03 Nov In The Green
By Jeff Harder
Investment banks bridge the gap and help fund the future of climate-resilient infrastructure.
The words “green bank” might conjure ATMs, drive-up windows, and deposit slips, but don’t be fooled by the name. Green banks—alternatively known as green investment banks—are akin to impact funds and use a mix of public and private money to back billions of dollars worth of low-carbon and climate-resilient infrastructure (among other initiatives), galvanizing the private sector to invest in and scale up sustainability and clean energy projects within the United States and around the world. And with an estimated $90 trillion required to transition the world to low-carbon and climate-resilient infrastructure by 2030, according to the Global Commission on Climate and the Economy, green banks are helping bridge a critical gap in funding.
The UK Green Investment Bank Offshore Wind Fund consists of interests in six operational wind farms, including Sheringham Shoal, a 317MW offshore wind farm located off the North Norfolk coast.
“There’s more and more talk of [green investment banks] in the climate resilience space, which I think is a good thing: There’s a lot of infrastructure to make resilient within the next 15 years,” says Stacy Swann, a founding partner of Washington, D.C.-based consulting and advisory firm Climate Finance Advisors, as well as board vice chair of Maryland’s Montgomery County Green Bank.
Swann previously worked for the International Finance Corporation, a member of the World Bank Group that deals with private sector investment in developing countries, where she spent nearly a decade heading its Blended Finance Unit. A blended finance model involves capitalizing a financial entity with public dollars; leveraging the far larger coffers of private investors by issuing guarantees, equity, and debt with discounted, concessional terms (for example, offering 5 percent interest if the market rate offers 10 percent); and steering the funds into projects with significant social benefits. The model has been around for decades—Rhode Island’s Infrastructure Bank has followed a blended model since the 1990s—but as public budgets dwindled and clean energy and climate resilience became transnational concerns in the last decade, blended finance models have helped correct certain market failures—say, for instance, under-investment in clean energy technology because of its perceived risks.
“Due to the relative lack of performance history for many proven technologies in the new and evolving energy landscape—including solar, wind, fuel cells, battery storage, et cetera—traditional capital providers tend to be less familiar with developing financing products to enable the deployment of those resources,” says Keely Conway, an analyst at New York Green Bank, the largest green bank in the United States. “Traditional financing therefore may not yet be available and/or borrowing costs can be higher due to a perception of greater project risk, leaving otherwise technically and economically feasible projects without needed capital.”
The same concepts that drive blended finance more broadly drive green investment banks in particular. Today, there are at least 13 green banks around the world, all nonprofit or government-affiliated entities independently established through policy or legislation (though not all adorned with the “green bank” label) to address the regional burdens of a warming world. Capitalized through tax dollars, utility bill surcharges, and other public sources of money, green banks draw private investment to fund a variety of sustainability projects—solar, wind, and hydropower; energy storage; LED streetlights and low-carbon vehicles; and energy-efficiency retrofits in low-income housing.
Each green bank specifies the limits on how to spend investors’ money, whether for energy efficiency upgrades or clean energy projects, and enacts restrictions and safeguards to prevent steering public money directly to private companies’ bottom lines. And by operating at smaller scales, green banks direct attention to projects that might not catch the attention—or the funding—or large financial institutions. “There are very few options for financing these things,” Swann says. “In the U.S., the green bank model is really filling a gap at the state and local level.”
Since the United Kingdom’s government established the first bona fide green bank in 2011, at least a dozen more have emerged in the United States, Australia, Asia, and elsewhere in Europe, and early returns show green banks making a remarkable impact. According to a working paper produced by Climate Finance Advisors, the Natural Resources Defense Council, and the Coalition for Green Capital, a network of six green banks—the UK Green Investment Bank, New York Green Bank, Connecticut Green Bank, the Australia Clean Energy Finance Corporation, the Green Technology Corporation of Malaysia, and the Green Finance Organization of Japan—have raised $22 billion for clean energy projects since 2014, putting the group on pace to exceed its goal of $40 billion by 2019. And rather than leeching off ratepayers, green banks have amplified the impact of limited funds: According to the working paper, green banks have mobilized eight dollars in total financing for clean energy projects for every public dollar invested.
