When thinking about climate change, banks are probably not the first companies that come to mind. Yet, in 2013, Bank of America (“BOA”) was the unlikely candidate that launched a $50 billion (increased to $125 billion in 2015) environmental business initiative, issued the first corporate green bonds, and continues to top the league table in underwriting green bonds since. There will be three parts to this blog post, firstly exploring the role of financial institutions in climate change, next zooming into how BOA has responded to climate change, and finally putting forth recommendations for BOA in advancing this cause.
The role of financial institutions in climate change, and the effects on their operating models
Climate anomalies continue to be on the rise globally, with 2015 not only being the 30th consecutive year with global temperature above the 20th century average, but also the hottest year in historical record. We are currently on a CO2 emissions trajectory consistent with long-term global temperature increases of 2°C – 4.5°C, making irreversible climate change a reality. To limit global temperature rise to the lower bound of the range (i.e. 2°C), the International Energy Agency estimates that US$48 trillion of investment to meet the world’s energy needs in 2035.
Given the high level of sovereign debt across the globe, governments of nations alone will not be able to solve this US$48 trillion problem. The private sector needs to be the bridge the funding gap. Given the role of financial institutions as intermediaries, banks are well-positioned to shape the way their clients approach business initiatives, and influence investment decisions in ways that best tackle climate change.
Steps that BOA has taken to address the effects of climate change on its operations
BOA made its first environmental business commitment in 2007, commenced its second initiative in 2013, and in 2015 increased their environmental business initiative to investing $125 billion in low-carbon business by 2025, through lending, investing, capital raising, advisory services and developing financing solutions for clients around the world.
Instead of setting aside these funds as merely another corporate social responsibility effort, this initiative has fundamentally changed BOA’s operations across various business units. In their lending business, BOA has made a concerted effort to finance low-carbon and sustainable businesses that address climate change, as well as finance the transition of companies to low-carbon initiatives. As at May 2016, they had already directed $53 billion in projects connected to clean energy, energy efficiency, and sustainable transportation.
BOA has also made significant changes to their investment banking business. BOA continues to shape and grow the market for green bonds (to fund projects that have positive environment and/or climate benefits). Apart from issuing two green bonds totaling $1.1 billion in proceeds, they have additionally been the top underwriter of green bond underwriter since 2013. To help develop this industry, BOA also co-authored the Green Bonds Principles, which are guidelines to promote integrity of this nascent market.
Additional steps that BOA can consider
BOA’s efforts to take on the responsibility and tackle climate change are commendable, particularly since the industry does not seem to have a direct link to the problem. That said, more can always be done. I will focus on how BOA can enhance the green bond market in this section.
There are four phases that a new financial product goes through before gaining mainstream adoption, as set out in Figure 1 below.
Figure 1 – Phases of new product development
Starting from the “incubation” phase in 2007 where green bonds were first invented, the green bond market entered into the “excitement” phase in 2014, where bond issuance more than tripled from 2014 to 2015 (See Figure 2). Stakeholders across the industry are starting to take a keen interest in the space. For instance, Standard & Poor’s is now officially rating green bonds.
Figure 2 – Annual green bond issuance from 2012- 2015
To progress to becoming mainstream, the green bond market would need to increase investor awareness of 1) what they are, and 2) the benefits of investing in them. Traditional investors only made up 15% of IFC’s February 2013 bond issuance, suggesting a significant potential for growth in the sales of green bonds among traditional investors.
As a market leader, BOA can cross-sell green bonds to both its institutional and retail clients. BOA can also consider issuing green bonds that are tailored to the specific investment needs of investors, e.g. green bonds sold exclusively to high net worth individuals. More broadly, as an intermediary, BOA should leverage on its vantage point to systemically influence behavior across various clients and industries to tackle climate change. (783 words)
 “Fixing the Future: Green Bonds Primer”, Bank of America, 8 Sep 2014
 “World Needs $48 trillion in Investment to Meet its Energy Needs in 2035”, International Energy Agency, 3 Jun 2014, http://www.iea.org/newsroom/news/2014/june/world-needs-48-trillion-in-investment-to-meet-its-energy-needs-to-2035.html
 “Business Leadership on Achieving Climate Goals”, Bank of America, 18 May 2016, http://about.bankofamerica.com/en-us/global-impact/business-leadership-on-achieving-climate-goals.html#fbid=k0J-N3Ks6Va
 Bank of America 2015 Business Standards Report and Environmental, Social and Governance Addendum, 2015, http://about.bankofamerica.com/assets/pdf/Bank-of-America-2015-ESG-Report.pdf
 “How Green Bonds will Become Mainstream”, Stanford Social Innovation, Review, 18 Jul 2016, https://ssir.org/articles/entry/how_green_bonds_will_become_mainstream
 2015 Green Bond Market Roundup, Climate Bonds Initiative, Retrieved on 1 Nov 2016, http://www.climatebonds.net/files/files/2015%20GB%20Market%20Roundup%2003A.pdf
 Next Season’s Green Bond Harvest – Innovations in Green Credit Markets, International Finance Corporation, June 2014, https://www.ifc.org/wps/wcm/connect/b1369b80446446d880588cc66d9c728b/Next+Season’s+Green+Bond+Harvest+final+paper+16+June+v3.pdf?MOD=AJPERES