Where banks are eyeing profits in the green economy

June 2, 2021 4:01 AM

Even before banks were facing pressure from the Biden administration to start accounting for the risks associated with climate change, many were embracing the opportunities associated with the transition to a low-carbon economy.

Efforts to combat climate change are giving rise to new technologies, upgrades to existing infrastructure and new jobs. They are spurring new demand for specialized financing, capital markets advice and even retail banking products. Bankers have also made clear that their preference is to work with carbon-heavy clients to help them reduce their own carbon footprints, rather than abandon those customers.

In his annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon called climate change “a critical issue of our time” and stressed that banks should be part of the solution.

“There’s huge opportunity in sustainable and low-carbon technologies and businesses. While many of these technologies and companies are mature, many more are just getting started — and more will need to be created in the coming decades,” he wrote. “In addition, all companies will need capital and advice to help them innovate, evolve and become more efficient while staying competitive in a changing world.”

Here are some examples of how banks are capitalizing on the transition to a greener economy.

Issuing green bonds and sustainability bonds

Green bonds, which enable banks to finance environmentally friendly projects, have become more popular as the threat from climate change has intensified.

“There’s a huge and growing interest in sustainable investment among financial institutions and investors around the world,” Treasury Secretary Janet Yellen said in April remarks.

JPMorgan’s inaugural green bond issuance last fall, which totaled $1 billion, went to finance projects that included green buildings and renewable energy. Bank of America and Citigroup have also issued green bonds in recent years.

In a related development, large and midsize banks have also been issuing sustainability bonds, the proceeds of which go to finance a combination of green and social projects. Last month, Wells Fargo announced a $1 billion sustainability bond, with half of the proceeds slated to go to renewable energy projects and the other half reserved for affordable housing and projects that advance socioeconomic equality.

Ramping up renewables

Banks are angling for a larger role in financing renewable energy, both for corporate clients who produce fossil fuel energy and for those that consume it.

Regions Financial in Birmingham, Alabama, for example, has established an expertise in financing solar energy, and it’s now looking to grow that business. The $147 billion-asset bank has financed solar projects in rural areas and worked with companies, including some oil and gas firms, to help them invest in renewable energy.

Regions’ solar tax equity finance team has funded around 50 projects in the past five years, according to Ronnie Smith, the company’s head of corporate banking. More recently, the bank has also gotten into wind generation, he said.

“It does represent good demand, good need and the right thing to do for the communities we serve,” Smith said.

KeyCorp is another bank that is scaling up its renewable energy finance business. The Cleveland-based company recently added a new team of investment bankers who specialize in green energy to its capital markets division.

While the $176.2 billion-asset Key has been financing renewable energy for over a decade, executives say that those investments have been gathering more momentum lately, driven by a number of factors.

“The cost of power generation is continuing to come down, and renewables are now competitive with any other power generating option,” said Randy Paine, president of Key Institutional Bank in the company’s capital markets division. “You also have the new administration under President Biden that we believe will be targeting investment and helping to further increase the competitiveness of renewables vis a vis other power sources. We believe the momentum is only going to increase.”

Offering green deposits to corporate customers

While pro-environment capital markets activities have become more common in recent years, green deposits are still somewhat rarer. But that is starting to change.

MUFG Union Bank recently launched a commercial deposit account for corporate clients that want to see their cash loaned out for sustainable projects.

Corporate cash placed in the firm’s green deposit product will be loaned out only to projects that meet certain environmental and social criteria, which could include renewable energy, wastewater management or sustainable packaging development, according to the U.S. subsidiary of the Japanese conglomerate Mitsubishi UFJ Financial Group.

More recently, HSBC USA announced its own green deposit product for corporate clients. HSBC said the product was part of its own commitment to achieve net-zero carbon emissions from its financing activities by 2050. Though few large regional banks currently offer similar products, some bankers believe there’s an unmet demand for basic deposits with a green purpose.

“We have a large number of clients already interested, and I think having something like this would be attractive to prospective clients,” said Olu Adebiyi, a managing director for MUFG Union Bank.

Helping consumers monitor their environmental impact

Though there are currently few environmentally minded retail banking products in the U.S., Bank of the West is taking a stab at the concept.

Last year, the $98 billion-asset bank unveiled a retail checking account called its 1% for the Planet account. It’s so named because the San Francisco company will devote 1% of net revenues from the account to nonprofit organizations that focus on environmental issues.

What’s unique about the account is a carbon-tracking tool embedded into the mobile app, which aims to give consumers an idea of the environmental impact of their purchases. That tool relies on the Åland Index, a cloud-based program developed by the Swedish fintech firm Doconomy.

The tool calculates the carbon impact of a given transaction, using the merchant code and purchase amount. Bank of the West also offers a debit card made of compostable plastic to be paired with the account.

Building a bank around combating climate change

A community bank founded exclusively to address climate change opened its doors on Tuesday in St. Petersburg, Florida.

Climate First Bank received conditional approval from the Federal Deposit Insurance Corp. in March. It ultimately raised over $42 million in capital, more than double the $17 million that the FDIC required in order to open.

Founder Ken LaRoe said that he built the bank’s products around ways to tackle the climate crisis. Climate First Bank will, for example, offer financing for rooftop solar, regenerative agriculture and building retrofits.

Climate First is the third bank LaRoe has started, and the second with an environmental focus. In a February interview, LaRoe spoke about the shift in public opinion around climate change since 2009, when he formed First Green Bank.

“Then it was really not mainstream or Main Street,” he said. “The response I've gotten from the regulators this time is, ‘This is the coolest thing ever.’ And the community has rallied. We get so much communication from people saying, I'm going to bank with you the minute you open. I've got investors coming from everywhere, people I have never known, never met.”