Green Banks 101- What’s Behind the Buzz?

Hearing more people talk about Green Banks lately? Do you want to better understand the buzz? Here is a quick primer on what they are and why they may become increasingly relevant. 

Let’s start with a basic definition: Green banks are lending institutions designed to finance projects that reduce carbon emissions, promote clean energy, and help lower greenhouse gas emissions. They are usually funded with public or philanthropic dollars.

A key idea behind green banks is that their initial investment will encourage private investors to put up additional funding, filling in financing gaps in clean energy markets.  Since 2010 green banks have invested about $2.59 billion and were able to garner about $6.34 billion in additional dollars from private investors, like for-profit lending institutions and institutional investors, according to the nonprofit organization Coalition for Green Capital, which supports the development of green banks.

Green Banks usually work with homeowners, small businesses and municipalities to make their properties more energy efficient. That often means providing loans for retrofitting buildings and installing solar power. These types of projects can include more efficient heating and cooling systems, like heat pumps, better-insulated roofs, or installing new solar arrays. 

"The idea is that the savings generated from these investments will more than offset the cost of repayment, even for low income borrowers," said Henry Litman, a senior director at the nonprofit Coalition for Green Capital, adding green banks often help people living in lower income or working class communities, who may otherwise have trouble finding financing for green building or renewable energy.

The focus on more equitable lending reflects the fact that lower income people tend to live in areas where there are heightened climate risks. For example, the New York Times this summer wrote about a community in Texas where residents had trouble escaping the heat. There were few nearby green spaces, pools, or other municipal cooling areas and residents often couldn’t afford adequate air conditioning. Lending to lower income areas to build infrastructure is a model used previously by the World Bank and regional development banks.

Green banks also guarantee loans for work with local lending institutions, credit unions, and community development financial institutions (CDFI). By guaranteeing loans, green banks hope to help local institutions generate enough data about loan performance, so that they will eventually offer financing without additional support, said Litman.

Currently there are about two-dozen green banks in the US. Some green banks are entirely state-run entities while other green banks are independent and are funded with a mix of public and philanthropic funds. While a lot of their investments have focused on retrofitting buildings and installing solar power, green banks have also invested in infrastructure resilience, transportation electrification, and other activities that help people or their communities adapt to climate change.

Many green banks are relatively new entities. According to the Coalition for Green Capital five green banks became operational in 2021, including: Nevada’s Clean Energy Fund, California’s Climate Catalyst green bank; The Colorado Clean Energy Fund, The Philadelphia Green Capital Corporation; and the Green Energy Fund of Puerto Rico. In September 2021, Illinois passed legislation creating two green banks, an Illinois Climate Bank and Clean Energy Jobs and Justice Fund and in March, Virginia passed legislation allowing municipalities to create their own green banks. 

 Meanwhile, the Inflation Reduction Act is likely to direct more federal funding to green banks and could also be used to create a national green bank. The act, passed by Congress in August, sets aside $27 billion for the Greenhouse Gas Reduction Fund, administered by the Environmental Protection Agency. “The fund has three main appropriations buckets: $7 billion for zero emissions technologies, $12 billion for general assistance, and one of $8 billion for low-income communities,” says Ulysses Smith an ESG Senior Advisor at the law firm Debevoise and Plimpton.

The Inflation Reduction Act does not explicitly mention a national green bank, but some lawmakers, including Michigan Congresswoman Debbie Dingell, have said the fund should be used to create a national green bank that would make direct investments into qualified projects at the national, regional, state, and local levels. A national green bank, she said, would also support other lenders, like credit unions, community development finance institutions, and other, more locally focused green banks.

Litman believes the $20 billion allocated for general assistance and low-income communities could be used to create a national green bank. The Coalition for Green Capital hopes to become the national green bank, said Litman, adding the organization is “currently working with all of the state green banks as well as nonprofit green banks, CDFIs, Credit Unions, and others to establish how the money can best be leveraged to achieve the policy goals.”

If that were to happen a national bank could broaden the scope of green lending and also focus on larger, regional infrastructure projects like networks of electronic vehicle charging stations or investment in regional clean energy transmission lines. For larger infrastructure projects, the national green bank could agree to provide subordinated debt to attract additional pools of capital.

Even if a national green bank does not come to fruition, it looks like the topic of green lending will get a much needed boost through the Inflation Reduction Act and other climate-friendly trends.

 

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