I'm Stephen Byrd from Morgan Stanley Research. I cover clean energy, utilities, and midstream at Morgan Stanley. I'm joined by Mark Savino, our quite excellent ESG and sustainability analyst. We're thrilled to be here today with the management of Hannon Armstrong. I'm joined today by Jeff Eckel, Chairman and Chief Executive Officer, Jeff Lipson, EVP and CFO, and Chad Reed, Head of Investor Relations.
Before we get into the heart of the topics, I just want to start with our disclaimer language at the very beginning here. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Just in terms of format for today, Jeff is going to start out with an overview of Hannon Armstrong. We're thrilled to have Jeff and his team with us.
Hannon, from our perspective, is really a very key enabler in decarbonization in so many ways, as you'll learn through today's presentation. We do have some questions we're going to ask Jeff and Jeff on this call. Feel free also to submit any questions you all have. You can either email me or use our online portal to ask any questions. I'll be sure to cover those topics as well. Without further ado, I'll turn it over to Jeff to kick things off.
Thank you, Stephen, and thanks to the Morgan Stanley team for hosting us today. Hannon Armstrong is an investor in climate change solutions. We invest exclusively in assets that reduce greenhouse gas emissions or mitigate the impacts of climate change. For us, it is a large investable opportunity, and our investment thesis is that we will make better risk-adjusted returns investing on the right side of the climate change line.
As a public company for seven years, we've done that approximately two times the S&P 500 total shareholder return. The three buckets we invest in, we call behind the meter, grid-connected, and sustainable infrastructure. Let me focus on the first two, behind the meter and grid-connected. That distinction, we used to call it energy efficiency, wind, and solar. With the emergence of distributed solar and storage, we actually saw behind-the-meter projects take on a much different characteristic.
They include a lot of energy efficiency investments, mundane lighting, heating, cooling assets that reduce the carbon profile of a building. You also have a certain amount of supply and resiliency from the storage. Behind the meter has become a more complex and frankly, a much more interesting asset class to invest in. Most of the assets, virtually every asset we invest in saves the obligor money, but they're also getting something else.
They're getting really a different kind of energy supply. It's much more sustainable. If they have a corporate sustainability goal, it's very important. It's generally more resilient, and the buildings are often. If you've ever been in an old building versus a green building, you know they're much more interesting opportunities. The other aspect of behind the meter that's important is the economics are defined by the retail price of electricity.
When you go to grid-connected, generally onshore wind and solar, the economics are generally driven by the price of natural gas, which anybody who's been paying attention knows natural gas is extraordinarily inexpensive at this point. We'll talk about some investments in both these categories. Sustainable infrastructure is a smaller part of our portfolio, but a growing part.
As the impacts of climate change are felt, communities and jurisdictions need to increase resiliency and adaptation. An example of this might be stormwater remediation. Shifting to the next slide. The key to our business is our clients. We are a financial services company. We don't do anything but supply money. Our clients really have the much harder and more challenging job to go engineer, develop, operate these assets. Our job is to make sure that the financing for these assets can be quite aerodynamic.
I would call myself a refugee from the project finance world. We have a concept called programmatic finance. We align ourselves with the best infrastructure and energy firms in the world, Engie, Trane, SunPower, Siemens, Schneider, and we try to do as much of their business as we can. These are the companies that will survive downturns like we're seeing now and really are the ones who are engineering the future of a low-carbon economy. The other aspect of the business is the number of financial counterparties we have. We have a first-class shareholder base.
Any of you are on the call, we'd love to add you to it. We also have longstanding relationships with fixed-income debt providers, life insurance companies particularly, over our 40-year history. We have a very diverse portfolio. Moving to slide five. Totals a little more than $2 billion, and we'll update the portfolio on our Q2 call, I believe August 6th. Again, you can see the split between behind the meter and grid-connected are the preponderance of assets on our balance sheet. Jeff Lipson, do you want to go to page six and talk about the business model?
Sure. Our business model, as illustratively shown here, reflects we really have a dual revenue model. We take certain of our investments, we put them on the balance sheet, we fund them with debt and equity, we achieve a net investment margin on those. Because of the long-dated nature of our assets, that net investment income tends to go on an individual investment for several years.
