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Management in Practice

Why We Need Finance to Fight Climate Change

There won’t be a transition to clean energy without a way to finance what could be the largest infrastructure project ever undertaken. Green banks—purpose-built financial institutions that facilitate funding of clean-energy projects—aim to lead the way. Yale Insights talked with Jeffrey Schub ’13 of the Coalition for Green Capital about what a National Climate Bank could achieve.

A solar generation project outside Linyi, China. Photo: VCG/VCG via Getty Images.

A solar generation project outside Linyi, China. Photo: VCG/VCG via Getty Images.

  • Jeff Schub
    Executive Director, Coalition for Green Capital

Climate change is a complex global problem, and solutions will come from all sectors. But banking in particular may be the key to decarbonizing the economy.

Clean-energy infrastructure is critical to hitting greenhouse gas emission reduction targets. The work required to reach 100% clean energy is enormous in scope, representing the largest building project ever undertaken. The mechanisms to finance that project will need to be in place for emissions targets to turn into reality.

In the last decade, green banks—public or nonprofit financial institutions purpose-built to develop, facilitate, and scale investment in greenhouse-gas reducing projects—have popped up to pioneer finance solutions. Fourteen green banks have launched in the United States, with more in development, and a number of countries have built national green banks. They are helping develop financial products and markets that let greenhouse gas reducing projects find financing. In the U.S., these purpose-built banks have turned each dollar of public funds into $3.40 of private co-investment, creating $3.67 billion of clean energy investment through 2018. A bill currently before Congress would create a National Climate Bank in the United States, with the goal of leveraging a $35 billion capitalization from public funds into $1 trillion in greenhouse-gas-reducing investment.

Jeffrey Schub ’13, executive director of the Coalition for Green Capital, a nonprofit green banks incubator and advocacy organization, explains the emerging industry and the proposed National Climate Bank.

Q: How important is finance to addressing climate change?

It’s absolutely essential. A recent estimate said it would take $4.5 trillion of investment to decarbonize the energy supply in the United States alone. The transition to clean energy is fundamentally a construction project. The challenge is as much about finding the capital to pay for the construction as it is finding the technology to deliver the necessary emissions reductions.

We have to finance clean-energy infrastructure the same way we would finance any other construction project. Coal plants have needed and received project finance for decades; the same is now true for solar, wind, efficiency, micro grid, battery storage, and so on.

When states set ambitious renewable energy portfolio targets, it gets headlines. But a target is just a target without an implementation mechanism. Implementation doesn’t happen without finance solutions.

Q: Is it something that can be done by the private sector alone?

The private sector isn’t blind to the opportunities in clean-energy solutions. There’s been hundreds of billions of dollars of private-sector investment over the last decade or so. The investments can generate really attractive returns while doing good for the planet.

But climate change is the biggest challenge facing our country, and every country in the world, right now. And no private financial institution thinks it’s their job to solve climate change. If we don’t have somebody designated to solve the problem, from an investment standpoint, it just won’t happen.

Hundreds, if not thousands, of very large financial institutions—often backed by governments—are financing fossil fuels. If we’re going to counteract that, we need a climate-focused, mission-driven financial institution.

Private-sector banks have return requirements, so they’re not inclined to spend time figuring out how to finance first-of-their-kind transactions. They operate at a very, very large scale, so they don’t have incentive to finance small, segregated projects that take a lot of time to evaluate and underwrite. They’re not going to be the first to move into a new market when the economics of that market are just on the margin. It’s not the mission of private financial institutions to create a 100% clean energy grid.

Green banks provide a mechanism for moving to the next frontier of viable clean-energy markets and investing in the kind of technology and opportunities that are right on the edge of being financeable by the private sector but which the private sector is not yet inclined to take on themselves.

Q: Can you provide some grounding? What is a green bank?

A green bank is a purpose-built, mission-driven finance institution whose goal is to maximize greenhouse-gas-emissions reductions. It achieves that by raising and deploying a blend of public, private, and philanthropic capital and investing it into clean-energy projects alongside private co-investors. It’s a powerful mechanism because it uses public funds in a cost-effective way, while maximizing total investment, by partnering with private resources.

