Talking about banks can mean floating lots of numbers and calculations and equations. Boring stuff, right? Maybe we can think about banks in a different way, one that zooms right into our very existence and that sets a trajectory for a safer, healthier tomorrow. You see, banks have a critical role to play in the climate crisis. If we support institutional change that attracts private investment in clean energy, we can accelerate the transition to a zero emissions future. And it’s starting right now! The years-long advocacy to formalize green banks has paid off: a national climate bank provision is contained within the Inflation Reduction Act.
A Nonprofit National Climate Bank
The Inflation Reduction Act (IRA) creates important incentives for clean energy and equity-centered environmental investments by authorizing $27 billion for the establishment of a national climate bank. It will provide affordable financing for clean energy infrastructure projects. Of the $27 billion, states and tribes can apply for $7 billion worth of grants and loans “to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies,” the legislation says.
The gist is that all 50 states will have much more wherewithal to cut emissions. A national climate bank will unleash public and private dollars for investment in clean energy and climate resilient infrastructure in underserved communities.
What’s really important is that this funding will be delegated to nonprofit banking. Created by the federal government, it is an independent, nonprofit institution using public funds and market-based tools to finance the clean energy transition.
As the NRDC explains, the law empowers the EPA to fund nonprofit organizations designed to finance the rapid deployment of low- and zero-emissions products technologies and services, particularly in disadvantaged communities. The national green bank will enable bold climate action across the country that puts underserved communities first.
The Coalition for Green Capital states that a national climate bank has the potential to catalyze investment in clean energy solutions that lower energy costs for all people in the US as part of comprehensive and socially-just climate policy. It is empowered to prioritize investments that benefit underserved and low-income communities, bringing them the jobs and savings associated with clean energy. Drawing upon financial tools and expertise to attract private investment, the national climate bank will multiply the institution’s overall impact in terms of GHG emissions reductions per public dollar invested.
According to the US Climate Alliance, a bipartisan coalition of governors committed to meeting the goals of the Paris agreement, the bill makes meaningful investments in state climate action, providing critical resources to accelerate state leadership in tackling greenhouse gas (GHG) emissions and protecting Americans from climate impacts.
California, Connecticut, Colorado, Florida, Maryland, and New York have a head start: they already have green banks. They help finance the pieces of the clean power transition: heat pumps, distributed solar, microgrids, and EVs. In addition to supporting economic development, these investments will reduce air pollution and improve overall health and safety.
Banks & the Fight for Zero Emissions
Banks have an essential role to play in mitigating carbon emissions.
Banks have been vocal in pledges to commit to net zero goals by 2050. However, trillions of dollars in bank finance still keeps the coal, oil, and gas industry viable — without those funds, the fossil fuel industry would be be transitioning much more quickly to renewable energy and prodding their clients to do the same. In the 5 years after the Paris Agreement the world’s 60 biggest banks alone provided $4.6 trillion to the fossil fuel sector.
As BankTrack has uncovered, banks also act as financiers of other high emitting business sectors, such as steel, cement, petrochemicals, manufacturing, transport, and real estate. They continue to finance of business sectors that impact natural forests and other ecosystems critical for climate mitigation and adaptation, including agricultural commodities such as soy, sugar, rubber, beef, and timber.
Fossil fuel financing from the world’s 60 largest commercial and investment banks amounted to a total of $4.6 trillion from 2016–2021– with $742 billion in fossil fuel financing in 2021 alone. Which banks were the worst culprits?
- JPMorgan Chase
- Wells Fargo
- Bank of America
Barclays is the worst in Europe, and Bank of China is the worst in China, according to the Banking on Climate Chaos report. A clear disconnect exists between net-zero aspirations and current banking practices, as 27/44 banks in the report lack a meaningful corporate level, no expansion policy for any part of the fossil fuel industry.
A global call asks all banks to acknowledge that their continued support for the fossil fuel industry is incompatible with saving the planet from climate breakdown, and to urgently take the following steps to end this support.
ClearView Energy Partners, an independent research firm, as reported by the Washington Post, wrote to clients, “As renewables proliferate on GOP-represented grids, their economic and political relevance to government officials seems likely to grow.”
Are you wondering if the anti-ESG rhetoric that is so prevalent right now would stimy the movement for a national bank focused on climate investments? The financial consequences for most asset managers and banks from all the anti-ESG rhetoric coming out of the mouths of Republican politicians in the US is almost certain to be minimal—at least for now, according to Bloomberg Green’s Tim Quinson, who says that any business losses would be insignificant relative to the firms’ overall bottom line.
What Will Change With A National Bank?
The National Green Bank Act of 2019 was referred to the Subcommittee on Energy and stalled there. Members of Congress and advocacy groups kept working to make a national green bank a reality, and the IRA has introduced the establishment of a national green bank to provide low-cost financing for clean energy infrastructure projects.
Green banks work by harnessing financial tools that break down barriers from climate action investments. They identify and shatter obstacles that prevent private capital providers from fully investing in the target market opportunities, expand markets, and create new opportunities for private investment.
Green banks can offer credit enhancements, such as loan loss reserves or loan guarantees, that help de-risk investments for private investors.
Small and geographically dispersed projects like residential or small business energy efficiency are often not cost-effective for private investors to underwrite. Green banks can bundle together projects that are not cost-effective to underwrite on their own. Pooling these loans diversifies risk and achieves scale, making them far more attractive to lenders.
Transactions that have never been done before are more labor-intensive than typical standardized transactions. Green Banks can put in the technical legwork to develop frameworks for new types of transactions. As the new transaction types become more common, processes become more standardized and friction is reduced.
Ultimately, the use of these financial tools enables much greater overall investment than would have otherwise taken place. A green bank’s investment impact can be many times that of its initial capitalization funding.
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