipment. This is done in some cases with full remanufacturing models, but more typically with some form of reconditioning, with certification and warranties that boost customer confidence in choosing used equipment.

This is not new to Cisco, which has been selling remanufactured equipment through its Cisco Refresh program since 2001. Cisco actively encourages customers to send back equipment that has reached the end of its useful life at no cost. It then remanufactures some of that equipment and sells it for second-life use through Cisco Refresh. The company reports that it reuses or recycles more than 99% of what is returned.

Cisco is one of many technology OEMs that have reimagined their business model to optimize resources and promote sustainability by making durability and reuse a priority in their designs. They point to the environmental benefit of materials and components that can be redeployed and offer a second and perhaps third life cycle.

This has been a longstanding practice in the healthcare equipment industry, which early on recognized a strong business model in remanufacturing equipment and putting it back out to new clients. Selling or leasing this second-life equipment at a lower price point not only makes it more profitable, but it also expands access to equipment to new customer groups who may have smaller budgets. Companies such as Siemens Healthineers, GE HealthCare and Philips now also promote sustainability as an added benefit of the circular model.

While these examples demonstrate the potential value proposition to businesses of using circular models in the design, sale, leasing and service agreements of their products, recent trends indicate that the circular model is quickly becoming the standard business model.

Driven by both corporate and government sustainability targets, in some markets there are already requirements to have second-life equipment included in contracts and a focus more on the outputs of the equipment rather than the specification of the equipment itself. It’s moving from a “nice-to-have” to a requirement to be fulfilled.  This is requiring more attention on equipment management and plays increasingly to the strengths of the leasing and equipment finance industry.

“As-a-service” for the Green Era
The greater focus on equipment performance and its link to sustainability is also providing a tailwind to the “equipment-as-a-service” model. Again, for certain segments of the industry, this is far from a new concept.

The “pay-per-copy” business model pioneered by Xerox in the mid-20th century laid the foundation for the as-a-service models that have evolved today.
We predict this model will become even more relevant as the climate equipment market expands. Take, for example, the growing market for vehicle charging. A “pay-per-kilowatt hour” model could prove more efficient than a straight sale or lease of charging equipment. Instead of managing an asset, you’re selling a service.

Just like the old pay-per-copy model, these kinds of energy-as-a-service models will need to be backed up by contractual agreements that still essentially provide for the financing of the asset. Leasing companies have traditionally made this work by carefully managing all potential points of risk. This kind of risk management could include underwriting equipment dealers and writing contracts that allow for the substitution of a new dealer for non-performance.

Our industry has the expertise and talent needed to help this model evolve to serve the climate equipment market. We are also seeing some notable innovation in the ways that goods can be marketed as a service and where new value pools can be created to the benefit of clients, service providers and lessors.

Take textiles, for example. LossLess Group is a European startup which has built a “textiles-as-a-service” business model that uses RFID chips to track how many washing cycles each piece of linen has undergone. This enables LossLess to provide newer linens to the hospitality industry, but also market older linens to other third parties. The linen itself becomes a leasable asset with residual value, making the offer both circular and a good value for the end customer, and achieving both cost-savings and sustainability goals.

We expect to see more innovation like this, as new technologies are deployed to better track both the usage history and performance of equipment and goods throughout their life cycles and in their own local environments. The advantages are numerous. As-a-service models typically allow for more predictive maintenance, as well as using historical usage data to match maintenance and service to when a client has downtime. This allows the equipment to be more productive in general, and to be available when the client can make the best economic use of its resources.

This type of thinking relies increasingly on capturing and exploiting data, and having a much closer understanding of the customer’s business and their equipment needs.  This is a great opportunity for our industry to position itself as the domain experts in equipment management from both an economic and sustainability perspective.

Industry Momentum
Our industry provides many opportunities to learn about the immense opportunity that climate equipment finance presents. The Equipment Leasing and Finance Association (ELFA), for example, created the Climate Finance Working Group (CFWG) in 2022 to determine the size of the market and provide education, best practices, government advocacy and networking opportunities.

Members of the CFWG are industry experts and others who see great potential in this emerging marketplace but warn that with new business models comes risk, and climate equipment is no exception.
The CFWG focuses its work in three main areas:

  • Education – Communicating best practices and clarifying the ins and outs of various tax credits and other available incentives.
  • Networking – Helping equipment leasing and finance professionals connect and share their experiences.
  • Advocacy – Seeking opportunities for the industry to speak with one voice on policy matters that will impact how this market develops.

The CFWG is actively seeking individuals who want to join and contribute to these efforts. And for those who still just want to learn, the group offers regular webinars on climate-equipment topics, with one planned for the fourth quarter of 2023. At the ELFA’s 62nd Annual Convention in Phoenix, Ariz., the Working Group is sponsoring a breakout panel titled, “Sustainable Innovation: Driving Climate Finance in Today’s Market.” The panel is supported by the ELFA Climate Financing Committee. During this panel, the Working Group will provide an update on climate finance research that has been commissioned by the Equipment Leasing and Finance Foundation. The full report is expected in early 2024. To learn more about this research or the CFWG, contact Patricia Voorhees.

Conclusion: As the business world changes, seize the opportunity...

Renowned management consultant Peter Drucker said, “The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” This moment in our world’s efforts to build an economy that makes more sustainable use of resources and leaves a lighter carbon footprint presents just such an opportunity. In this series, we’ve laid out the immense business prospects for the equipment finance and leasing industry because of the tens of trillions of dollars going into global efforts to expedite the deployment of more sustainable technologies, systems and equipment. We have identified specific competency areas—such as risk assessment, legal resources and specialized tax incentives knowledge—that leasing and finance companies may need to boost or retool to position themselves to capitalize on this opportunity. And in this final piece, we have highlighted some underlying business principles in which our industry is highly experienced, and that will become increasingly relevant as equipment-based industries shift to more sustainable operations. We also offer avenues to become involved as the equipment leasing and finance industry builds knowledge around the climate equipment finance opportunity. By seizing this opportunity, equipment finance professionals can not only build valuable new business lines, but also play a leadership role in helping lead industry toward a more sustainable future.

Readers may also read Parts 1 and 2 of this article series:

Part 1: Climate Sector Strategy to Seize Equipment Finance Opportunity

Part 2: Risk Assessment is Key to a Successful Climate Finance Strategy

Authors Patricia Voorhees - Director The Alta Group and Ian Robertson - Co-owner - Invigors EMEA on Equipment Finance Advisor

Patricia Voorhees and Ian Robertson
The Alta Group
Patricia Voorhees is a Director in The Alta Group and chair of the ELFA’s Climate Financing Working Group, formed in 2022 to determine the size of the market and provide education, best practices and government advocacy. She has more than 25 years of experience in equipment finance and is a frequent conference speaker, guest lecturer and author. Recent publication topics have included ESG, climate finance, circular economy models and current equipment-finance funding dynamics.

Ian Robertson is a co-owner of Invigors EMEA, a part of The Alta Group. Formerly Global Head of Asset Management and Remarketing at DLL, Ian is expert in both vendor finance and direct leasing. Robertson is regularly called on by clients to help develop their energy transition strategies as well as to help them address the newer risk categories that come along with some of the equipment classes. An expert in equipment management and as a service business model design, Robertson also consults regularly on Circular business model design and lifecycle management and equipment data exploitation. Robertson is a regular speaker at major Industry events and was part of the organizing team at the recent Leasing Life Sustainability Summit in Paris.
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