Feb 12, 2008
“A Change in the Financial Climate‿
Raleigh, North Carolina
February 12, 2008
…introduction given by Representative Joe Hackney, Speaker of the North Carolina House of Representatives…
Thank you, Mr. Speaker. I appreciate it…
I want to thank you… the Institute for Emerging Issues… and Governor Jim Hunt, for your ongoing leadership and your commitment to our state’s future.
The focus of this conference has been how North Carolina can accelerate our movement toward a sustainable energy future. Like any large, important, transformative project, this one is going to require a lot of money. I’m guessing that’s why you invited me.
Citizens and communities across North Carolina are becoming more focused on protecting our environment every day. Businesses are responding to the marketplace… as they should… and the race to fund the expansion of the green economy is heating up fast.
Many financial institutions – including Bank of America – have pledged funds to support the growth of the green economy. Our company announced a 10-year, $20 billion environmental initiative last year to help address climate change.
Getting large financial institutions on board with environmental programs is a great first step. But we understand 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 always 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.
In some ways, I imagine our situation is similar to the dawn of the carbon economy. In 1853, in Titusville, Pennsylvania, George Bissell, a New York lawyer…Edwin Drake, a down-on-his-luck journeyman… James Townsend, a Connecticut banker … and Benjamin Silliman, a Yale chemist started what we know today as the oil business.
The emergence of oil as a cheap source of light and energy brought major changes to the U.S. economy… and the financiers of the day had to figure out on a daily basis how to keep up. The immediate problem was that nobody really knew where the oil was. With a growing market, “wildcatters‿ starting drilling everywhere, sometimes hitting the jackpot, other times blowing their life savings on dry wells. Every time a glut hit the market, prices crashed, driving many new ventures out of business.
The young industry relied heavily on what today we’d call venture capital. My guess is that banks were cautious participants at best… until Rockefeller consolidated the industry and stabilized the market.
Today, as then, vast economic change creates great business opportunities… tremendous financial risks… and a challenge for the financial services industry. It’s a challenge we must answer if we are to help create a sustainable economy for future generations.
Answering the challenge will require new approaches to lending and investing… new models for assessing and managing risk… new formulas to calculate economic costs and benefits… a willingness to see emerging technologies in a new light… and belief in the possibility of a future that bears very little resemblance to the present.
So what I’d like to talk about today is this: first, what Bank of America and other financial institutions are doing today to meet the changing needs of the green economy… second, financial gaps that are slowing the movement down… and, finally, what more can be done to help move us toward the right solutions for the future.
Let’s start by talking about what the financial services industry is doing today.
In a report released last month by Ceres, 40 of the world’s largest banks were evaluated on their responses to climate change. The report found that…
• The 40 banks have issued more than 100 research reports related to climate change;
• 24 have put in place targets for reducing their own greenhouse gas production;
• 29 reported on their financial support for alternative energy… and,
• 22 offer climate change related products to consumers, investors or businesses.
Globally, about $600 billion every year is invested in the energy sector by financial services players of all kinds – banks, hedge funds, private equity, etc. A few years ago, the share of that total that went to alternative energy and renewables was about $40 billion. Last year, it was more than $100 billion – about a sixth of the total. So the momentum in the green economy is building, and the financial services industry is clearly taking notice and taking action.
I’ll highlight some of what’s going on in a few categories. First, consumer products.
A number of banks, including Bank of America, are now offering green mortgages… mortgages that take into account the greater value of a green home, offer some kind of a discount at closing, or give favorable consideration in the credit decision. Our product offers homebuyers a $1000 discount at closing.
Several banks in the Ceres study are offering green credit card products, including ours. The idea here is similar to many “rewards‿ cards, except that instead of cash rebates or airline miles, consumers earn carbon credits through their purchases, or contributions to environmental organizations.
One of the most interesting consumer opportunities we’ve looked at… but haven’t found the right way to participate in yet… is the large scale leasing of residential solar panels to homeowners. By purchasing and leasing solar panels in bulk, financial intermediaries relieve consumers of the largest obstacle to this technology: the incredibly high cost of purchasing and installing the panels.
Several states have passed incentives for residential solar leasing. As more do… or if incentives were passed at the federal level… the market will expand. Banks will quickly find this can be a great way for us to work with customers who want to go green.
