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The Bottom Line of Green Banking: Part I

Banks Boost Profits and Shrink Risk with Environmental Strategy

Why does Union Bank have a substantial dedicated environmental stewardship team? Why has Citibank pledged to invest $50 billion in climate change solutions? Why does Bank of America offer a Visa card with points that support The Nature Conservancy? This is the first in a four part series covering environmental sustainability for banks.

Why look at environmental sustainability for banks? At first blush, it may be tough to see how this issue relates to the financial services sector.  Banks do not operate factories or power plants which release pollutants into the air, nor do their supply chains require huge amounts of raw materials with large environmental footprints.  In fact, the perceived sum of a bank’s impacts might seem to be simply the resources used in their administrative offices, retail branch locations, and IT facilities.

We’ve heard the joke that money is already green; a bank’s environmental program requires only a few recycling bins, offering customers paperless billing, and having a reserved parking space for hybrid vehicles.  Or does it?  Actually, environmental issues ranging from climate change, to pollution abatement, to how to finance new energy are crucial challenges facing the financial services sector.  Banks provide capital to nearly all sectors of the economy and as environmental sustainability issues increasingly affect more businesses, they will similarly impact lending decisions, underwriting criteria, stakeholder relations, facilities and supply chain management and brand differentiation.

In many cases, “going green” represents a major opportunity.  A recent study by Accenture and Barclays identified a capital requirement of over €2.9 trillion for the developed world to collectively transition to a low carbon business model through investments such as smarter electrical generation, greener buildings and cleaner transportation infrastructure (Carbon Capital: Financing the Low Carbon Economy). At the same time, environmental issues represent a distinct and growing risk which must be understood and mitigated.  The United Nations Environmental Programme has estimated that lost value, as a result of climate change, could total $1 trillion annually by 2040—a frightening figure for banks that finance vulnerable assets (Insuring for Sustainability).

Leading banks are already addressing the opportunities and risks stemming from evolving environmental dynamics.  To be clear, doing so is not philanthropy: it is corporate strategy.  HSBC Holdings recently stated, “[We consider] climate change to be a long-term influencing factor in the development of group strategy.  This is both because of the potential for climate change to disrupt our own activities and those of our clients and also because the shift to a low-carbon economy requires finance which presents an opportunity to HSBC.” (CDP 2010 Financials Sector Report)

Like HSBC, many banks understand that they must carefully weigh the risks and skillfully harness the opportunities of financing a greener future.  Sustainability has been closely correlated with stronger financial performance.  An iconic study by strategy firm A.T. Kearny looked at bank performance during the global economic crisis of 2008-2009 and found that financial services providers focused on environmental sustainability outperformed their peers by 25% in terms of their market capitalization over a 6 month period. Any financial institution that wants to follow this good example must begin, as with any business endeavor, by defining a strategy.

An important first step is examining the reasons why banks consider environmental issues to be a matter of strategy, the actions being taken, and the benefits realized. This leads to a deeper understanding of the opportunities inherent in financing a greener future, new approaches to risk management, and cost-saving benefits of cutting environmental footprints both inside and outside a bank’s walls.

So what makes a comprehensive environmental strategy for a bank?  There are several key components:

  • Green Lending
  • Environmental Underwriting Criteria
  • Green Operational Programs

Over the course of this series, I will detail how leading banks and their smaller peers are already leveraging these components to boost their bottom line and reduce exposure to risk.

Andrew Malk is the Founder and Managing Partner of Malk Sustainability Partners (MSP), a specialty management consultancy, which guides forward-thinking businesses around the world to profit from operating in better balance with the environment.  MSP has particular expertise in serving the financial services sector.

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7 thoughts on “The Bottom Line of Green Banking: Part I

  1. I keep hoping banks and governments will wake up and realize that working together they can tie energy loans to properties through tax assessments. Connecting energy saving loans to the properties eliminates the risk associated with transferring ownership. It especially stops energy related capital improvements from getting wiped out in a (sale) transfer. Connecting repayment to the property assures that the beneficiaries of heat pumps, solar panels etc. pay for the benefits purchased with the property. This will not happen in a market valuation/appraisal environment. However by connecting repayment to the property, the original borrower does not suffer a capital loss and he or she can take the risk to make higher cost greener improvements.

    This will be the key to investing the $trillions needed to transform existing homes and commercial properties from energy wasters to energy misers. On the home scale, imagine an energy home equity loan granted by a bank and put in a special tax district by the local government. After a subsequent sale the assessment remains with the property. This will require repayment by the beneficiary who receives the reduced energy bill which allowed for the repayment to be essentially cash neutral to the new owner. The bank is better served because the foreclosure risk is zero. Even payments in arrears can be insured. Banks do know how to make home equity loans. Are the loan criteria for a kitchen upgrade any different than the one to add solar or go geothermal? Is one type of home equity loan better than the other?

    In terms of loan payments, the bank could receive the money and report that the tax assessment was paid so that the local government can be kept out of the lending business. If the energy savings match the assessment payments the loan costs nothing to the first or subsequent borrowers. The collateral value is enhanced by the improvements. What’s stopping us?

    The same principles can easily aid in transforming NNN, retail and full service office spaces as utilities pass through (in one form or another) as well as tax assessment to the tenants.

    By putting certain energy upgrades in a special tax district and matching energy savings $$$ to the assessment $$$, neither the landlord nor the tenant foots the bill and we all benefit from lowered carbon footprints, job creation, cleaner air. It just may be the jobs program that politicians from both parties could agree on.

    I do hope the banks start pushing this soon as they are the key players. There is no way this happens with just PACE (Property Assessed Clean Energy) programs and municipal bonds. The lending opportunities are huge.

  2. @ Girard:

    Citi is focused on finding solutions to help bring the energy efficiency finance market to scale. We co-hosted a convening on the issue in NYC with Environmental Defense Fund last week. More information here:

    and outcomes from the conference here:


  3. So…I know this is all about commercial lending but when are banks going to get on the band wagon and help our economy and our energy issues by pushing “green” mortgages and energy efficient upgrades for the more than 112 million homes that need energy improvements in this country? They could create job–and customers–and reduce our dependence on fossil fuels by doing so. And our little training/consulting firm has a 2-day class (which has received rave reviews nation-wide) that introduces lenders to green building & lending. http://www.porterworks.com.

  4. Thank you all for your comments and while the first installment of this column referenced larger banks and large scale finance more than green retail banking, we will cover green consumer and small business loans in the upcoming blogs. It is terrific to see Citi and EDF teaming up to create a well attended forum on bringing the energy efficiency finance market to scale. The ideas suggested Girard Gurgick certainly deserve strong consideration at forums like this and should be piloted by banks.

  5. There are a number of very brilliant and profitable solutions being created for financing real property energy efficiencies and upgrades. PACE is by far the most reasonable and easy to quantify for ROI. On-bill utility financing is another. Although there are some thought leaders like Union/Citi/Barclay’s Bank, the “disconnect” is the collective financial and appraisal communities that have been very slow to the green game to recognize and “value” the ROI of energy efficiencies. When we close that gap, we create a complete transormation of our building stock, energy independence for our country, and support thousands of new jobs. And imagine the money that is being wasted through ineffecient buildings – both reseidential and commercial – that would flow back into the economy with the energy cost savings. It all makes sense, we just need consensus. Thank you Girard for your attention to the issue, and working toward common sense solutions.

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