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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