Alternatively, we have a secondary gain on sale represented in this chart on the right. In this, we take certain of our investments and we securitize them typically with life insurance companies and accelerate the gain and take it from. It's a nice balance in terms of the way we've built that revenue model, and using a modest amount of leverage illustratively keeps our ROE roughly in the 10% range. With that, let me turn it over to Jeff to talk about COVID response.
Perfect. We moved very early, March 10th, to close the office, focusing on employee health. It's a blessing to be in the financial services industry because you can work quite effectively in a remote basis. Until this thing has some kind of a virus or, excuse me, a vaccine, I think we'll be working remotely for a long time. From our asset base, we initially worried a lot about residential solar given the high unemployment rate. Given the credit quality of our high FICO obligors, that portfolio has performed very well. In general, renewable energy and energy efficiency assets are saving people money and are generally considered essential in terms of construction and operation. Jeff has done a fantastic job using his 2008, 2009 playbook from CapitalSource to access capital markets and ensure our liquidity through the crisis.
We've raised more than half a billion dollars, including a $400 million green bond. We have, just as we did in '08 and '09, we're completely able to access the private securitization market with life insurance companies. I've mentioned the portfolio performance, I think the key thing is generally these assets save people money, that is different than car loans and home mortgages. People are wealthier if they pay our bills. Through the last downturn, our portfolio stayed intact, we certainly are on the watch for problems, right now we're quite pleased with where we are.
Finally, the investment pipeline seems to be accelerating, not slowing down, which is perhaps counterintuitive but exciting to see. It remains at more than $2.5 billion. Jeff mentioned we invest approximately a $1 billion a year. We did announce in Q1 a partnership with Engie and Meridiam for the University of Iowa. We also announced, and I will be talking about it, last week, a $500 million+ investment in a portfolio of wind and solar projects with Engie. Knock on wood, we are in good shape through this crisis. The next slide basically hits a few numbers. Jeff, why don't you do this one?
Sure. This is really our first quarter earnings slide. Some of the metrics on the right there, our portfolio yield at the end of the first quarter was 7.7%. Our debt to equity was 1.4% and our ROE was just over 12%. The CarbonCount, importantly, is at the bottom right there, which we disclose every quarter. Then importantly in the lower left, I think probably the most important thing we said on our first quarter call was that we reaffirmed our guidance to be above the midpoint of our previously issued three-year guidance of $1.43.
That was at a time, as we all recall, when most companies were either withdrawing or reducing their guidance. I think a good reflection on the stability of the business and our confidence in the existing portfolio and the pipeline. We did reaffirm our 2020 guidance, I think that's the most important thing on this page. I think the last slide, which I'll let Jeff talk about, is our deal with Engie that we announced last week.
Yeah. We do report our CarbonCount, which is basically the efficiency with which capital is used to reduce greenhouse gas emissions. We talk about it on slide eight, but with a 0.2 CarbonCount. The NG transaction is a 2.0 CarbonCount, one of the more impactful investments we've made. If you look at the location of the physical assets, South Dakota and straight down through Texas and Virginia, you've got a lot of coal, which is what's driving that CarbonCount. Basically, we have committed to a $540 million equity investment. It's common equity, but with a preference in cash flow, which is, if you followed us over the years, we typically like to have a senior position in the cash flow. We don't operate the assets. We work with the best companies in the world to operate.
They should bear the risk of those operations as well as the successes. We're quite confident that the structure is a good balance for us as well as Engie. What Engie's doing with the proceeds is basically recycling capital. They have very aggressive renewable goals globally as well as in the U.S., they'll use our investment to keep building new developments, and hopefully we'll have more opportunities with them. It's 2.3 GW, highly contracted, in five states, as I mentioned. What's very interesting about it dovetails our overall view of the market, but also Engie's, is Engie is offering a corporate PPA, with names you can see here from Amazon to Walmart that solves the supply side of a corporate sustainability goal. Engie also has an energy services business, which has been our historical finance opportunity.
What we think Engie's doing quite differently than, or perhaps more ambitiously than other companies, is combining the supply side and the demand side to really give the corporate off-takers what they want. People want to reduce carbon, but actually, Amazon wants to ship stuff. They want somebody else to worry about the carbon. I think using Engie as a service provider achieves that goal for them. For Hannon, it definitely grows our balance sheet in what we consider a COVID-19-proof portfolio. Continues our diversification.
