Green banks will be critical for meeting U.S. President Joe Biden's ambitious goal to steer 40% of clean energy investments to disadvantaged communities, according to an administration official who also noted that green banking must rapidly expand to meet that need.
To boost this growing but still small piece of the financial sector, green banks need the support of a federal accelerator program, Jahi Wise, a senior White House adviser for climate policy and finance, told a Yale University event May 11.
"Doing project finance at the individual facility level, at the community level, is complicated," Wise said. "Sometimes the transaction costs can be high, and we need institutions that are specialized in doing that work. Green banks have stepped up to fill the void. We need to support these institutions with technical assistance and with capital."
Democrats in the U.S. Senate and House of Representatives introduced bills early this year to establish a federal program that would carry the "accelerator" mantle and stimulate green banks. The broad climate bill introduced in the House on March 2, known as the CLEAN Future Act, would authorize $100 billion in federal support for the accelerator to boost private sector investments in clean energy and other climate solutions.
Such policy proposals coincide with a growing interest in green banking.
In 2020, green finance spurred a record $1.69 billion in total U.S. investments, up from just under $709 million in 2015, according to a new report by the American Green Bank Consortium. The group of 21 local green banks and six foundations is a project of the nonprofit Coalition for Green Capital, where Wise was a policy director before being tapped for the White House job.
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With a close focus on environmental and social justice, the Biden administration has promised to earmark 40% of all climate and clean energy investments proposed under its $2 trillion infrastructure plan for communities vulnerable to climate change and a loss of fossil fuel jobs. That goal was also reflected in the CLEAN Future Act.
Systemic investment barriers must be removed
Steering money to neighborhoods that historically received little attention from solar panel installers or energy efficiency contractors can be challenging, green banks advocates said.
Among other barriers is what the American Green Bank Consortium called a systemic "low incentive" to serve certain communities that may not fit a certain financial profile. Yet those areas are often where clean energy investments can bring the largest benefits.
"An installer of residential efficiency projects, for example, may be selling those installation services without any financing solution, relying on the homeowner to pay cash out of pocket," the group's report noted. "That installer may then presume that households in certain communities won't have sufficient cash on hand to pay for the installation, and so the service is never offered."
Sometimes clean energy companies presume that households in low-income communities cannot qualify for financing, the report said. The cost of renewable energy can also be a barrier, as can a lack of consumer awareness about solutions such as community solar or other distributed generation, the study added.
"It's not just about how you create financial products that actually create reasonable benefits for communities," Wise said. "But how do you get institutions that can solve all the other barriers that come along with deploying those products?"
Green banking emerged as a concept in the U.S. financial sector a decade ago with the establishment of the Connecticut Green Bank, the nation's first full-scale institution of its kind. Since then, a dozen other states and local jurisdictions have established such banks.
Today, those banks provide loans to a range of projects; not all fit Biden's 40% rule, but many do. The Florida Solar & Energy Loan Fund, for example, has completed 2,000 sustainable home improvement projects thus far with investments reaching $18 million. Underserved markets captured 74% of the lending and had a default rate of less than 2%, the fund reported.
Independent national green bank 'essential'
Governments and market players in 22 more states are taking steps to form green banks, the American Green Bank Consortium said. But the patchwork of individual institutions has left the industry vulnerable at times.
The fiscal crisis in Connecticut a few years ago caused investments to plummet in 2017 and 2018 as private backers got cold feet.
"This is why the national green bank, supported by the president and with bipartisan congressional support, [must be] an independent nonprofit corporation that can be insulated from fiscal or political fluctuation," Alex Kragie, the consortium's director, told S&P Global Market Intelligence. "This independence is essential to attract private co-investors."