By John Manning – International Banker
At the end of July, JPMorgan Chase revealed its plans to facilitate $200 billion in clean-energy financing through 2025. The announcement follows on from similar promises made back in 2015, when the US’s biggest investment bank announced a $15 billion annual commitment to the sector that included green bonds, tax-equity financing, project financing and IPOs (initial public offerings). This new pledge—which is the largest commitment by a financial institution worldwide—raises that figure to approximately $22 billion per year. In addition, the lender also promises to use renewable energy to wholly power its own energy requirements by 2020—those requirements include offices and operations in more than 60 countries across more than 5,500 properties, covering approximately 75 million square feet, which, according to the bank’s calculations, is about 27 times the square footage of the office space at the Empire State Building.
Explaining JPMorgan’s plans, CEO Jamie Dimon observed that businesses must play “a leadership role in creating solutions that protect the environment and grow the economy”. Dimon also supported his bank’s new investment increase on the basis that it “leverages the firm’s resources and our people’s expertise to make our operations more energy efficient and provide clients with the resources they need to develop more sustainable products and services”. Indeed, the action taken is undoubtedly a welcome development in the world’s efforts to accomplish its investment goals as stipulated by the Paris (Climate) Agreement. It seems to be becoming increasingly clear, moreover, that while banks may want to get involved in the name of reducing climate change, there are also plenty of business opportunities from taking such action.
Indeed, all around the world it seems that banks are becoming increasingly aware of the need to boost their exposure to clean energy, a sector that’s becoming increasingly difficult to ignore. The Paris Agreement has given extra impetus to companies to phase out usage of fossil fuels; in turn, this means that fossil-fuel companies are likely to suffer a deterioration in credit quality during the coming years. As warned by accounting firm PwC (PricewaterhouseCoopers), “If collectively unidentified and unmanaged, credit risk driven by climate policy could concentrate in banks’ lending portfolios and create a systemic risk to financial stability.” Therefore, as existential pressure mounts on heavy-polluting industries, banks will be increasingly required to explain to investors, customers and regulators just how they are reducing their exposures to such industries, and ultimately what measures they are taking to respond positively to the threat of climate change.
Perhaps it was the acknowledgement of this responsibility that prompted the Bank of England to announce in June that it will be initiating a review of climate-related risks in the UK banking sector, and to describe the financial threats posed by global warming as “significant”. Although few details have been provided, the review marks the first time that a British financial regulator has conducted such a task. Many believe it will involve a combination of research, surveys and company meetings, largely to ascertain the extent to which UK banks are currently lending to climate-threatening sectors, such as oil and gas exploration. Bank of England Governor Mark Carney has been particularly vocal regarding issues concerning financial climate risk, and has frequently expressed concern over the potential damage to financial assets from unpredictable weather patterns, as well as the threat to investors from stricter government regulations on fossil-fuel industries.
For the banks, increasing their capacity for renewable-energy lending would appear to be a logical step to take, while placing climate change within their sustainability and risk-management frameworks is becoming increasingly commonplace. As is collaboration on the issue—in July, for example, 11 global banking leaders announced they will be working together with the United Nations Environment Programme Finance Initiative (UNEP FI) to develop analytical instruments designed to enhance their ability to assess risks and opportunities related to the climate. The task force, which was established by Mr Carney and former New York City Mayor Michael Bloomberg, will now be spearheaded by banks ANZ, Barclays, Bradesco, Citi, Itaú, National Australia, Royal Bank of Canada, Santander, Standard Chartered, TD Bank Group and UBS. The banks will reportedly work together to improve transparency over how financial institutions can help to facilitate greater support for low-carbon and climate-resilient activities from international markets. According to the UNEP FI, the project “puts the eleven UN Environment Finance Initiative’s members in the vanguard” of efforts to meet the Paris Agreement’s goals, and results “will be made public to encourage banks worldwide to adopt the scenarios, models and approaches developed”.
Other US banks, meanwhile, have taken similar action to JPMorgan’s in recent times, with Wall Street seemingly bracing itself for a rise in demand for direct renewable energy, particularly from the corporate sector, as prices for solar and wind power continue to drop. Goldman Sachs, for instance, aims to invest $150 billion in clean-energy financing by 2025 and is committed to using renewable power to meet all of its energy needs by 2020. The bank recently completed a deal to buy 68 megawatts of power from a wind farm in Pennsylvania to power the bank’s data centre in New Jersey, thus providing a convincing demonstration of the bank’s dedication towards fulfilling such commitments. And fellow US bank Citi previously announced its Environmental Finance Goal to lend, invest and facilitate $100 billion “to activities that reduce the impacts of climate change and create environmental solutions” between 2014 and 2023.
