Cities looking to ‘green banks’ to help fund sustainable infrastructure
WASHINGTON — As President Donald Trump this spring moved toward a decision to withdraw the United States from the Paris climate agreement, the mayor of the U. S. capital city made her own announcement: She would seek to earmark millions of city dollars to lend to developers and others who want to bolster building efficiency, invest in renewable energy and undertake other ways to reduce carbon emissions.
In so doing, Washington Mayor Muriel Bowser was proposing to create the country’s first city-led “green bank” — a fast-growing strategy for using public money to reduce risk for private-sector investment in sustainable infrastructure and more. This month, following Trump’s decision, Bowser was among the first mayors to pledge that her city would seek to uphold the Paris goals — an aim that her green-bank idea would help along.
While Bowser could create the first such entity in the United States, city green banks already are underway in other parts of the world. Notable examples include Amsterdam, London, Melbourne, Sydney, Toronto and Masdar, in the United Arab Emirates. This week, a meeting in Mexico City is exploring how green banks help fulfil countries’ pledges not only under the Paris Agreement but also under the new Sustainable Development Goals (SDGs).
So what exactly is a green bank, and what can this strategy offer to city officials intent on bolstering their sustainability initiatives? For a primer, Citiscope’s Carey L. Biron spoke with Douglass Sims, director of strategy and finance at the Natural Resources Defense Council’s Center for Market Innovation in New York.
Sims focuses globally on financing low-carbon, resilient infrastructure in ways that allow the maximum amount of private capital to come to the market, including at the city level. He also is involved in the Green Bank Network, a clearinghouse of information and technical support on the issue.
This interview has been edited for length and clarity.
Carey L. Biron: What is a green bank, and are they fundamentally different than a traditional bank?
Douglass Sims: The first thing to understand is that a green bank is not a bank. It’s really a term used to indicate that we need to bring financing to the so-called green sectors. By green sectors, I mean in the first case renewable energy and energy efficiency, but also things that stretch into other kinds of investments in infrastructure, like green infrastructure for storm water, stable infrastructure for electric vehicles, advanced water-conservation technologies, waste/sewage-treatment technologies — things that go to either low-carbon resilience or resource efficiency.
So green banks come from the realization around six or seven years ago that there was a real opportunity to invest in this new infrastructure, but that there wasn’t the kind of response from the private sector that you would expect in something that was actually this important and potentially profitable.
There are a lot of efforts, particularly in the energy space, to provide subsidies for different entities to adopt clean technologies. But there’s also a lot of hesitation to adopt them. In some cases, money isn’t the barrier: It’s a perception of risk, or a perception of whether or not something’s worth doing. Also, even when subsidies do work, they become expensive, and taxpayers and other people get tired of paying them.
The idea of the green bank is to take some public money, which would otherwise be used as a subsidy, and try to use it to reduce some of the risks for private-sector players. That could be homeowners, business owners and other investors — to try out investing and buying or leasing clean energy and green infrastructure, and to understand that it actually is a good investment, and it does improve lives. By using the public money to essentially what we call “crowd in”, you get more money overall applied to these sectors, and you get faster progress in reaching things like carbon-reduction goals and energy-efficiency goals.
Q: What are some examples of where these models have been particularly successful?
A: Big successes have really been in the United Kingdom and the U. S. The first green bank was established in the U. K. around 2010 or 2011, called the U. K. Green Investment Bank. The U. K. had looked at their national climate targets and realized that they needed to really work on certain areas where there wasn’t enough investment, namely biomass for energy, energy efficiency, waste reduction and offshore wind. The big success story for the U. K. has been in that offshore wind area, which went from being really low penetration when the U. K. GIB started getting involved to being one of the leading markets in the world for wind.
In the U. S., the early success story is the Connecticut Green Bank, which came on the heels of the U. K. GIB. In Connecticut there was, as part of a big energy bill, a concept that would basically convert an existing entity into the Connecticut Green Bank, which would be a more robust entity and would aim at trying to work in certain specific areas in Connecticut in solar and energy efficiency, and really on the smaller project size.
Small projects like solar and retrofitting homes and buildings have a lot of barriers due to their size: They have high transaction costs. They’re not, in some cases, familiar to people like mortgage lenders and other investors. They sometimes involve technologies which are novel to local banks. They may have high upfront costs.
In its first years of operation, Connecticut Green Bank has seen both the cost of deploying solar in particular go down, and the deployment in-state go up as high as 2,500 percent. So it’s really a success story.
Q: Have these models sparked additional interest? Are there any broad global trends on this issue?
A: Yeah, there are broad global trends. In the U. S., on the heels of Connecticut, New York decided to form a green bank, which NRDC was involved in designing and incubating. There are also institutions that fulfil some of these same functions that exist in California, like the California Infrastructure Bank. There are some new institutions being formed that are exciting around the country. Montgomery County is doing the first county green bank. Washington, D. C., is forming its own green bank on a city level. New York City has formed what amounts to a specialized green bank called New York City Energy Efficiency Corporation. Rhode Island has a green bank.
Internationally, it’s really been taking off in the sovereign and sub-sovereign level. There are green banks in Japan, Malaysia, Australia. There’s interest in forming green banks in India. There’s some movement to form what are called green funds that are very similar in China. There are city-level green-bank-type entities in Sydney, in Melbourne, in Toronto, London.
