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March 19, 2009

Fixed Income Investments Support Green Building
    by Robert Kropp

The New Mexico Mortgage Finance Authority and Community Capital Management describe how fixed income investment help fund successful rehabilitation of buildings based on green building principles. -- Green building initiatives have emerged as significant opportunities for realizing energy efficiencies on a national scale, both in new construction and the rehabilitation of existing buildings. Many federal and state programs now exist for supporting green building initiatives on the neighborhood level. In many cases, funding for these programs is achieved by a combination of government grants and taxable municipal bonds and other instruments that provide fixed rates of returns for investors.

Please support
our sponsorsAccording to the Environmental Protection Agency (EPA), buildings account for 39% of total energy consumption, 38% of carbon emissions, 30% of raw materials waste in landfills, and 12% of potable water consumption. Adoption of green building practices can improve energy efficiency, reduce energy consumption costs, and provide safe and healthy living environments. Because sprawl development, low-density housing, and commercial uses located in automobile-dependent outlying areas can harm the natural environment in a number of ways, many programs focus on the rehabilitation of urban areas.

A recent webcast on the subject of fixed-income investing in green building initiatives, entitled "Green Approaches to Fixed Income Investing," was hosted by the Boston College Center for Corporate Citizenship. The forum was moderated by David Wood, who directs applied research and other activity for the Institute for Responsible Investment (IRI), a project of the Boston College Center for Corporate Citizenship that provides a platform for dialogue on fundamental theories and practices underlying responsible investment and corporate citizenship.

"Mission-driven investors are especially interested in how investments can integrate social and environmental issues in a triple bottom line approach," Wood said. Triple bottom line accounting expands traditional corporate reporting frameworks to account for ecological and governance issues as well as financial performance.

Michael Furze is the Green Initiative Specialist for the New Mexico Mortgage Finance Authority (MFA). Since its creation by the state legislature in 1975, the MFA has provided $3.9 billion in affordable housing finance options and related services for low- to moderate-income New Mexicans.

Referring to the EPA statistics on energy consumption by buildings, Furze said, "Some of the largest carbon dioxide emitters often hide in plain sight. Our commercial, industrial, and residential buildings consume national resources because you can simply flip the light switch and have power in your home."

Furze referred to a number of green building initiatives undertaken by the MFA in New Mexico that incorporate benchmarks for the design, construction and operation of high performance green buildings provided by Leadership in Energy and Environmental Design (LEED) and recommendations for energy efficiency from Energy Star, an EPA program.

The initiatives use a relative energy use index called the Home Energy Rater System (HERS) established by the Residential Energy Services Network (RESNET) to identify the energy efficiency improvements needed to ensure the house will meet Energy Star performance guidelines. RESNET is a national standards making body for building energy efficiency rating systems.

"The main idea behind MFA is to create sustainable communities," said Furze. Financing for the initiatives come from mortgage and rehabilitation programs requiring HERS ratings. In addition to a $9 million federal program to which the MFA has access, the mortgage and rehabilitation programs are funded by fixed income investment.

Barbara VanScoy, Executive Vice President and Senior Portfolio Manager for Community Capital Management (CCM), sought to provide a framework for sustainable investors who are considering a fixed income investment strategy as part of their mission. CCM is a Florida-based investment advisor that provides fixed income management and client services to institutional investors.

"CCM proactively seeks undervalued, high credit quality fixed income investments financing environmental sustainability and community development that do not sacrifice returns by taking additional credit risks," said VanScoy. Fixed income investments are typically bonds that pay a fixed rate of return.

"Strengthening cities is beneficial to the environment," VanScoy continued. "When urban areas have good schools, job opportunities, an adequate supply of housing, safe and reliable transportation, and low crime rates, they become attractive places for families to live and businesses to set up shop. Robust communities reduce the pressure on the environment associated with sprawl."

CCM has invested in a number of urban renewal projects that have resulted in increased manufacturing in urban areas where thousands of jobs have been lost and revitalization of housing in targeted disadvantaged areas. The rehabilitation projects employed green building principles and resulted in increased energy savings. One such project reduced carbon dioxide emissions by 69%.

"Our goal is to invest at least 50% of the portfolio in securities that support environmental initiatives," said VanScoy. "These securities include taxable municipal bonds, multifamily mortgage-backed securities, asset-backed securities that support enterprise development, and targeted single-family securities that support affordable and responsible home ownership."

In a recent blog entry, Walker Wells, Director of the Green Urbanism Program at Global Green USA, a national environmental non-profit organization, observed, "Green urbanism is the practice of creating communities beneficial to humans and the environment." Strategies utilized in achieving the goals of green urbanism include the application of green building principles at the neighborhood scale, the linking of buildings, infrastructure, and natural systems, and an emphasis on retrofitting existing urban areas.

With the adoption of green building principles as a central platform of President Obama's economic stimulus package, the number of building projects that incorporate environmentally sustainable practices while making sense as financial investments are expected to grow. At a time of historic turmoil in the stock market, the fixed returns offered by municipal bonds and similar financial instruments are likely to gain increased attention from sustainability investors as well.

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