A Changing Financial Climate

By Ken Lewis
Chairman and CEO, Bank of America

The world’s largest banks have been joining the movement to address climate change with great enthusiasm in recent years. But one thing we’re learning is that keeping pace with the demands of the green economy will take more than just big piles of money doled out in traditional ways.
Don’t get me wrong, big piles of money are a good start. But many emerging technologies are so new, and markets are growing and evolving so rapidly, that new financial approaches are needed to effectively meet the needs of the marketplace.

For some years now, banks have been working to reduce greenhouse gas emissions from their own operations. Banks are creating products, such as green credit cards and green mortgages, that enable customers to reduce their carbon footprint. The total dollar value of bank-financed, eco-friendly real estate development is growing at 50% a year. More banks are also investing in renewable energy—more than $100 billion last year alone—to support everything from solar, wind and hydro power, to giant buoys that capture energy generated by ocean waves.

I’m pleased that my industry has taken up these efforts. But meeting the changing needs of the green economy will also require new approaches to lending and investing, new models for assessing risk, new formulas to calculate economic costs and benefits and belief in a sustainable future that bears very little resemblance to the present.

Imagine, for example, if consumers had the option to install energy-saving solar panels on their roof through leasing, rather than buying. Banks could help relieve consumers of the largest obstacle to this technology: the incredibly high up-front costs of purchasing and installing the panels. Banks, including ours, are working to figure out a financially viable way to build a large-scale market in the U.S. for residential solar leasing.

One of the biggest challenges we are working on is the fundamental change that a green economy brings to the traditional, carbon-based utility sector. Coal, for example, provides half of all electric power in the U.S., and with energy demand rising by as much as 50% over the next 25 years, coal is projected to increase its share of the market—even accounting for the rapid growth of renewables. But the competitive and regulatory environments for coal in particular, and energy in general, are changing. And so will the risk formulas that banks use to finance the industry.

With these facts in mind, we have decided, as have other banks, to start assessing the cost of carbon in our risk and underwriting processes as we evaluate the business models of utility sector companies. In the absence of federal legislation, we estimate the cost will fall between $20-$40 per ton of carbon dioxide.

The inclusion of these projected costs for carbon emissions are simply a reflection of new risks that utilities face in a changing economy, and will be an incentive for companies to develop cleaner technologies. As financial and strategic partners, banks are working with the utility sector to drive these changes forward.

Back in the 1950’s, when I was growing up in Georgia, clean air, fresh water and fertile farmland seemed abundant. Industrial progress seemed to show our ability to bend the earth to our uses, and the earth’s ability to shrug us off as it had for millions of years. That illusion has been shattered, and it’s clear that pressures on our environment will continue to grow. The good news is that we can create a sustainable economy. We have financial and natural resources, human ingenuity, and plenty of motivation to preserve our planet for future generations. The banking industry is taking important steps to help build a new, sustainable economy for America. We can do more. And we will.

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