This is 13 transactions, and I think our average investment size will go from $12 million to $15 million, something like that. It's still quite a diverse portfolio. We love the technology and geography diversity and for power markets. This is an example of an expected programmatic relationship. We did our first transaction with Engie, about $50 million a few years ago, a portfolio of distributed C&I assets. We did the University of Iowa transaction and now this. We love where this relationship is going, and we will continue to update on the portfolio performance. With that, Stephen, we'll turn it back to you.
Great. Thanks to both Jeffs for a great overview of Hannon Armstrong. I'm going to kick off the questions, and then I'm going to hand it over to Mark in a little bit to touch on a number of ESG topics as well. Jeff , you mentioned the resiliency of your customer base and the fact that your products save money, which I think is maybe a fundamental that some investors may not appreciate about what you do.
Could you just talk a little bit more about, in your different segments, what's been the customer reaction during this economic downturn? For other product types, a lot of other companies are suffering from lower sales. What are you seeing just sort of week-to-week, month-to-month here as we go through COVID, as we go through economic weakness in terms of really the demand for the underlying products that you're helping to finance?
I think there's two elements to that question or to the answer. One is how is the portfolio performing? It's performing well. People are paying their bills. We really do not have anything meaningful to report in terms of credit issues. That's good news. That said, we may be early days in this crisis. We're continuing to stay focused on it. Our portfolio management group is all over it, and our clients are all over it. The other aspect is the pipeline development. The good news for our business is we see things 6 to 18 months after they get developed. Any impact of COVID-19 on our pipeline, we actually won't see for a while. When we talk to our clients, they're actually not seeing big delays. They're not seeing supply chain interruptions.
They, like us, are on the lookout for delays, they're actually seeing new business develop. We're cautiously optimistic that because something's changed in terms of people's perception of climate change and sustainability, these investments seem to be getting prioritized both with respect to payment and as well as new initiatives. We're grateful for the position we're in with these assets and frankly, cannot forecast or cannot report any real diminution in pipeline growth.
That's great to hear. For both Jeffs, just on the solar side of things, on rooftop solar, you've developed a lot of relationships with some of the leaders in rooftop solar. We love the growth rate that we're seeing there. Would you mind just talking to more specifically, how do you help those companies like a Sunrun or a Vivint, what your role is and how you see in terms of the growth outlook from here for your work there?
I'll start, Jeff, you can finish. Particularly the residential solar business, very capital-intensive business. These markets are developing quite well in terms of their ability to transact. People certainly are much more aware of where their power comes now that we're all sitting at home these days. It's been very interesting to watch those companies respond through COVID-19 and flip to digital selling, something they frankly needed to do to get their customer acquisition costs down.
From the financing standpoint, they're voracious consumers of capital. The securitization market for the senior debt piece has performed very well. Spreads blew out for a while, they've come back in. I think that market is very viable as people gain more confidence in the residential solar model. Where we've invested is in more junior slices. We've done the more senior, but the pricing isn't very attractive.
For some of the places where we were senior in the capital stack, we've doubled down on those portfolios and gone deeper into the capital stack. We always have somebody, Sunrun or Vivint or SunPower, in back of us. When they talk about their economic value in their portfolios, we get paid out $1.00 on the dollar if they're going to achieve $0.10 of that value. We still have, we believe, quite a strong equity cushion in back of us. Jeff, anything you would add to this resi solar discussion?
No, I think you covered it. We're ultimately a mezz debt provider to pools of leases. As Jeff said at the very beginning, we provide capital. That's a service we provide. That's how we support those clients.
Well, that makes sense. Again, rooftop solar, this is a product that saves consumers money. If they don't buy power from Sunrun or Vivint, they're going to be paying more from the utility to start with. We do like that that's not an obligation from our perspective, it's a savings.
Right
Makes sense to us. I wanted to talk a little bit about your business model. You had discussed before sort of two different forms of income, investment income and fee income. I know this can vary quarter to quarter in terms of just a new arrangement, a new business deal comes out. Do you have a desired mix between investment income and fee income or within different segments of your business? How do you think about sort of business mix in the long term, not really quarter to quarter?
You want me to take that, Jeff?
