How lenders aim to profit from climate change
Banks can play many roles in the wider movement towards a low carbon economy, one of which is to help commercial and other customers reduce their carbon footprint.
Businesses that are committed to minimizing their own environmental impact often need financing or other banking services to achieve this goal, and consumers want similar help on a personal level. This results in more loans, bonds and other products to meet these needs.
“There are huge investments that are going to take place in the context of decarbonization. There are a lot of business opportunities and jobs and jobs that will come with it, ”said Christian Deseglise, Head of Sustainable Finance at HSBC.
Calls are growing for the financial services sector to be proactive in addressing climate challenges. A recent report from the Commodity Futures Trading Commission urged financial institutions to do more internally to tackle the causes of global warming.
“Financial innovations, in the form of new financial products, services and technologies, can help the U.S. economy better manage climate risks and channel more capital into technologies critical to the transition,” the report’s authors wrote. .
Fannie Mae, for example, recently extended its green bond program to single-family mortgages, and so far it has issued around $ 50 million in green mortgage-backed securities. The agency has offered a green mortgage program for multi-family properties since 2010 and issued $ 75 billion in multi-family green mortgage bonds during that time.
Its new green mortgage program will cover single-family homes built to Energy Star certification, which Fannie Mae estimates to be 20% more energy efficient, on average, than homes built to code. In both cases, the basic idea is to encourage the construction of houses that ultimately use less water and energy.
Elsewhere in personal banking, Bank of the West launched a current account this year aimed at attracting consumers wishing to minimize their environmental impact. The account is equipped with a carbon monitoring tool integrated into the mobile app, and it’s associated with donations to nonprofit environmental groups. The checking account can help a customer understand the environmental impact of a purchase like a new laptop, for example.
And financial institutions are also getting more creative in commercial banks. One of these is transition financing, a generic term that generally refers to financing a commercial customer’s transition to carbon neutrality. It could include an obligation to reduce plastic waste or a working capital line of credit that ties a more favorable interest rate to certain measures such as water use, Deseglise said.
For example, HSBC Commercial Bank recently launched a new green lending service, offering term loans, revolving loans and commercial real estate finance aligned with the Green Lending Principles of the Loan Syndications & Trading Association. These principles, released earlier this year, define green loans and set out the guidelines for their assessment and review. A green loan, for example, should serve a clear environmental benefit. The borrower should quantify and measure this benefit, to the extent possible, and provide the lender with regular updates.
Deseglise said HSBC also recently formed a new unit specifically to help business clients integrate environmental, social and governance factors into their strategies. Led by three bankers based in New York, London and Hong Kong, the unit will provide advice and financing ideas to corporate clients. Bankers can, for example, advise a large retailer on how to reduce water consumption throughout its supply chain.
Governments and municipalities will also need this type of funding. Bank of America, for example, funded a $ 105.5 million project to turn streetlights in the city of Los Angeles into LED lighting. The city repays the loans, granted from 2013, using the tax savings thanks to more efficient lighting. BofA estimated that the city saves around $ 10 million in annual electricity costs and between $ 2 and $ 3 million in maintenance costs with the new lights.
Yet US financial institutions are “taking timid steps” compared to their European counterparts, which have embraced sustainable finance, said Emilie Mazzacurati, founder and CEO of Four Twenty Seven, a Moody’s subsidiary. Mazzacurati, whose company specializes in climate risk, said it has seen more and more European banks apply environmental factors in the underwriting process and publicly commit to green finance.
“We are seeing banks applying ‘green’ adjustment factors, whereby the bank reduces risk-weighted assets placed against the deal for projects with strong environmental characteristics, leading to an adjusted view of the return on equity, ”she said.
Scale is one of the main challenges. Morgan Snyder, adviser to risk management firm RiskSpan, has expressed some skepticism about whether Fannie’s new green mortgage product will grow enough to have an impact.
“The multi-family product was a success in itself. It’s easy for them to manage because the loan amounts are larger, ”he said. The single-family green mortgage, he added, is “a cool concept, but if you look at the size of the MBS they’ve made… it’s just a drop in the ocean.”
Another challenge is that the market for some of these products may not seem clear at the moment. For many financial institutions, it’s just easier to stick with the products, industries and customers they already know, said Dan Saccardi, senior director of the Boston nonprofit Ceres.
Banks must start investing now in the people, data and assessment tools they will need to capitalize on financing opportunities arising from climate concerns, he said. They must also give their bankers time to seize these opportunities.
“Bankers themselves should be encouraged and motivated to continue these types of operations, to find new types of clients or to think about new financial tools or product offerings,” Saccardi said. “It could become something very valuable within a year if there is some change in the regulatory landscape or in consumer or business demand.”
Mazzacurati and others have pointed out that industry in the United States has at least one blind spot when it comes to green financing: many efforts still focus on energy efficiency. Banks also need to think about financing efforts that can strengthen infrastructure against increasingly severe hurricanes, floods and wildfires.
Mazzacurati said: “Given the exposure of the United States to extreme weather events, American businesses and homeowners will need a lot of funding for adaptation and resilience projects, and banks could play an important role. in supporting these efforts. “
Correction: An earlier version of this story underestimated the value of the green single-family mortgage-backed securities that Fannie issued.