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Invested in a cleaner planet

Why it makes business sense for companies to play a greater role in efforts to transition to clean energy.

From developing nations to the developed world, the effects of a warming earth are factors of daily life. No country or corner of the world has been untouched. California was recently drenched by deluges of heavy precipitation caused by jet streams of moist air, or atmospheric rivers. San Francisco has seen more rain in the first two weeks of 2017 than it did the entire year of 2013—causing floods, power outages and tragic, wide-scale destruction.

At the same time, drought in east Africa, combined with extraordinarily high temperatures, has forced thousands of people from their homes and left at least 17 million people dependent on humanitarian aid for food.

The great majority of scientists agree that the globe’s rising temperature increases the odds of more harmful weather conditions like those in California and east Africa. “Many extreme events are indeed tied to climate change,” said Edward R. Carr, professor of international development, community and environment at Clark University in Worcester, Massachusetts.

But the danger isn’t just to the physical planet—it also has the potential to damage the global economy. “If we continue along the current path, climate change inaction could result in losing 1 to 5 percent in gross national product each year worldwide,” said Sarbjit Nahal, analyst with Bank of America Merrill Lynch Global Research. Those costs range from reconstruction after hurricanes to fixing deteriorating infrastructure and treating negative effects on health.

The widespread concern about the long-term consequences of climate change resulted in the Paris Agreement, a historic accord among 196 countries at the 21st Conference of Parties in 2015. This agreement provides a framework for nations to address climate change, requiring them to develop and share plans on limiting carbon emissions in their respective countries.

The agreement—which went into effect in 2016—is ultimately designed to prevent global temperatures from rising above 2 degrees Celsius—beyond that point, many climate scientists believe it will be difficult to prevent dangerous results to the earth.

In the wake of this agreement, many nations have boosted spending to fight climate change, but it’s becoming evident that governments alone can’t foot all the bills. So how will this funding gap be filled? Increasingly, the answer seems to lie in new private sector initiatives, either alone or in cooperation with the public sector. “It will be hard to achieve the ambitious goals set by the [Paris] agreement unless the private sector gets involved in a substantive and meaningful manner,” said Christian Grossmann, director of climate change for the World Bank’s International Finance Corporation.

Allies in the fight

Business leadership is key, as initiatives to slow the growth of greenhouse gas emissions and stem the rise in world temperatures don’t come cheap. They require investment in infrastructure, research, development and technology, as well as renewable and alternative energy, and more efficient energy use. The International Energy Agency estimates the world will need approximately $1 trillion a year through 2050 to finance the transition to a low-carbon economy.

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There is no better example of shared success than clean energy. It’s a way of investing that allows us to address significant global issues, create jobs, improve infrastructure and also see a business return.

Anne Finucane, vice chairman, Bank of America

Much of the answer may lie in private-sector participation and public-private partnerships. Tackling challenges like climate change requires a joint effort to be successful, said Anne Finucane, vice chairman at Bank of America. “There is no better example of shared success than clean energy,” she noted. “It’s an investment area that allows us to address significant global issues, create jobs, improve infrastructure and also see a business return.”

stats stats

THE CLIMATE SPENDING GAP - U.S.

(Between 2015 - 2030)

WHAT IS NEEDED

16.5T

15 years

What is needed from the U.S.
to prevent global temps from
rising more than 2°C above
pre-industrial levels*

WHAT WE’RE
PROJECTING TO SPEND

5.9T

15 years

Based on what U.S. public and
private actors spent on low carbon
and climate resilient actions in 2014

PROJECTED
GAP

10.6T

15 years

If U.S. numbers remain at the 2014 level

Source: Climate Policy Initiative, March 2016
*A key goal of the 2015 Paris agreement

Taking the long view

The global business community is indeed playing a greater role, identifying climate change as the top global economic risk at the World Economic Forum this January in Davos, Switzerland. Many businesses see it as a matter of long-term self-interest, while in the short term, a narrow focus on profit might lead businesses to avoid costly climate related initiatives. But more forward-looking companies can see that minimizing the harmful and costly effects of hurricanes, floods, droughts and other extreme weather events, as well as investing in climate initiatives, will increasingly help their own long-term profitability and value. The World Bank and various studies, such as one published in 2015 by the journal Nature Climate Change, have cautioned that lack of action could negatively affect global investment portfolios by the trillions of dollars.

The private sector is also responding to heightened public awareness and pressure from interest groups. The “social good” argument behind climate investments is “having a very resounding impact,” especially among millennials, Nahal said.

For these reasons and others, businesses of all sizes are focusing on policies and projects that enhance their environmental, social and governance efforts—by adding impact investments to their portfolios, appointing sustainability directors to their boards and implementing green energy policies.

According to Bloomberg New Energy Finance, clean energy made up 68 percent of new energy sources in 2015. And this area of economic strength and jobs creation represents one of the world’s fastest-growing sectors, far outpacing fossil fuels. Thus, from a business standpoint, “clean energy is a good opportunity for us,” Finucane said. “And we have seen this opportunity pay off. In 2016 alone, we financed $15.9 billion in clean energy and other sustainable projects.”

These projects are improving people’s lives while enhancing our environment over the long term. For instance, in partnership with the District of Columbia water and sewer authority, Bank of America played a major role in underwriting a portion of the District of Columbia Water & Sewer Authority’s DC Clean Rivers project, a $100 million undertaking supporting water infrastructure needs. The bank also helped arrange Transport for London’s green bond, which will help it fund clean transport in London.

As part of our $125 billion environmental business commitment, Bank of America has become a global leader in underwriting green bonds to finance low-carbon and sustainable projects, and we have led the way in making it easier for others to do so as well.