So far, green banks have made a profound impact. By June 2017, New York Green Bank, a $1 billion state-sponsored investment fund, had invested more than $400 million in clean energy projects in New York State and generated $17.8 million in revenues, all of which was reinvested in the business. Recently, the UK Green Investment Bank established the Offshore Wind Fund to attract institutional investors to offshore wind farms and free up developers to finance new wind projects; by the end of 2016, the fund invested in five projects. Last year, the Rhode Island Infrastructure Bank’s Efficient Buildings Fund lent $17 million to carry out energy efficiency and renewable energy projects in six communities that reduce greenhouse gas emissions by the equivalent of millions of car miles per year, generate enough power to run 8,700 homes, and free up a combined $20 million for those communities. “That’s a significant savings in taxpayer dollars that can be directed into education and other services that cities and towns provide,” says Jeff Diehl, executive director and CEO of Rhode Island Infrastructure Bank.
Homeowners and commercial building owners enjoy subtler connections to green banks: While they can’t offer direct consumer financing, they work with local financial institutions to offer underwriting, risk-sharing, or credit lines, which the institution might deliver as attractive financing for a retrofit or a solar installation, for example. Green banks can also function as matchmakers, vetting and recommending contractors and lenders for a given project, and also bring wider awareness to the value of green building, resilient infrastructure, and energy efficiency. “When a local bank is financing a remodeling project or a retrofitting project, they’re usually not thinking about the need to implement or integrate measures that would make it more resilient in the long run,” Swann says. “Part of the role green banks have played, and certainly part of the role that blended finance plays internationally, is building that awareness into the projects themselves.”
And as states and municipalities become leaders in building for resilience, green banks can help finance infrastructure that remedies drought, intense rain, coastal storms, and other disparate effects of climate change. (“The impacts are very contextual, and the people who understand that context really well are the local policy makers,” Swann says.) And while green banks are complements—not substitutes—for thoughtful climate and resilience policies, their role often goes beyond finance: The Rhode Island Infrastructure Bank, for example, now makes available a consulting engineer to municipalities—free of charge—to help determine which energy efficiency measures will have the greatest benefits. “That’s part of our mission: not just accelerating investment and providing finance, but also helping bring technical expertise so decisions are being made in a better-informed way,” Diehl says.
In the long run, Swann says, the true measure of success of green banks is when they become less and less necessary. Other actors in the financial ecosystem will fulfill the same functions. The finance gap will disappear. A more resilient world will gradually arrive, and it won’t break the bank.
New York Green Bank manages a pool of state money designated to help finance private sector renewable energy, energy efficiency, and other clean energy projects that may not otherwise be efficiently financed by commercial entities.
Sustainability is a fixture of the culture at JPMorgan Chase, the New York City–headquartered bank and financial services company, and an ever-increasing priority for its clients—so much so that by 2020 the company plans to lean entirely on renewable energy for its operations at 5,500 properties across 60 countries. And recently, JPMorgan Chase announced that it’s going a few steps further: By 2025, it will offer $200 billion in clean financing, the largest such commitment made by a multinational finance institution.
“Our commitment to sustainability reflects our continued belief that business must play a leadership role in creating solutions that protect the environment and grow the economy,” says Erin Robert, head of capital strategy for sustainable finance at JPMorgan Chase. “That means leveraging our core business and expertise as a global financial institution to advance sustainability focused financing opportunities.”
That $200 billion commitment takes many forms—advisory services, financing and risk management solutions, and debt underwriting for companies and projects that facilitate clean energy, clean transportation, sustainable waste management and water treatment, pollution control, and clean technology innovations. In recent years, JPMorgan Chase has been involved in some of the largest strategic transactions in the renewable energy sector, advising DONG Energy, an offshore wind company, on its $3 billion initial public offering (IPO); serving as bookrunner on Apple’s $1 billion green bond offering this past June; and contributing to the $900 million Teesside Renewable Energy Plant, the UK’s largest dedicated biomass project, which produces enough energy to power 600,000 homes.
“We continually strive to be a leader in this space,” Robert says, “and demonstrate that supporting sustainability-focused companies and projects can both generate significant environmental benefits and make good business sense.”