Another major area of activity for banks in the green space is the work we’re doing with our commercial, corporate and institutional clients. These loans and investments support everything from solar to wind to the expansion of hydro power… and even experimental technologies, such as giant buoys that capture energy generated by ocean waves.
For example, we worked last year with the San Jose Unified School District in California and Chevron to install what we believe is the largest solar power system in a school system in the United States.
We’ve also looked at the possibility of financing an “anaerobic digester facility‿ that would take food waste and convert it into eco-friendly byproducts, energy-producing methane and low-grade fertilizer. Such a project would reduce the carbon footprint of the food waste disposal… produce thousands of tons of fertilizer for city parks… and produce renewable energy, taking tons of greenhouse gases out of the atmosphere.
Another example is the work we’re doing to protect forests. Last summer, we financed the acquisition of 50,000 acres of the Usal Forest in northern California to preserve the forest in perpetuity. The transaction protects the forest’s ability to absorb carbon out of the atmosphere (which will create carbon credits and a future revenue stream for the managed forest)… and allows sustainable timber harvesting that will protect local jobs and economic strength. We’re working on a much larger forestry project now.
Green commercial construction is a very big deal, for our industry in general and Bank of America in particular. We’re very excited about Greenbridge, an eco-friendly residential development here in Chapel Hill we’re financing… our One Bryant Park office tower in New York will be the world’s greenest skyscraper when it opens this year… and we’re developing a new green office tower in Charlotte, as well. Green commercial projects accounted for 6% of all commercial construction in 2006 – about $15 billion worth – and are growing at a rate of close to 50% a year. By the end of next year, almost 25% of new commercial construction will be green.
Carbon trading is another fast growing area for financial institutions. Bank of America joined the Chicago Climate Exchange last year, but the Europeans are way ahead of us in developing these markets. As more and more countries put greenhouse gas emission cap-and-trade systems in place, carbon trading markets will become central in our efforts.
The last point I’d like to make in terms of what banks are doing today is that energy efficiency is still the lowest hanging fruit on the tree. Our existing energy infrastructure isn’t going away, and it accounts for about 90% of the power we use. Finding ways to use this energy more efficiently may not be as exciting as harnessing the power of ocean waves… but it’ll make a heck of a lot bigger impact in our lifetimes.
For example, I’m excited about a new technology we’re piloting in 3,200 of our banking centers that uses sophisticated computer software to monitor and adjust our HVAC systems. The company that developed the software needed capital to build out their operations, and a large scale project to be economically viable… so they turned to us.
We announced in January that we are joining Ceres and the United Nations Foundation to promote aggressive energy efficiency measures as the most effective, profitable and actionable steps we can take to address climate change. The Task Force on Energy Efficiency will collaborate with a wide variety of players… including advocacy groups, power companies, utility regulators, and state and federal policy makers… to improve state utility regulation to create positive incentives for energy efficiency.
Well, that was the fun part – telling you about all the great stuff we have going on. Now, for the less fun part: Where do we still have gaps?
The biggest issue we run into is upfront cost and cash flow.
I understand one of our speakers yesterday – a green housing developer – noted that what most of his customers want is a green mortgage that adjusts the interest rate or extends the term of the loan to keep monthly payments on par with similar homes without the green features. It’s a good point… one that mortgage lenders will have to figure out.
High upfront cost is an obstacle in many areas of the green economy, simply because newer technologies often lack the scale that is required for low-cost efficiency. In a recent survey, two of the top obstacles to green building cited by developers and owners were higher first costs and different budget accounting, e.g., capital vs. operating costs. These are issues banks are working to understand and address.
The other major issue we see with green mortgages is certification of the home as green. In the commercial space, LEED certification is now the industry standard… in the residential mortgage space, we have Energy Star ratings, which are a great start. But it would be helpful to have state or even federal guidelines that created a consistent and level playing field for the green residential industry across the country.
One of the biggest gaps we are working to fill has to do with fundamental changes that the green economy is bringing to the traditional, carbon-based utility sector. Coal is a great example. The fact is that coal 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.
So the coal industry will be with us for a long time… but the competitive and regulatory environments for coal in particular… and energy in general… are changing. And so will the risk formulas banks use to finance the industry.
Consider the following facts:
• the utility sector is one of the largest contributors to greenhouse gas emissions…
• the carbon impacts of new plant construction will be with us for many years…
• regulation of greenhouse gas emissions is coming, but until it does we need to make assumptions about what the cost of carbon will be…
• there is a growing volume of research showing the needed actions and associated costs to slow, stop and reverse the growth of greenhouse gas emissions.