Q: Would you give some examples?

Here’s one. The cost of solar technology has come down dramatically, to the point that it is not the primary concern. The cost of capital is often the key hurdle. Green banks are able to lower the cost of capital for solar installations enough that a private co-lender is able to achieve its required returns while customers receive competitively priced power. In this case, green banks facilitate an existing market.

Another example comes from the Connecticut Green Bank, which created and scaled a new market. The Commercial Property Assessed Clean Energy Program (C-PACE) allows building owners to finance energy efficiency retrofits or upgrades to clean power at no upfront costs.

These projects reduce greenhouse gas emissions and typically more than pay for themselves over time, but the costs come upfront and it has been all but impossible to get loans. C-PACE programs provide loans that are repaid through a lien placed on the building through the local property tax collection. The lien structure makes it a more secure loan for the bank, so it can offer a lower interest rate or a longer term, which makes energy-efficiency projects, in particular, financially viable.

Initially, when the Connecticut Green Bank launched the program, private lenders weren’t actually making any loans, so the green bank used its own funds to finance C-PACE projects. Then they securitized those loans and sold them into a secondary market.

Very quickly, that scaled C-PACE to a very different level. The Connecticut Green Bank partnered with a private financial institution, Hannon Armstrong, to set up a $100 million warehouse to co-invest in C-PACE projects. Many more private lenders have come into the market and are making loans and sales all the time. Programs in Colorado, Rhode Island, and a number of other locations launched entirely designed on the Connecticut model.

This is what green banks can do: figure out how to make a new market work, provide some initial financing, partner with private investors, scale, and in some instances also develop a secondary market. The Connecticut Green Bank invented a successful market that was completely non-functional before a green bank laid the groundwork.

Green banks can facilitate innovative clean energy transactions that should be completely bankable because the technology is strong and the savings are real, but due to a host of institutional and financial barriers aren’t getting financed.

Q: Would you explain the bill in Congress to create a National Climate Bank?

This is a very exciting, innovative bill to create a standalone nonprofit National Climate Bank capitalized with $35 billion of federal funds. This national green bank would do three different things. First, it would directly finance a range of clean energy and greenhouse gas emissions reduction projects, primarily those that are very large in scale or multi-state, such as transmission, offshore wind, or utility-scale solar.

Second, the National Climate Bank would provide capital to state and local green banks around the country, so that they could then finance more localized distributed projects. That would include supporting existing green banks and helping create new state and local green banks.

Third, the National Climate Bank would be authorized to use its capital to accelerate the retirement of coal plants and to actually purchase coal that is still in the ground. This is entirely new and was added to the bill because it is effectively impossible to hit climate targets in the United States without taking coal out of the system much faster than scheduled retirements allow. As far as I know, this is the first federal legislation to ever propose using federal funds for this priority.

This Cash for Carbon program specifically authorizes the National Climate Bank to provide a range of different investments into the affected communities where coal plants are being shut down in order to facilitate a more just transition for these communities.

Q: How would the National Climate Bank work?

It will look like a development bank. To use a familiar example, dozens of countries deposit money in the World Bank to capitalize it. The World Bank doesn’t actually lend the money that the United States or the United Kingdom or France invest. It borrows money on capital markets, using that initial capitalization as part of its collateral to dramatically increase its lending capacity. Most multilateral development banks like the World Bank are as high-quality credit as you can possibly get, and they can borrow money very cheaply.

The National Climate Bank will operate in the exact same way. The federal government will capitalize it with $35 billion. The National Climate Bank is designed so that it is able to borrow against its balance sheet as commercial banks and development banks currently do. Beyond that, the National Climate Bank would leverage private capital, at the project level, through direct co-investment. It would also be able to recycle capital as loans are repaid, achieving multiple uses of each dollar over its 30-year charter.

"This is not about forcing consumers to do something that the government thinks is right for them. This bill is specifically designed to provide solutions that lower energy costs while delivering clean energy."