Maybe I could start.
Okay.
For 32 years before going public, we were 100% fee-based. We didn't have a balance sheet. We worked with $1,000 of paid-in capital. The fee business is something we know well and have good experience through a lot of different cycles. It's not an easy business. It's very episodic. For a public company to be completely reliant on fees, that's going to be a challenge going quarter to quarter. The goal of taking the company public was to start to build the balance sheet. That's been challenging as the industry's evolved, but things like the Engie transaction shifts the mix of revenue from a preponderance of fees to a preponderance of long-dated net investment income. With that backup, Jeff, I'll let you give the actual answer.
Thank you. Yes, we do get that question a lot because of the dual revenue model. Folks ask, is there a target of net investment income versus fees? The answer is really no. I think the dual revenue model works really well. If we thought about the extremes, if we put everything on balance sheet, we'd be 100% reliant on public capital markets, and we'd have a lot of low-yielding assets on the balance sheet.
If we tried to securitize everything, we would start every quarter with no revenue. Both those alternatives are much weaker than the one we deploy, which is to balance it. I think the best way to answer the question is certain of our investments lend themselves better to securitization. Energy efficiency is a good example. PACE, which is essentially energy efficiency in the private markets, is a good example.
A few others. Those will be always good candidates for securitization. They're well understood by the life insurance companies. They tend to be lower yield, a little bit lower risk, and will tend to get securitized. Most of the rest, we'll tend to put on balance sheet and retain an earning stream for a very long period of time. That's not a hard and fast rule, but that's probably the best way to think about it.
That makes sense. That sort of draws on the best strengths of both and gives you a good mix. Another topic that comes up often within Armstrong is just sort of thinking about changes in interest rates, flexibility of the business model, how your business changes as the interest rate environment changes. How do you think about sort of how your business has done? You've done great in a variety of interest rate cycles, but why don't we just try to address the impacts from interest rates?
Go ahead, Jeff.
Sure. Political in there for a second, one thing we've become fond of saying over the past several months is three or four years ago, if one said, we're going to have a presidential administration that's completely averse to climate change, your business will probably suffer. If we have an interest rate environment that's very flat with very low rates for a very sustained period, your business will probably suffer. We've had both those things for the past three-plus years, and Hannon Armstrong's business has prospered quite well.
We almost want to take that question almost off the table, that in any political environment, in any interest rate environment, we think we've built a business that really works. As it relates specifically to this, we're much more credit spread driven. Just use the illustrative example of if we're investing at T + 600, and when we're funding ourselves at, call it T + 250, it doesn't matter what T is. If we're always doing that through cycles and maintaining an adequate spread there, the absolute level of interest rates is not particularly impactful.
Well said. You've proven that ability to do well in a variety of business cycles, administrations, etc . I think the proof is there. I've got one more before I turn it over to Mark. I hear we have an election this year. We're getting a lot more investor questions just about impacts. I think people understand the status quo, and both Jeffs, you describe well how you've done well in the current administration. In the scenario in which we did see a blue sweep where the Senate turns Democrat, Vice President Biden becomes president, how do you think about the sort of range of policy outcomes, how your business would do, sort of what you think makes sense from an environmental policy point of view? Anything else you want to touch on regarding the election would be great.
Sure. Well, as you said, we've worked very hard over four decades to try not to be dependent on what happens in Washington. That said, having a tailwind, that would be lovely. A little bit like the Paris Agreement. We would be quite in favor of it. If it goes Democrat, where there's upside is if there's a price on carbon, which I'm starting to hear, while Biden won't talk about it during the election, there is good bilateral support for a carbon tax and dividend as a market-based solution and frankly, an alternative to a heavily subsidized Green New Deal type thing.
The downside scenario for us is when there's some kind of a Green New Deal stimulus where the government gives money away, much like with the Recovery Act in 2010. It's very hard to compete with free money. I just saw that our monthly national budget deficit was $850 million in May. Excuse me, $850 billion. That was a year, and a bad year. I don't really see that we have an infinite capacity to subsidize. Frankly, I think industry has shown they don't need the subsidy.
Yes.
Some of the Democratic policymakers are a little bit behind saying it's a capital problem. It's not. There is a ton of capital looking to get invested in this area. I'm cautiously optimistic that a price on carbon will do more efficiently what tax credits were designed to overcome as a longstanding subsidy of fossil fuels.