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 (based on recent analyses by McKinsey and other leading experts).
These projected costs for carbon emissions will also mean that the financial services industry must work with traditional utility clients to finance the development of cleaner technologies. It will take time to make this shift happen. In the meantime, I’d like to keep the lights on.
One more obstacle I should mention is, ironically, the profusion of new ideas and proposals flooding the marketplace.
There are a lot of great ideas out there… but as in any innovation boom, the hits are vastly outnumbered by the misses. This fact creates a huge risk management challenge for banks that choose to participate in the greening of the economy. As a financial backer of new technologies, the bank is in the position of picking winners and losers. We have to approach that task with the gravity it demands… with close attention to the financial, market and operational risks of each project or client… and pick wisely.
The last key question I promised to tackle today is: What more can be done to make financial resources available to the emerging green economy?
I certainly don’t have all the answers. But I have some thoughts.
Financial service providers can get on board. The Ceres study I mentioned made clear that while many banks are in this game… many more are not. Those of us leading the charge need to help our colleagues understand the importance of this work.
One of the ways we’ll do that is by highlighting the profit potential. In my mind, this shift in the financial services industry is the ultimate example of doing well by doing good. Our $20 billion initiative isn’t charity by any stretch. We expect an attractive risk-adjusted rate of return on this capital. Our initiative is an expression of our belief that the direction the global economy is changing. And we are backing up that belief with cash.
We can continue to innovate, by listening closely to our customers and clients who are working on green projects… by understanding your challenges, and by working together to figure out how to solve them.
We know that aligning financial resources with the needs of the low carbon economy can be a challenge. As a further sign of progress on our initiative, I’d like to announce a new team within the bank that will be 100% focused on identifying and financing the best new ideas in the green economy. Led by Richard Cohen of our Strategic Investments Group, this team will apply the broad capabilities of our company to the biggest environmental challenges. We expect the group to be up and running within the coming months.
Public policy leaders also play a key role. Capital cannot solve the problem alone… public and private sector partners need to work in tandem to meet challenges this big.
So here are some ideas for our public policy partners.
First, we need a stable and predictable regulatory environment with a bias toward clean energy and the green economy. When innovators and financial backers are confident of government support, risk calculations change and good things happen.
Second, policy leaders need to work across jurisdictions to determine which incentives or regulations work best at the state level… and which work best at the federal level. We need to balance between the benefits of states acting as laboratories of innovation… and the inefficiency that results from a patchwork of inconsistent regulation.
Third, at the federal level, we encourage Congress to create a cap-and-trade framework for carbon emissions. We favor a market based mechanism to set a value for carbon allowances, and a clear, federal standard that would give investors the certainty they need to plan for the future.
Finally, consumers, businesses and entrepreneurs also have an important role.
You can work with financial partners to help us better understand the economics of your ideas. You can work with public policy partners and the financial industry to educate partners on both sides about issues, hurdles and potential solutions.
You should be very choosy when hiring firms to execute green projects… so much of the green economy is new, and many vendors are unproven… banks get a lot of comfort from seeing vendors with proven track records involved in projects from the start.
And you can plan for a low carbon economy. Be aware of what’s changing, what’s likely to change in the future, and how you or your company will adapt to that environment.
Bank of America is involved in financing the green economy for a lot of good reasons. We believe it represents the future, and a tremendous business opportunity. We believe it’s what our customers and clients need us to do to support them. And we believe it’s the right thing to do for our communities, our country, and our planet.
I grew up in Mississippi and Georgia in the ’50s. We were surrounded by clean air and water and fertile farmland. Industry had begun to affect the environment, but we didn’t see or feel the impact. Industrial progress seemed to show our ability to bend the earth to our uses… and the earth’s ability to shrug off our activities as it had for millions of years.
That illusion has been shattered. We now know that we have an impact on our planet, and we know the pressures on our environment will continue to grow.
The good news is that we can create a sustainable economy. Our financial and natural resources are abundant, if we manage them wisely. We have human ingenuity, through which we create amazing new technologies. And we have the motivation of wanting to preserve our planet for future generations.
Bank of America stands ready to work with all of you to help us meet this challenge… and I look forward to all we’ll accomplish, working together.
Thank you.
