Follow the Money: The (Slow) Rise of Green Financial Services

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by: Joel Makower

Markets for environmental products and services tend to cluster in categories. Makers of computers and other electronics, for example, have almost unanimously embraced energy efficiency, product takeback, and the like, as demands accelerated from from customers, activists, shareholders, and regulators. Energy and environmental considerations are also becoming commonplace in appliances and most other energy-consuming goods — with the notable exception of automobiles. It's hard to find a dishwasher, for instance, that doesn't boast about its energy-saving features.

We seem to be on the cusp of a cluster of green financial services — everything from energy-efficiency mortgages to green consumer banks to climate-friendly credit cards. It's hardly approaching a tipping point, but financial services companies seem increasingly interested, almost eager, to cater to green-minded consumers and companies.

A new report from the United Nations Environment Programme Finance Initiative has nicely documented the trend, showing what's happening and where, and what it might take for such services to garner even greater interest.

The report (Download – PDF) looks at the current crop of green products and services, in North America, Europe, Australia, and Japan. It notes that "Relative to their North American counterparts, banks in other developed regions have traditionally been more proactive and innovative with respect to 'green' product and service development." As usual, we Americans are green laggards.

One reason is that U.S. banks have gone through a wave of consolidation in recent years, leaving fewer, larger banks. As a result, says UNEP,

it becomes more challenging to integrate innovative banking products, including "green" products and services, into their respective portfolios. In a less competitive environment, banks are not given a high incentive to innovate and thus differentiate themselves from peers with state-of-the-art offerings, such as "green" financial products and services.

When they do offer green products and services, it's usually because of one of two drivers, says UNEP: they are either "board-driven" (when a bank's leadership recognizes the opportunities or risks of an environmental issue, then responds by defining one or more optimal products or services) or "client-driven" (where a bank recognizes a considerable demand and fills a niche). For example, in the area of emissions trading, the board of Paris-based BNP Paribas made an executive-level decision to enter the climate change market long before clients expressed the need for such a service. Conversely, Italy's Banca Intesa waited to establish an emissions trading desk until a considerable number of corporate clients requested the service, which over time became highly profitable.

Of course, activists have played a role, too, with environmental and shareholder organizations demanding that financial institutions adopt sustainable banking policies and practices, such as the Equator Principles, which govern project financing, especially in the developing world. Some groups, such as BankTrack, also provide advice on improving bank sustainability policies. Last year, for example, BankTrack engaged with several European banks, including ABN, AMRO, Citigroup, HSBC, and Rabobank, to review their environmental initiatives.

What impressed me most about the UNEP report was its exhaustive catalog of green banking products and services, including examples from around the world. Consider the world of retail banking — the kinds of services typically available to individuals and small businesses. A sampling of green offerings:

  • Home mortgages – reduced interest rates for loans that meet environmental criteria (several Dutch banks); free home energy rating and carbon offsets during the life of the loan (Cooperative Financial Services, UK); Generation Green Home Loans, which allow existing mortgage holders to take advantage of discounted rates by doing energy retrofits (Bendigo Bank, Australia).


  • Commercial building loans – Condominium loans, in which the developer repays loan with funds that would otherwise be spent on operating costs using conventional equipment and material (TAF, Canada); Loans and refinancing for LEED-certified commercial buildings, in which developers don't have to pay an initial premium for green features, due to lower operating costs and higher performance (Wells Fargo, U.S.).


  • Home-equity loans – One-stop solar financing, with a 25-year amortization, equal to the same period of time as the solar panel warranty (New Resource Bank, U.S.); Environmental Home Equity Program for customers using a line of Visa access credit, for which the bank will donate to an environmental NGO (Bank of America, U.S.).


  • Auto loans – Clean Air Auto Loan with preferential rates for hybrids (VanCity, Canada); goGreen Auto Loan, offsetting 100% of a car's greenhouse gas emissions for the life of the loan (mecu, Australia).


  • Deposits – Landcare Term Deposit, in which for every dollar spent, the bank lends an equivalent amount to support sustainable agriculture practices (Westpac, Australia); EcoDeposits, fully-insured deposits earmarked for lending to local energy-efficient companies aiming to reduce waste and pollution, or conserve natural resources (Shorebank Pacific, U.S.).

    That doesn't include any of several green credit cards that, variously, donate a portion of sales to environmental groups, offset emissions associated with purchases, or reduce interest rates for green products and services, among other schemes.

    Such products seem to be paying off for some banks. For example, the goGreen car loan offered by Australia's mecu — in which the bank provides low interest rates to cars based on their greenhouse gas rating, the offsets the car's carbon emissions during the life of the loan — has led to a 45% climb in car loans at the bank. Meanwhile, Barclays has issued nearly 11 million of its Breathe carbon neutral debit and credit cards.

    And then there's the corporate and investment-grade banking category, featuring another wide spectrum of offerings, involving project finance, securitization, bonds, technology leasing, carbon finance and emissions trading, and other products and services. The UNEP report offers examples of each.

    There's more to come, says UNEP, including green commercial real estate, carbon markets, clean technology, and climate-related insurance, to name four broad markets expected to gain traction in coming years.

    For all the promise, however, UNEP remains skeptical about the U.S.

    There continues to be minimal environmental leadership, or at least awareness, in North America's retail banking sector. The popular perception is that the consumer and [small and midsized company] banking space remains relatively neutral in terms of environmental impact; a stance that overlooks the formidable influence, positive and negative, that clients wield over the use and management of natural resources.

    Moreover, UNEP acknowledges that most green financial products and services remain either in the nascent stage of development or haven't yet proven themselves in the marketplace. As a result, "any rigorous measurement or ranking of these designs would be overly speculative and risk misrepresenting some designs over others."

    Still, the growth of green finance seems inevitable, as banks and other financial institutions recognize the pressing environmental need and the growing customer demand for more socially responsible financial services.

    And that, at the end of the day, money is the root of all evolutions.

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