It really is a growing movement. In the wake of the Paris climate agreement — which really talks about commitments to decarbonize and to make sure that we build superstructure that’s climate-resilient and adaptive — there’s a real desire to convert those concepts into actual projects and investments. Green banks are seen as being a way to bridge between the public sector concepts of infrastructure and private sector investment.
Q: What is the role of a green bank specifically within the city context, and are there any particular obstacles to cities getting involved in this approach?
A: I think in the city context, it’s got advantages and disadvantages — each city is different from another city. I think the primary case for a green bank, or we’ll call it a specialized green financing entity, is to develop locally tailored solutions for that city. If you have a locally focused entity staffed with professionals that know the local markets, you have a customized solution that is necessary in certain cities.
“The green banks are really generating a lot of data —demonstrating to the market that green investments are profitable and good business.”
In the U. S., the cities that are highly urban are very dense. That creates an opportunity and a challenge in energy efficiency and distributing energy: high up-front costs, lack of understanding of technologies, lack of track record with certain technologies, and lack of dedication of professional investors in this space. They’re hard to finance.
From the side of building owners in cities, there’s a lot of things they want to do to make their building more valuable: They may want to build a new lobby; they may want to add on other facilities. The last thing on their mind oftentimes are things like energy efficiency. There are also just structural problems in cities — for example, building owners have to invest in energy efficiency and energy, and yet the savings oftentimes accrue to the tenants.
So there are some real barriers like that, which need to be attacked. Those barriers are both about changing practices, like leasing practices, and also bringing in innovative financing tools that can draw in traditional lenders into the space, to try to understand and value, and to bring competition to these markets.
We do a lot of work in the “public-private partnership” space, and there’s unfortunately oftentimes a disconnect between the public sector and the private sector, and not a lot of trust. By having these green banks really functioning as financial experts on infrastructure that have a private-sector background but are operating on behalf of the city, we have a real opportunity to actually bring in more equitable public-private partnership structures.
The challenges that we see in cities with green banks are really the same ones we see everywhere. The first one is, where does the money come from? On the state level, on the federal level, there are just generally more pots of money to access, to put into a green bank. It’s really critical that the money that goes into a green bank is “patient”, that it doesn’t have to be paid back very quickly. It’s also got to be low-cost, so that the end-user who’s using the financing doesn’t have to pay a lot.
The way that the green banks have been capitalized at the state level have been through things like repair surcharges on energy bills, and budget allocations from state budgets. The right kind of funding isn’t always available in every city. You look at sources like philanthropy or one-time asset sales. Montgomery County, I believe, is using some proceeds from a legal settlement with a utility to do this. So finding the right kind of patient capital is really the first challenge.
The next challenge is really finding the right people, the expertise, to run these institutions in a way that is both sophisticated and market-savvy but also really responsive in terms of its public purpose.
Q: What are some of the key cities across the globe that have been successful in this space, and do they share any commonalities?
A: Again, the core idea is that these entities respond to local conditions. It’s probably going to be quite different in every city. One thing that is going to be fundamental is that these entities typically need to have a certain size, because to really get the value for the money, they can’t charge very much for interest rates or other fees. They have to have a fair amount of volume to be self-sustaining.
The London Green Fund is very interesting — I think it’s the largest city green bank. It’s got capital from various entities in the U. K., as well as some capital from a regional European entity. That capital has increased leverage through private money, which it has been able to attract. It’s interesting because there are actually three separate funds, which have been created to focus on different market segments that are important to London. One is focused on energy and waste, another on energy efficiency, and the third is focused on social housing, which means greening the low-income housing.
“Talking about the intersection between the Paris Agreement and the Sustainable Development Goals and other urban development agendas — these are all new areas for investors to think about, and they think about them together and oftentimes in cities.”
These are unique in that each of these funds are publicly funded, but they’ve brought in essentially private managers who are experts in the area to help make the investments. That’s a bit different from the model that we see in the U. S., where we have essentially an entity that is managed by public servants who do have private-sector experience. In Amsterdam, the Climate & Energy Fund similarly has some management by external folks but is really designed to take on both energy and sustainable infrastructure within Amsterdam.
Toronto is a good model to look at, as well. The Toronto Atmospheric Fund has been successful. And Washington, D. C., will probably be the first city green bank in the U. S., insofar as it’s going to call itself a green bank and it’s going to have some very, very patient capital, and a pretty interesting broad mandate.
Q: Do you feel that these green bank mechanisms have a specific role to play in delivering on sustainable urban development in the future?
A: Yeah, they can and they should. Talking about the intersection between the Paris Agreement and the Sustainable Development Goals and other urban development agendas — these are all new areas for investors to think about, and they think about them together and oftentimes in cities.
In one sense, the energy investment in the world of renewable energy and energy efficiency is pretty developed. What’s happening is that some of the lessons that are learned in the so-called environmental or green space are now being applied to the social area. You’ve probably heard of social impact bonds and things like that — the green banks now are starting to partner with essentially leaders in the social investment space, and trying to combine potentially green attributes and performance with other positive social attributes like creating jobs, improving health care, improving energy efficiency, improving access to jobs.
The green banks also are really generating a lot of data — that’s a really important dimension. They are about demonstrating to the market that green investments are profitable and good business, and they’re tracking not just the things like greenhouse gases and leverage ratios and megawatts deployed or buildings that are built, but also they’re tracking jobs. They’re starting to try to work with the leading-edge indicators of social progress that are demanded by trying to adhere to the SDGs and other sustainability-focused initiatives.