While US banks are evidently taking giant strides in developing their clean-energy credentials, it would appear that Japan’s biggest lenders have taken the lead in terms of lending to clean-energy industries in recent times. The country’s support for the sector has been particularly pronounced since the 2011 Fukushima nuclear disaster, which prompted a search for alternative opportunities in the energy space. Attractive margins have also helped Japanese banks secure much renewable-energy business, with lending to solar, wind and geothermal projects proving especially lucrative. Data from Bloomberg New Energy Finance reveals that two of the country’s lending giants—Mitsubishi UFJ Financial Group and Mizuho Financial Group—were neck and neck in the race to be the biggest lead arrangers of lending to the renewable-energy industry during the first half of 2017. While Mitsubishi provided more loans to the sector at $1.697 billion, Mizuho offered more project-finance loans, valued at $1.662 billion. Indeed, last year saw Japanese lenders hold three of the top five positions in terms of global exposure to clean energy.
A new type of banking institution has also emerged across the world that specifically focuses on financing clean-energy projects. While not quite a bank in the traditional sense of the word, the so-called green bank has been instrumental in bringing financing to green sectors over the last few years. Green banks are public entities that have been specifically established to facilitate private investment in low-carbon, climate-friendly infrastructure and green projects such as water and waste management, and ultimately to make clean energy more affordable and accessible to homeowners and businesses. They have been adopted by respective governments at all levels, including nationally (for example, Australia, Japan and the United Kingdom), regionally (California, New York and Hawaii in the United States) and at the city level (Masdar City in the United Arab Emirates).
Green banks are proving useful in plugging gaps by interjecting to support projects initiated by private-market entities that are seeking to lower their carbon footprints, but may not get the appropriate funding from traditional lending institutions. The banks are thus helping the economy make the transition towards mass clean-energy adoption during a period when both governmental support and bank lending in the space remains far from certain. Through public-private partnerships, they are accelerating the growth of clean energy by providing cost-effective and sustainable financing that’s dedicated to saving energy.
Among the most successful green banks to date is the Connecticut Green Bank, which was the first of its kind to emerge in the US and which has now been in operation for more than six years. The bank has managed to facilitate more than $1 billion in such public-private partnerships; and by the end of the last fiscal year, $165 million in state funds was used to attract private investment to the tune of $750 million. It has also managed to exceed $100 million of projects as part of the Commercial Property Assessed Clean Energy (C-PACE) programme, including solar-panel installation, replacing old boilers and switching to more energy-efficient lighting. Indeed, Connecticut Green Bank’s projects were so successful that only California—a considerably bigger state—has managed to complete more project financing within the country. Furthermore, C-PACE is estimated to have created around 1,500 jobs, generated more than 21 megawatts of clean energy, eliminated nearly 20,000 greenhouse-gas emissions and saved almost $200 million in energy costs. And perhaps the most remarkable statistic of all is the substantial increase in the share of funds being contributed to the bank’s clean-energy projects by private investment during the last five years or so. In 2013, the bank completely funded the C-PACE projects (100 percent), but since then this share has steadily declined, to 72 percent in 2014 and currently to just 33 percent.
The award-winning bank has inspired similar institutions to be established around the country—with New York and Hawaii creating their own green banks in 2013, California doing so in 2014 and Rhode Island following suit in 2015—and is now seen as playing a distinctly crucial role in America’s overall clean-energy contributions, especially now that the country has withdrawn from the Paris Agreement. Indeed, it is currently being held up as a model for the sponsorship of a new proposal that supports the establishment of a national green bank. The Green Bank Act of 2017 aims to create such a bank, with an initial capitalisation of $10 billion in treasury-issued green bonds, that would provide financial support to regional, state and municipal green banks to fund clean-energy and energy-efficient projects. Financial support for the projects would then ostensibly be generated through loans, loan guarantees, debt securitization, insurance and other forms of risk management to those banks. Eventually, the returns generated would enable the green banks to fund their own projects over the long-term.
Finally, China has perhaps done more than any other nation over the last few years to transform its financial system into a climate-friendly industry. From 2014 onwards, when a coordinated effort from about 40 banking and development experts led to the creation of the Green Finance Task Force, China has made significant progress in inducing green-investment flows, adapting its financial system and changing the regulatory framework to support greater financing of renewable-energy industries. The government has since acknowledged the crucial importance of helping such industries to flourish, as evidenced by the creation of “Guidelines for Establishing the Green Financial System”, which was released by Beijing last year. The publication details how China’s financial institutions can both help in attracting more private investment into clean-energy industries and effectively contribute to reducing pollution. Green bonds are deemed to be especially useful for this purpose, and are now helping China achieve its goal of generating $600 billion in additional green-finance requirements, most of which will have to originate from the private sector due to fiscal limitations.
Chinese banks are also being made increasingly aware of the risks to their overall earnings from failing to address environmental factors. And regulators are ensuring that lenders are incorporating sustainability considerations into their business models, with systems being implemented as appropriate to ensure banks are following through with such considerations in practice. As such, with the US pulling out of the Paris Agreement, the world is increasingly looking to China and other countries for leadership on green-finance issues. Chinese banks are responding, and it seems only a matter of time before they take the lead from their American and Japanese counterparts as the world’s biggest financers of clean energy.