That's a great overview. With that, I'm going to turn it over to Mark Savino to cover a number of ESG topics, and then we'll go back to some investor questions we've received.
Great. Thanks very much, Stephen. Thanks to Jeff and Jeff both for doing this today. A couple of questions just kind of honing in on some of the areas that our ESG-focused clients are really kind of digging into. First, Jeff, you mentioned it earlier, but I want to just ask from a reporting perspective on the CarbonCount metric that you disclosed, because it is quite unique. I wonder if you could just comment in a little more detail in terms of how that guides your strategy. How important is it? Do you have sort of internal targets of where you want that metric to get to? Because I think it is, again, quite a unique sort of disclosure mechanism.
We don't have targets. It's really tracking carbon. It is a very complex concept, and people can get really confused when they talk about green, and it's qualitative. We want it quantitative. In my annual report letter, I said we're going to lose climate change unless the big financial institutions, including Morgan Stanley, do three things. One, before they make an investment, they ask themselves the fundamental question, is this helping or hurting climate change? Just a simple question. A lot of businesses that the six big banks are in are not helping climate change.
Second, that they report all of their investments, not just the ones they want to talk about. Third, and this is where CarbonCount is, again, if capital is scarce and carbon counts, we ought to be making, as a society, the most impactful investments. What CarbonCount is, that is the efficiency with which capital is being used to reduce climate change. I think until we do those three things, we're on a trajectory for a much warmer planet than anybody's going to want.
No, I think those are all great points and certainly all worth considering and thinking about for sure. One of the other areas that I wanted to kind of dive into is on the energy efficiency side, because it is definitely from our perspective and from the inbounds we're getting from investors, a growing area of interest. Particularly around sort of the real estate and building sector, where you've now seen, even in the U.S., several U.S. cities that have put into place very strict emission standards that are going to be coming into place over the next couple of years.
Just curious within your behind the meter segment, can you talk about the opportunity to invest in energy efficiency solutions in a little bit more detail? Curious to hear a little bit about the types of investments that you're considering in that area specifically.
Two of our clients, Trane Technologies and Carrier, well-known names in heating and cooling. They would just love to get rid of natural gas being burned in a building to create 72-degree temperatures. It's a nonsensical way to heat a building. The electrification of building heating and cooling, and connected backward chillers and all that, is an enormous opportunity for those clients of ours. When they go in, they're not going to do just that.
There's so many other technologies that can be combined to make a really smart building. Lighting controls, just to name a few. It becomes just a much smarter, much less carbon-intensive building. If we took all the natural gas that was combusted to generate 72-degree heat and instead either left it in the ground or used it to generate power, that would be a very good thing.
We've spent some time with Trane and Carrier as well, and I think there's obviously a lot of opportunity for those types of companies and obviously that creates opportunities for you as well. I think it is definitely an area that's going to continue to get focus, particularly as the regulatory side is supporting some of those efficiency efforts. Another area that I wanted to touch on, and I think Stephen would agree, we're getting a lot more questions these days on storage and on hydrogen as very critical solutions to decarbonization long term. Curious to understand how you're thinking about those segments specifically, what the opportunity set is there. I think that would be a helpful overview.
In general, if we're actually serious about decarbonization, the amount of capital that's required is in the trillions. We are not short of investing opportunities. The real key for us is that our clients are commercializing those technologies. Engie was in the press, talking about hydrogen for industry in Provence this week. It's not quite economic yet, but look at storage and wind and solar five, 10 years ago, it wasn't economic. I think the trend is absolutely inevitable.
Costs are coming down and as our large clients figure out how to commercialize this, one thing we know for sure is it all needs capital, and we want to be there as a capital provider. Storage, to me, is a complete game changer for the utility business, both on the utility rate base, I think that's a tremendous asset for utilities to invest in, but also on the distributed side.
Yeah, I think we would absolutely agree with that comment in terms of the amount of capital needed. Shameless plug for the blue paper that we did last year, where we came to a nice round estimate of about 50 trillion of capital that we think is needed across all the major decarbonization technology. Certainly, ripe for opportunity. Shifting back to, we talked about the election a couple of minutes ago. Tax credits, pricing on carbon. Curious, are there other policy outcomes, other regulatory outcomes that we should be thinking about that could impact your opportunities in either positively or negatively? What are the other areas that you're particularly focused on?
