Banking on change
Bank of America takes the lead on sustainability – but is it enough?
For the global economy to transform into a low-carbon world, it is going to need help from banks. The total cost of mitigation and adaptation plans submitted at COP21? Five trillion dollars, or the total GDP of Germany and Canada combined (1). For the world’s largest banks, this represents both a risk and a business opportunity. Because they are exposed to every sector through lending, banks are uniquely vulnerable to the consequences of climate change. Yet banks have the opportunity to grow through innovative financing that accelerates the scaling of important solutions.
Bank of America (BOA) is leading the charge. Through clean investment, green bonds, innovative new financing mechanisms, and operational improvements, BoA has established itself as a trailblazer.
BoA’s climate change efforts include several industry-leading initiatives:
Environmental Business Initiative: Launched in 2007 with a $20 billion commitment, this initiative will grow to $125 billion by 2025. To date, it has provided over $53 billion in financing to clean energy and low-carbon investments in transportation, water conservation, land use, and waste management.
Green Bonds: In addition to issuing the first ever corporate green bond in 2013, worth $500 million, BoA also co-authored the original version of the Green Bond Principles (GBP), voluntary guidelines that “recommend transparency and disclosure and promote integrity” in the green bond market (2). Last year, BoA was also the largest underwriter of green bonds (3).
Catalytic Finance Initiative: BoA launched this $10 billion initiative in 2014 to advance innovative financing mechanisms that de-risk clean energy investments. Initial projects under the initiative focus on emerging markets and include investment in clean cook stoves and a green bond for wind farms in Peru.
Coal Policy: In 2015 BoA announced that it would reduce its credit exposure to coal mining (4). The company’s new policy recognizes that “the bank has a responsibility to help mitigate climate change by leveraging our scale and resources to accelerate the transition from a high-carbon to a low-carbon society” (5).
Internal Mitigation: In addition to addressing climate change through its business model, BoA has also worked to make its internal operations more sustainable. From 2010 to 2015, BoA reduced carbon emissions by over one third through energy efficiency projects, such as lighting upgrades and wind-powered data centers. Looking ahead, BoA has committed to becoming carbon neutral by 2020 and to using 100% renewable energy by 2050. On top of its own efforts, BoA will ensure that 90% of its suppliers report their own greenhouse gas emissions (GHG; 6).
However, given the urgency of the problem, BoA must do more. Climate considerations can no longer be separate from day-to-day activities – they must be fully integrated into firms’ core business models.
Though BoA has reduced its investment in coal, it has yet to adapt its risk management strategy to fully account for climate-related risks more broadly (7). Doing so would put BoA at a long-term strategic advantage, enabling it to better plan for the future. Therefore, BoA should conduct climate-related stress tests and even consider incorporating climate-related risk into loan pricing. As climate change intensifies, investors will increasingly demand transparency into how BoA is accounting for climate risk.
In addition, BoA should expand the scope of its green bonds beyond energy. To date, BoA has used proceeds from its green bonds to finance energy efficiency and renewable energy projects, with large investments in solar and wind solutions (8). However, there are several other well-established and viable options, including rail transport, electric vehicles, agriculture, sustainable forestry and paper production, recycled materials, and climate change adaptation in water use. Though still a tiny fraction of the $100 trillion bond market (9), the green bond market has grown quickly to become a $66 billion industry, and all signs point to continued growth as investors realize their profit motive is aligned with their environmental priorities. By expanding its scope to include other green industries, BoA can maintain its leadership in the green bond space.
Finally, BoA should be more transparent with regards to its plan to reduce credit exposure to coal. Though BoA claims to incorporate a series of environmental metrics in due diligence (air quality standards, waste, endangered species and wetland protection, and more), the bank has not shared what measure of violation is considered severe enough to preclude investment. By setting targets and reporting on progress, it will build its credibility and can encourage other banks to follow suit.
- Banking on Climate Change http://www.huffingtonpost.com/lauren-compere/banking-on-climate-change_b_8471668.html
- Green Bonds http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds
- Green Bond Awards 2015: Biggest underwriter https://www.environmental-finance.com/content/green-bonds-awards/biggest-underwriter-bank-of-america-merrill-lynch.html
- Bank of America backs away from coal mining http://www.huffingtonpost.com/2015/05/06/bank-of-america-coal_n_7226830.html
- Bank of America coal policy http://about.bankofamerica.com/assets/pdf/COAL_POLICY.pdf
- Bank of America pledges carbon neutrality by 2020 http://www.environmentalleader.com/2016/09/19/bank-of-america-pledges-carbon-neutrality-by-2020/
- Are banks prepared for climate change? https://bostoncommonasset.com/Membership/Apps/ICCMSViewReport_Input_App.ashx?IX_OB=None&IX_mId=18&IX_RD=Y&ObjectId=731308
- Bank of America issues $600 million “Green Bond” http://about.bankofamerica.com/en-us/green-bond-overview.html#fbid=cViQPGi_35g
- Bonds and Climate Change, the state of the market, 2015 http://www.climatebonds.net/files/files/CBI-HSBC%20report%207July%20JG01-Spreads(1).pdf
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Student comments on Banking on change
Great post! I hadn’t even thought about financial institutions and I had never heard of green bonds. You’re absolutely right that the banking sector is significantly (and uniquely) impacted by the effects of climate change because of its broad exposure to various sectors. I loved that you called attention to the lack of specificity around BoA’s coal policy. It strikes me as more of a PR move than a meaningful sustainability strategy. In the absence of a specific public commitment, BoA is free to change its coal investments in response to current business needs without any repercussions. I also completely agree with your point about adjusting for climate-related risk, but it’s definitely not a trivial step. BoA would start to look a lot more like an insurance company and might need to bring in much more outside expertise in order to nail these models precisely.