Combined, we’ve estimated that these factors could use $35 billion of initial capitalization to mobilize up to $1 trillion dollars of investment. [For a detailed explanation, read the Coalition for Green Capital’s white paper, “Mobilizing $1 Trillion Towards Climate Action.”] That’s a number that starts to get us to the scale we need to be addressing climate change.

An important technical note: the National Climate Bank does not have the full faith and credit guarantee of the federal government. Any debt it might issue will only be backed by the credit-worthiness of the institution and the underlying products.

Q: Green banks have existed for a decade; does the bill draw on insights gained in that time?

One thing that all existing green banks around the U.S. have shown is that political independence goes hand in hand with being perceived as a market participant. The private sector is not going to enter a financial arrangement with an institution that might disappear after the next election. It’s critical that we create as much independence from political interference as possible.

The national green bank in Australia, the Clean Energy Finance Corporation, has done an incredible job fighting off political interference even as the national government keeps changing its opinion on whether or not they care about climate change.

Beyond that, there are several innovative pieces. The National Climate Bank would be designed around core principles that are very often missing from clean-energy policies. Number one, the bank’s express purpose is to maximize greenhouse-gas reductions per dollar deployed. Its mission is not to deploy more clean energy; it’s not to lower the cost of clean energy; it’s not to spark innovation. All of those things will happen, but the bank’s purpose is maximizing greenhouse-gas reductions.

Number two, every single project that the National Climate bank finances, either directly or indirectly, has to hold households and businesses harmless. That is, it will lower their energy costs. This policy is fundamentally based on market principles. There is no market for energy that is more expensive. This is not about forcing consumers to do something that the government thinks is right for them. This bill is specifically designed to provide solutions that lower energy costs while delivering clean energy.

We think this approach is morally essential to ensure that low-income, underserved, and minority communities are served. It is also politically essential. If we learned anything from the federal climate effort of 2009 to 2010, it’s that solutions that are perceived to increase energy costs in America are not politically viable.

Q: Why are environmental and social justice factors written into a bill that is so focused on greenhouse gas reductions?

I think the environmental community broadly has woken up to the reality that environmental and economic concerns are interconnected social problems. The Green New Deal is the embodiment of that understanding. Where we can solve both problems with one set of solutions, we’re accomplishing something significant.

We view the National Climate Bank as one of the most meaningful substantive examples of what it would look like to implement the principles of the Green New Deal.

The most straightforward way that environmental and social justice are in the bank’s DNA is through the requirement to lower energy cost for all households and businesses. The energy burden of low-income households is higher than that of wealthy families, and so, even independent of climate change, finding ways of lowering that burden is doing good for those in greatest need in our society.

Further, it’s specifically written into the lending criteria that, when the board is considering which projects to finance, all else being equal, the bank will prioritize low-income, underserved, and minority communities. If we’re going to 100% clean energy, that’s everybody, and we can’t leave this community to be last.

Q: How viable is the bill, in terms of getting passed into law?

We feel good about the bill’s prospects, though not for 2019 or 2020—this is primarily a play towards 2021.

We first worked with partners on Capitol Hill to introduce federal green bank legislation in 2009. That bill passed the House of Representatives with bipartisan support in 2009. It also had bipartisan support in the Senate in committee in 2010, but the cap-and-trade bill that it was attached to just never reached the Senate floor.

We think this is the first legitimate opportunity that’s existed since then for any climate legislation. The political tides have turned; Americans care about climate change now. They believe it’s real; they see the evidence of it. Poll after poll shows that Americans want the government to do something. We also think that the merging of social, economic, and climate concerns benefits the green bank solution from a practical standpoint.

And maybe most importantly, in 2009 there were no green banks in the U.S., and for all intents and purposes there were no green banks anywhere in the world. Now there’s a decade-long track record with $30 billion of total global green bank investment and nearly $4 billion of green bank investment at the state and local levels in the U.S. We have proof of concept to show that this works.

Interview conducted and edited by Ted O’Callahan.

The Yale Center for Business and the Environment, a joint effort of the Yale School of Management and the Yale School of Forestry & Environmental Studies, offers a one-year online certificate program on financing and deploying clean energy, including the foundations of green investment banking. Learn more.