I think we've had a science lab of policies that could have hurt us over the 3.5 years. I'm not sure what else the Trump administration could throw at our industry. I'm sure the fossil fuel industry will continue to try to come up with ways to slow the demise of their business, but I don't think that's going to work very well. In terms of positive policy, I'm a bit of a broken record on pricing carbon.
I think we have a pretty good sight line of how we're going to decarbonize the electric power sector. At least the solutions are there. What we don't have any sight line on is industrial applications that need fossil fuel now, like cement, ag, and transport. I think a carbon tax will unlock a lot of innovation in all of those areas that I'm not sure you need a policy beyond markets. Markets are really powerful, when they're unleashed and they're priced correctly. I get really optimistic.
Yeah, I think that's absolutely a fair point. We think about the industrial applications is certainly where the challenges.
Yeah
Lie. You could think about technologies like carbon capture and we talked about storage and hydrogen, and they all have a role to play. To your point, it's certainly that market mechanism is a very powerful way to really drive effective change. I would certainly agree with that. One other question from me, then I will kick it back to Stephen. As we've seen how the world's been changing and evolving over the last couple of months, the social sort of pillar of ESG has been getting a lot more focus from investors.
We're getting questions on human capital management and diversity and equality and inclusion, and things that were always important, but quite frankly, were sort of overshadowed by climate, and have now really come to light. I'm curious if you could talk a little bit about how you think about some of the social elements within your business. Codes of conduct, human rights, diversity, how you think about these issues, how you implement them within your business and also with the partners that you choose.
Great question, Mark. If you hadn't asked it, I was going to raise it. I have always put the E in ESG in like 44 font, because I'm such a climate change student. The last two months, particularly since George Floyd's murder, the S has profoundly affected me, and I think profoundly affected our board and our staff. We've had more interesting, honest, painful discussions as a company about, okay, we're not racist, but we're not anti-racist, to use the metaphor.
Are we actually proactively investing in the S? That has changed in the last two months, and our investors should expect much more leadership from our board, from me, and the company on the S. We have a lot of interesting things going on. I can always figure out the impact of climate change on rice farmers in Bangladesh. That's clear to me. I haven't been able to quite connect those dots in the U.S. of where power plants are sited, where flood impacts people. These are social issues that are related to climate change.
I'm committed to having the capacity as an individual, but also as a company, to do more than just the E. We're going to make the S a much more prominent aspect of our business. I think we have a really high-octane, high-intellect group. You mentioned all the checklists. I think there's a million checklists that we check off. We agree to this. We're signed up for everything. None of those mean a darn thing unless what we're actually doing is credible to our smart people. We have, I don't know, fair, but we have people who are able to judge if they're being patronized. I think people want to see real action. I'm hopeful that our company will emerge as a leader in this.
Yeah. I think it's certainly obviously a very important issue to think about. You raised an interesting point. We hear more and more about the issue of climate justice as it's often referred to, where if you do look at the physical effects of climate change, there is a much more pronounced adverse impact on lower demographic populations, for example. As we think about the issue of inclusion and equality, there is a very real tie-in with climate change that ultimately has to be solved. Definitely appreciate your thoughts on that. I think with that, let me kick it back to Stephen and see if there's any questions from the audience or any other questions you may have.
Great. Thanks, Mark . Jeff, I have to say, I'm excited to see how you all kind of approach the ES in ESG and the concept of climate justice is one that we're hearing more and more about from the investment community. Would welcome your leadership and your thoughts on that. That sounds exciting to me. I do have three questions I've received, but before I do, I wanted to highlight something that really struck me. For investors, I'd really recommend taking a look at the annual report from Hannon Armstrong. There's a statement in there I just thought I'd read. I thought it was profound and just useful, really, to think about. I'm just quoting from the report, and I promise it'll be very short, but it just really kind of blew me away. Very simple, but profound.
Our climate positive investment thesis is based on the following theories. One, more efficient technologies are more productive and thus should lead to higher economic returns. Two, lower portfolio risk is inherent in a portfolio of smaller investments generated by trends of increasing decentralization and digitalization of energy assets compared to larger, centralized utility-scale investments.
