By Billy Parish, Co-Founder and President of Mosaic
Five years after the Great Recession, most Americans have yet to regain their faith in our country’s largest financial institutions. The Dow is up, but the latest Financial Trust Index shows that 58 percent of Americans expect the stock market to drop 30 percent or more this year. Meanwhile, a recent Harris Poll noted that only seven percent of the public trusts the leaders of Wall Street.
Strangely, the same poll which found that most Americans think stock prices will decline also found that 92 percent of Americans plan to hold or increase their investments in the stock market.
What’s going on here?
Why do we put our money in institutions that we don’t trust and investments that we think are going to decline in value?
The problem comes down to a lack of quality investment options. It’s hard to access a mix of investments that will provide reliable returns over the long run. Add in criteria about not investing in harmful or risky industries and the task of finding a good investment can start to look impossible.
Fortunately, solar energy is a great investment for Americans, particularly when paired with new kinds of investment marketplaces like Mosaic. Here is how we think about our investment product:
Big banks are good at financing big projects. But for smaller projects, like commercial scale solar energy, big banks lend at exorbitant interest rates, if they lend at all. This fact makes it possible for Mosaic to make solar project loans with interest rates that are lower than those charged by banks, but still high enough to provide competitive returns for investors.
To date, over 1,500 investors have used the Mosaic platform to provide more than $2.1 million in financing to projects in California, New Jersey, and Arizona. The expected annual returns on our most recent loans has been between 4.5 percent and 6.38 percent. With 10-year Treasuries at near historic lows (1.90 percent), CDs at 0.5 percent APY, bonds averaging 5.20 percent from 2003-2012 and stocks in the S&P 500 averaging 4.95 percent annualized returns from 2003-2012, Mosaic’s expected yields are competitive with the best investment products on the market.
Like all investments, solar energy investments through Mosaic do not come without risks. Transparency is a core value, so we post the prospectus of each project on our website and encourage investors to read the prospectuses in order to understand the risks associated with our investments. Specifically, the broad categories of risk facing solar projects include credit risk (a borrower defaults), technology risk (solar panels fail), weather risk (a storm destroys solar panels), or operational risk (Mosaic goes out of business).
In the case of credit risk, Mosaic offers debt, rather than equity, financing for solar projects. if a project encounters a problem, our investors recoup their money first. We also employ rigorous underwriting procedures, which involve not only Mosaic’s project finance team, but also third party lawyers, engineers, and insurance experts to review every project. Finally, looking to the future, we recently helped found a solar industry consortium called truSolar, which aims to standardize the risk evaluation process for solar projects. Founding members of the group include 16 leading businesses and research groups, from DuPont and Standard and Poors to the Rocky Mountain Institute. By working with other thought leaders to establish best practices for risk evaluation, we aim to drive down financing costs across the solar industry.
In the case of technology risk, solar equipment is itself very reliable, to the point that manufacturers typically offer 25-year warranties for solar panels and solar inverters. Insurance for events like fires or hurricanes adds another layer of protection against weather risks.
Finally, in the event that Mosaic goes out business, we have entered into a backup servicing and successor agreement with Portfolio Financial Servicing Co. (www.pfsc.com) that would ensure the servicing of all issued loans. PFSC is one of the largest third party lease, loan and structured settlement servicers in the U.S., with $11 billion under management.
Where does distributed solar fit in a balanced portfolio?
For most investors, financial risk and return information doesn’t mean much outside the context of a broader portfolio. Most individuals and institutions invest in a portfolio of assets. We might invest in the stock market and in municipal bonds. Maybe we invest in ourselves, via payments for education, or in our homes, via expenditures on energy efficiency. So where do Mosaic’s investment products fit into this mix?
Our investment products function much like a bond. Debt generally lacks the significant upside potential of a stock (investors won’t earn more than the projected annual interest rate), but has less downside risk as well. Investors are repaid their loans, with interest, on a monthly basis. Investors could look at a Mosaic product to fulfill the same role in a portfolio as Treasuries or other kinds of fixed income investments.
More broadly, we see our products offering a hedge against two types of market risk.
First, because our investments are intangible, localized assets, they are “uncorrelated” and offer a hedge against dramatic shifts in global markets. If you’re heavily invested in major corporations or commodities, investing in community-based assets could make good sense.
Second, our investments hedge against the increasingly systemic risks facing fossil fuels. Energy is the world’s largest industry, and so it should come as no surprise that energy investments make up a large chunk of the portfolios of institutional and individual investors alike. Global energy markets have experienced major swings for fossil fuel prices in recent years — oil, for instance, running up two historic price peaks with a crash in between, or gas plummeting in cost, and now rapidly rising — and it’s only going to get worse. In particular, we think it’s important for investors to understand that fossil fuel companies are betting against action on climate change. HSBC recently warned that the top 200 fossil fuel companies could see a 40-60 percent decline in their equity value if governments take action to curb climate change. Mosaic investments represent a way to start moving away from fossil fuels before the bubble bursts.
If you invest in an index or mutual fund, or keep your savings in an account with a national bank, there’s a strong chance you are financing the operations of some of the world’s largest fossil fuel companies. As a father, I see this as illogical. What’s the point of making an investment that will pay for my childrens’ future if it also harms the world they inherit?
Mosaic investments run in the opposite direction. Our investors have so far financed enough solar energy to power 95 typical American homes every year. They’re creating societal gain, without compromising their personal gain.
But let’s break that down a bit further. The magic of investment is that it compounds. So what kind of compounded good could we create?
Well, our first fifteen hundred investors have put in $2.3 million. Assuming they all reinvested their money in new solar projects, and assuming they earn a rate of 4.5 percent, in ten years they would have a little over $3.6 million invested in solar energy. In twenty years, they’d be approaching $5.6 million invested, enough to power perhaps 600 American homes every year.
At Mosaic we believe the fastest way to create a 100 percent clean energy economy is to let everyone benefit from it. That’s why we work every day to create a rock solid, accessible clean energy investment.