Nice post, Sophie! I think all of BoA’s initiatives sound great, and I agree that they can be even more forward-looking by diversifying thier Green Bonds. The one thing that I am skeptical of is the regulatory environment. As jayflo mentioned, Green Bonds could be construed as BoA providing insurance on climate-related risk. Will regulators accept this risk, or will they see it as another new credit vehicle that can be exploited through securitization and diversification? Will the regulators be afraid of a climate-change induced financial crisis where they yet again have to bail out the banks? From my government experience, regulators are scared of change, and I think BoA will have to spend significant resources getting the several financial regulators on board with higher risk initiatives. Perhaps this is also an opportunity to use the bargaining power of other government agencies (i.e. EPA, FEMA, National Parks Service, etc.) to support BoA!
Interesting post! Your last comment on transparency mirrors my thoughts as well. I have read several posts now regarding initiatives by companies or non-profits that they are partnered with, and all of them have a lack of transparency on what is considered “insufficient” or in your case, “reason to preclude investment”. It has also amazed me that as I try to research the “hard” requirements for a lot of these projects, they are buried on the corporations’ website or non-existent. Thank you for a good example of an industry that affects a lot of others.
Great post Sophie! I agree that the role of financial institutions is essential in the development of clean energy projects and the Catalytic Finance Initiative is a great step in that direction. The company I worked at in Peru designed, financed, constructed and operated hydroelectric power plants and one of the biggest challenges was getting financial institutions to finance over 50% of the investment because these projects are deemed too risky. The lack of cheap debt sources makes renewable energy projects more expensive and less likely to be able to compete with non-renewable energy sources.
Interesting post! I have heard that the market size of green bonds is expanding. But I think to make the market “sustainable” so that the green bonds can sustainably lead the sustainability is important. The return and the liquidity would be keys. Though the balancing the return to convince investors to invest in and the purpose of green bonds may be challenging for the issuer, the impact it can offer is significant. I hope this kind of market grows sustainably and become popular investments among investors.
Thanks for the post Sophie! I agree that financial institutions play a major role in climate change. I spent many years working with them in Europe and hadn’t heard of green bonds. To give another example that shows perhaps banks are on the right track, Santander, one of the biggest banks in the world alongside Bank of America, has promoted and financed a significant numbers of renewable energy projects in the past few years, making it an important part of their strategy. Moreover, they are a part of the “Carbon Disclosure Project” initiative, that works with major corporations to disclose their greenhouse gas emissions. Though it is still in an early stage, they consider it to be the first step towards the identification of sustainable policies going forward.
Really interesting to read about the role that banks and financial institutions can play in helping fight climate change. I consulted for a number of financial institutions in Indonesia and they are at a much more early stage in terms of their thinking on how to promote a green economy. Many of their major initiatives currently revolve around an increasing focus on digital channels rather than brick-and-mortar branches, to reduce their operating costs, create a more convenient experience for their customers and also to reduce their energy use and carbon footprint. Going forward, I hope they take the lead of banks such as BOA in designing financial products that facilitate lower carbon emissions, particularly given that a lot of “dirty” industries dominate the Indonesian economy, including mining and oil and gas.
Great post, Sophie. I wrote a post that is very similar to this about Morgan Stanley’s efforts to help finance environmentally friendly projects.
Having worked at Bank of America Tower in NYC, I was aware that Bank of America has made significant investment in attempting to be environmentally friendly – Bank of America Tower was a $1bn+ project that focused heavily in building the most innovative environmentally friendly features into its design, earning it LEED platinum designation, the first commercial high-rise to earn this designation. However, not having worked on the credit team that supported investments in industrial business I was unaware of the efforts that were being made at the firm. In addition, I also asked the question about what responsibility finance firms have to be selective in their investment choices based on environmental factors. I was previously unaware of Bank of America’s effort to reduce their exposure to investments supporting the coal sector so I am glad that you pointed out Bank of America’s stated position and encouraged them to be more transparent in reporting on how they are leading the charge in turning down business that doesn’t meet certain environmental standards.
Great article, Sophie! There are large initiatives that have taken place at some of the other banks as well, such as Earth Week at Deutsche Bank (see https://www.db.com/cr/en/positions/energy-transition.htm and http://brett-lesage.com/deutsche-bank-earth-week-2011).
In addition to the green bond origination that you mentioned, there are also interesting in-house teams at various banks that work specifically on the financing of renewable energy projects.
While this is good progress and green financing is definitely an up and coming field to be working in, I agree there needs to be more communication around what the banks are doing to reduce their carbon exposures.
Sophie – this article is very interesting. I know we are obligated to focus only on a single company, but when reading through your post, my broader thought was the requirement for all financial institutions to really work together in promoting climate change. Specifically when you discuss less credit exposure to the coal industry (due to its high carbon footprint), the issue I foresee is that there is an oversupply of capital in the debt markets right now chasing yield, and although the coal industry may be in slow secular decline, it likely can still meet bond coupon payments and produce return for investors. Therefore, even if BAML will not lend to those industries, perhaps one of its peers (also public and under the pressure of quarterly reporting) will act as a creditor. Just goes to show that broad cooperation is critical in combating climate change.