Three, investing in assets aligned with scientific consensus and society's general beliefs will reduce potential regulatory and social costs through better internalization of externalities," which Jeff, you mentioned earlier. Then four, "Assets that reduce carbon emissions represent an embedded option that may increase in value if carbon regulation were to set a price on carbon emissions." I find that just profound.
I just thought I'd read that out for investors. The annual report's full of, I think, some interesting observations. With that, we did receive a number of questions from investors. The first is on the Engie transaction. Let me pull up the question again. The question is, does the Engie joint investment represent a new market growth opportunity for Hannon Armstrong in the blended finance category? If so, what is the potential size of that market?
It's not really a new investment category. We've got wind in the portfolio, albeit generally, we've got some preferred wind investments. This is just a lot more of them. Then the solar assets, we've not had the common equity in solar like we do now, because we haven't liked the returns. Instead, we bought the land. I think we own 25,000 acres of land underneath these same kinds of solar projects . It's different places in the capital stack of the exact same assets. In terms of the potential, clearly, wind and solar have enormous runways here. Plus, it's a question of pricing and risk. If we can get the risk-adjusted return that we like, we're all in. If we can't, glad we have other places to invest.
Understood. Another question we received is just in terms of competitive dynamics across your different markets. Are you seeing any changes, either positive or negative, in terms of new entrants or just what you're seeing day to day in terms of competition to serve your customers?
Well, I think the world is clearly awash in capital, but over Hannon's 40-year history, we have always done better in more volatile markets. This is certainly a volatile market. One of the reasons is, given our programmatic relationship with our clients, marginal competitors tend to go away in volatile markets. Clients tend to respect capital providers, not a lot, but a little bit more on the margin. While there is, I think, an increasing tide of capital coming this way, We've got clients. We're going to service them and do well. I like our position relative to new entrants into the business.
That's a good overview. The next question, there are a couple of elements to it. Let me just read it out to Jeff and Jeff here and see how you want to respond to it. I think they're really good questions here. The first part is, what timeline does Hannon Armstrong place on the demise of fossil fuels? That's the first part. How much reach does Hannon Armstrong have in a carbon-free future? How do you think about your business opportunity? Then lastly, we can touch on carbon capture, but maybe why don't we touch on these sort of fundamental points about the timeline over which you see fossil fuels, presuming you do see those having an end date.
I have to say, I believe in climate change, but I also believe in diminishing marginal returns in investing in certain assets. I am not a fossil fuel free believer. There are places where fossil fuels have just a profound role. It shouldn't be to heat buildings or boil water or drive an internal combustion engine or drive an automobile. Those, to me, are lazy technology solutions.
I think you'll get to using fossil fuels in the right way, which is in a substantially decarbonized environment. No timeframe. The world is a very hungry place for energy, and it's an enormous challenge we have to keep China and India and the rest of the developing world at some level of energy supply that allows them to have a quality of life that they aspire to. It's a tough problem in the U.S. It's tougher in the developing world.
Yeah. Very fair points. Maybe I can touch on just this last question. Does Hannon Armstrong have any plans for a way to make carbon capture a financially profitable goal? How do you think about carbon capture?
I think the classic carbon capture that southern companies tried, that's not our kind of deal. We get much more interested in regenerative agriculture, where you're reducing the use of fossil fuels by lowering the amount of fertilizer, and then you have healthier soils that capture carbon. There's some really interesting work going on in that. Is it investable now? Not. We haven't found a way, but from a, you think of Hannon Armstrong in the future, yeah, that could be more interesting. We do own a lot of land.
That's interesting. The topic of regenerative agriculture, that's something I'm personally fascinated by and makes sense. We'll stay tuned to see how that develops. I love that you all are very innovative, thinking about new ways to apply your expertise, your financing capabilities in ways that will help the planet. Those are all the questions we've had. I think we're just almost at the top of the hour. I want to thank the management team of Hannon Armstrong, Jeff and Jeff, and Chad as well from Investor Relations. Thank you so much. Thanks to our clients for being part of this, and feel free to contact us with any follow-up.
Thank you all and stay well.
Thanks, Jeff. Thank you. Have a great day.