Anne Finucane, vice chairman, Bank of America

Fresh ideas for funding a cleaner world

Innovative financing is an area where the private sector is playing an especially critical role in helping mitigate climate change, both for altruistic and business reasons. And these new ways of paying for a greener environment are resonating with the broader public.

Investors and governments put $330 billion into clean energy projects in 2015, according to Bloomberg New Energy Finance. Solar and wind power have had the fastest growth and the most dramatic cost declines, and private financing is growing rapidly in those areas.

The investment tools funding climate change are very much like traditional ones, except that they’re tailored to balance environmental objectives with the potential for market returns.

Blended finance, for example, involves partnerships that combine private sector capital with public sector or development institution funds. The private sector piece is structured to make it an attractive investment for capital markets.

stats stats

THE CLIMATE SPENDING GAP - GLOBAL

 

WHAT IS NEEDED

100B

per years

Amount that developed countries
pledge to raise by 2020 per the
2016 Paris Agreement to help
developing countries cope
with climate change

WHAT WE’VE SPENT

33.4B

2014

Amount developed countries
and multilateral finance raised
from public and private sources
to mobilize climate action in
developing countries

PROJECTED
GAP

66.6B

per years

Source: OECD, October 2015

The World Bank has organized many blended finance projects to support climate change. For example, its partnership with the Solar Power Company Group in Thailand has resulted in the construction of dozens of solar farms using photovoltaic cells, while the Bank’s Carbon Initiative for Development program underwrites projects such as one in Kenya that provides access to clean cooking fuel from biomass.

“Blended finance can rebalance the risk-reward structure to attract private sector financing into these projects, while also making the best use of scarce public funds,” said Kruskaia Sierra-Escalante, head of blended finance for the World Bank’s climate business department in the International Finance Corporation.

GREEN BUSINESS INITIATIVES

BANK OF AMERICA’S $125 BILLION ENVIRONMENTAL BUSINESS INITIATIVE IS ADVANCING ENERGY EFFICIENCY, RENEWABLE ENERGY AND OTHER SUSTAINABLE ACTIVITIES.

Tactics: Lending, investing, capital raising, advisory services and financing solutions around the world

As a global financial institution, Bank of America is providing financial and intellectual capital to its clients to help develop solutions to environmental challenges. By financing clean energy initiatives and advancements in renewable energy, the company is helping to spur new innovations and the growth of environmentally-focused companies, markets and jobs.

“The deployment of our financial capital is one of our biggest opportunities to have a positive environmental impact and help clients with their environmental and sustainable needs,” Finucane said.

In 2007 Bank of America set its first environmental business initiative at $20 billion and met that goal four years ahead of schedule. In 2013 it announced its second environmental business goal of $50 billion and increased it in 2015 to $125 billion by 2025 to address climate change and other demands on natural resources. As part of the second environmental business commitment, the company has already provided more than $49 billion since 2013 and since 2007, it has provided more than $70 billion in financing for low-carbon and sustainable business activities.

nuclear

nuclear

sustainable

wind

hydro

mixed

biomass/
biofuel

other

$19.1B

$7.9B

$7.5B

$7.5B

$4.6B

$9.3B

$1.3B

$6.1B

$30M

$1.7B

$573M

$863M

$3.4B

Large financial institutions are in a unique position with their global scale, reach and influence to be a leader in bringing the private sector together, while using their financial capital to finance sources of clean and renewable energy.

Bank of America went a step further in 2014 when it announced the Catalytic Finance Initiative and a $1 billion commitment to finance high-impact clean energy investments with a goal to bring in partners to reach $10 billion in investments. The intent of this initiative is finance opportunities that use innovative solutions to attract capital that would not otherwise be deployed in this sector. In 2016 the company announced that several partners are joining the CFI, bringing in $8 billion in total commitments for new investments in these projects.

Green bonds sprouting

Another popular financing opportunity comes from the issuance of green bonds. These bonds are used to fund projects that help curb greenhouse gas emissions, such as those that help finance wind farms and solar parks, or help build new urban transport systems. Like all bonds, they pay a coupon and return principle.

The Climate Bonds Initiative, one of many organizations tracking the market, estimates growth from $3 billion a few years ago to over $81 billion this past year. Corporate and financial institution issuances now make up more than half of the green bond market. In November of last year Bank of America issued its third and largest green bond for $1 billion in aggregate. The bond, which is exclusively being used to fund wind, solar and geothermal projects financed by the bank, brings the total funds raised by the bank through green bonds to $2.1 billion. In 2013, it issued the first benchmark-sized corporate green bond ― a $500 million offering and followed that offering with a $600 million green bond in May 2015.

“The wide adoption of these bonds has revealed an appetite among diverse investor groups to put money into climate-friendly projects—from resilient infrastructure to energy efficiency—that offer a return for both the investor and the planet,” said Judith Rodin, former president of the Rockefeller Foundation.

When it comes to underwriting bonds, Bank of America Merrill Lynch has been the number one underwriter of green bonds for the past three years according to Bloomberg New Energy Finance.

Shifting attitudes are a hopeful indicator

There’s an increasing consensus that the businesses driving our economic progress should also be involved in climate change, to protect the planet from innovation’s byproducts. This belief is shared not least of all by the businesses themselves. “The private sector is taking an extremely vocal and powerful role,” Nahal said.

Given the astronomical costs of repairing the climate, the collaborative efforts between governments and the business community are coming in the nick of time. They’re a promising sign that the world may be up to the expensive task of saving itself.

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