Bottom Line of Green Banking Part II: Green Lending – Financing the Future

by | Oct 24, 2011

In my last article, I provided an overview of green banking.  In this follow on, I focus on green lending as a growing means to finance a preferred future.

By far the biggest impact banks have on the environment, and on the world, is through the lending decisions they make. Simply put, financing turns dreams into reality, whether that dream is purchasing a home, expanding a small business, or creating a more environmentally sustainable future. Successful banks turn a profit by helping people, companies, and societies realize their dreams. Savvy banks are already focused on creating a greener future.

Many of the finance opportunities of the future will be driven by the investment demands of low carbon development. In other words, capital is needed to finance clean energy, less-polluting cars and buildings, next-generation public infrastructure, and many other green assets. Leading lenders, investment banks, and research institutions ranging from Goldman Sachs to the United Nations Environmental Programme are closely watching demand growth. They are striving to predict where future capital flows will need to go – and where the future profits of financial institutions will come from.

These market watchers see an enormous need for green capital. For example, a recent study by Accenture and Barclays found that global capital demand for transitioning to a lower carbon economy will top US $4.1 trillion in the coming years and concluded that “financing low carbon technology represents a unique opportunity for banks to benefit from significant growth of the low carbon technology sector whilst demonstrating a positive contribution in tackling climate change”.

Visionary banks, both large and small, see the opportunity in capturing the green market. Bank of America, for example, has pledged to invest $20 billion by 2020 into environmentally preferable investments such as cleaner energy and green real estate. These investments are not corporate philanthropy nor are they simply corporate social responsibility. As Bank of America CEO Brian Moynihan recently remarked on his bank’s green capital commitment, “This initiative is far more than doing good for its own sake – it has proven to be a long-term, compelling business opportunity for our clients, our company and our shareholders.”

Bank of America is not the only bank focusing on this issue. Financial institutions ranging from global giants like Citi (recently ranked by Newsweek as the greenest financial services provider in the US), which has made a $50 billion capital commitment to projects addressing climate change, to smaller banks like Comerica, which has a unit dedicated to monitoring climate-related business opportunities, view environmental sustainability as an emerging paradigm in lending. There are even mission-driven start-up institutions, such as New Resource Bank, which was founded in 2006 with a vision of bringing new resources to sustainable businesses and ultimately creating more sustainable communities.

One very reasonable question you may have in looking at these commitments is “What exactly is green lending?”

At this point there is no industry-endorsed definition or certification for a green loan. The definition varies slightly from bank to bank depending on the mix of products, markets of operation, and the positions of key stakeholders. However, it is generally fair to say that green lending is making return-driven investments which finance assets that reduce or mitigate humanity’s environmental footprint or help people to adapt to human induced climate change.

Under this definition, green lending might include, among other things:

  • Clean electricity generation projects such as wind, solar, biomass, geothermal or small hydro;  Green real estate projects that meet criteria such as the US Green Building Council’s LEED certification requirements or certain thresholds under the US Environmental Protection Agency’s Energy Star Program; and
  • Pollution or emissions mitigation projects such as landfill methane capture projects, which generate tradable carbon credits Small business loans to green businesses which receive special incentives under current Small Business Administration regulation

These are just a few examples, but in each case the asset or asset class would be desirable even without categorizing it as green. Green buildings, for instance, are high performing properties that are proven to achieve and maintain better occupancy than traditional buildings. Green building projects also often move through the permitting process faster. In each case, the green asset is a lower risk to the bank and therefore a more desirable investment.

The same applies to energy. Power producers are under increasing scrutiny from the federal government as well as state and municipal regulators to monitor and mitigate their impacts on our planet. Some banks are already limiting their exposure to these risks by avoiding lending on coal-fired power plants.  Choosing to invest in cleaner energy projects is a choice to invest in lower regulatory risk assets in a growing market segment. Between 2005 and 2010, the solar market grew 36% [pdf] while the wind power market grew by 31%.

Banks have every reason to consider the opportunities emerging from low carbon development, in their pursuit of product innovation and broader market penetration. A number of industry-oriented tools have been developed to aid in doing so. These tools include lending protocols such as the Equator Principles and vast libraries of resources from thought leaders such as the UN Environmental Programme Finance Initiative and the Coalition for Environmentally Responsible Economies.

However, green lending commitments and policies are not uniform across financial institutions. Every bank must design its green lending programs the same way  it designs its other products – by looking at where it is particularly positioned for success and creating offerings which allow the institution to profit from turning dreams into reality.

Andrew Malk is the Founder and Managing Partner of Malk Sustainability Partners (MSP), a specialty management consultancy, which guides businesses in developing profitable corporate environmental sustainability programs.  MSP has particular expertise in developing green banking strategies.  This article was written with MSP Partner, Zach Goldman.

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