© 2020 Arizent. All rights reserved.

How lenders aim to profit from climate change

Register now

Banks can play many roles in the broader movement toward a low-carbon economy, one of which is helping commercial and other clients shrink their carbon footprints.

Companies that pledge to minimize their own environmental impact often need financing or other banking services to achieve that goal, and consumers want similar help at a personal level. That’s giving rise to more loans, bonds and other products to cater to those needs.

“There are huge investments which are going to take place in the context of de-carbonization. There are lots of business opportunities and job and employment opportunities that will arise from that,” said Christian Deseglise, head of sustainability finance for HSBC.

Calls are growing for the financial services industry to be proactive in addressing climate challenges. A recent report from the Commodity Futures Trading Commission urged financial institutions to do more in-house to combat the causes of a warming planet.

Rooftop solar panels being installed
Fannie Mae has issued green bonds backed by mortgages on single-family homes that are designed to use less water and energy. A number of banks are offering direct financing of rooftop solar panels, too.

“Financial innovations, in the form of new financial products, services, and technologies, can help the U.S. economy better manage climate risk and help channel more capital into technologies essential for the transition,” the report’s authors wrote.

Fannie Mae, for example, recently expanded its green bond program to single-family mortgages, and so far it has issued about $50 million in green mortgage-backed securities. The agency has offered a green mortgage program for multifamily properties since 2010, and it has issued $75 billion of multifamily green mortgage bonds in that time.

Its newer green mortgage program will cover single-family homes built to Energy Star certification, which Fannie Mae estimates are 20% more energy efficient, on average, than homes built to code. In either case, the basic idea is to incentivize the building of homes that ultimately use less water and energy.

The program is part of lenders' increasing interest in renewable energy. A number of banks and credit unions are offering consumers direct financing of solar panels.

Elsewhere in consumer banking, Bank of the West launched a checking account this year aimed to appeal to consumers who want to minimize their environmental impact. The account is equipped with a carbon-tracking tool embedded in the mobile app, and it’s paired with donations to environmental nonprofit groups. The checking account might help a customer understand the environmental impact of a purchase like a new laptop, for example.

And financial institutions are getting more creative in commercial banking, too. One way is through transition finance, an umbrella term that broadly refers to financing a commercial client’s transition to carbon neutrality. It could include a plastic waste reduction bond or a working capital line of credit that ties a more favorable interest rate to certain metrics such as water use, Deseglise said.

For instance, HSBC’s commercial bank recently launched a new green lending service, offering term loans, revolving loans and commercial real estate financing aligned with the Loan Syndications & Trading Association’s green loan principles. Those principles, published earlier this year, define green loans and lay out broad guidelines for evaluating and reviewing them. A green loan, for instance, should serve a clear environmental benefit. The borrower should quantify and measure that benefit, when possible, and provide the lender with regular updates.

Deseglise said HSBC also recently formed a new unit specifically to help commercial clients incorporate 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 for corporate clients. Bankers might, for example, counsel a large retailer about how to reduce water usage throughout its supply chain.

Governments and municipalities will also need this kind of financing. Bank of America, for example, financed a $105.5 million project to upgrade streetlights across the city of Los Angeles to LED lighting. The city is paying back the loans, made beginning in 2013, using the tax savings from the more efficient lighting. BofA estimated the city saves about $10 million in yearly electricity costs and another $2 million to $3 million in maintenance costs with the new lights.

Still, U.S. financial institutions are “making timid steps” compared with their European counterparts, who have embraced sustainable finance, said Emilie Mazzacurati, founder and CEO of Four Twenty Seven, a Moody’s affiliate. Mazzacurati, whose firm specializes in climate risk, said she has seen more European banks apply environmental factors in the underwriting process and publicly commit to more green finance.

“We’re seeing banks apply ‘green’ adjustment factors, whereby the bank reduces the risk-weighted assets placed against the deal for projects with strong environmental attributes, which leads to an adjusted return-on-equity vision,” she said.

One key challenge is scale. Morgan Snyder, an adviser for the risk management firm RiskSpan, expressed some skepticism about whether Fannie’s new green mortgage product will grow enough to make an impact.

“The multifamily product has been successful in its own right. It’s easy for them to manage because the loan sizes are bigger,” he said. The single-family green mortgage, he added, is “nice in concept, but if you look at the size of the MBS they did ... it’s just a drop in the bucket.”

Another challenge is that the market for some of these products may not seem clear right now. For many financial institutions, it’s simply easier to stick to products, sectors and clients they already know, said Dan Saccardi, a senior director at the Boston nonprofit Ceres.

Banks need to start investing now in the staffing, data and valuation tools they will need to capitalize on the financing opportunities arising from climate concerns, he said. They also need to give their bankers the time to pursue those opportunities.

“Bankers themselves should be encouraged and incentivized to pursue those types of deals, to find new types of clients or think through new financial tools or product offerings,” Saccardi said. “It could become something very valuable a year from now if there’s a certain change in the regulatory landscape or consumer or business demand.”

Mazzacurati and others pointed out that the industry in the U.S. has at least one blind spot with respect to green financing: Many efforts still center on energy efficiency. Banks also need to think about financing efforts that can strengthen infrastructure against increasingly severe hurricanes, flooding and wildfires.

Mazzacurati said, “Given the exposure of the United States to extreme weather events, U.S. businesses and homeowners will need a lot of financing for adaptation and resilience projects, and banks could play an important role in supporting these efforts.”

Correction: An earlier version of this story understated the value of green single-family mortgage-backed securities that Fannie has issued.

For reprint and licensing requests for this article, click here.
ESG Climate change Commercial banking Consumer banking HSBC Bank of the West Fannie Mae Bank of America
MORE FROM ASSET SECURITIZATION REPORT