Climate change is visible wherever we look. We can sense it in the poor air quality around our homes and the irregular weather patterns that keep changing every year. To solve climate change, we need innovative solutions. But for most investors and traditional banks, these solutions are seen as too risky. There are no guarantees that the services or products will be profitable or even effective. So what alternative is there? Well, there’s green banking. Green banking is a fast-growing financial system that invests in these innovative technologies so they may get off the ground quickly and secure enough funding to expand widely across the planet. It’s aligned with the objectives of the Paris Agreement, and totally accountable to its investors, both private and public. At Aspiration, we believe that green banking will help our world become more environmentally sustainable.
In this article, we explore the benefits of green banking, and its impact on our planet’s future.
Why is green banking important?
Green banking is an initiative that helps countries and communities explore climate resilience projects. It does what many private banks won’t – it funds innovative projects that are aligned with the objectives of the 2016 Paris Agreement. Institutionalized in 2015 by a group of global development organizations, green banking is slowly becoming a key tool in the fight against climate change. It’s changing the conversation about what types of infrastructure projects should be financed for the future of the planet; away from fossil fuels and toward solar and wind energies. At the moment, green banks focus most of their funding on clean energy or energy efficiency projects. In 2018 alone, American Green Banks invested $676 million in clean energy infrastructure that included solar-powered electricity microgrids for low-income communities in Maryland and hurricane shutters for homes in Florida. Some green banks broaden their scope a bit beyond clean energy, like the Rhode Island Infrastructure Bank. It uses its funds to repair septic systems and connect them to sewage networks for better efficiency. Most of our planet’s existing infrastructure is incompatible with the needs of a sustainable future. Green banking comes in here to make sure that funds are available to help communities transition to low-carbon economies.
How do green banks work?
Green banks were traditionally funded by public funds but this is no longer the case. Most of today’s green banks crowdsource capital from a mix of philanthropic and government funds to build their own investment capital. Some green banks are privately owned and raise funds from the capital generated from their services. Using these funds, green banks finance innovative clean energy projects to give them the media attention they deserve as well as the starting capital to develop their products and services. In other words, they help greenlight promising new technologies so that these projects can secure more funding from either private or government sources.
As of 2020, green banks all over the world have invested more than $20 billion in new technologies ranging from solar farms to vehicle electrification. These projects help countries who are signatories of the Paris Agreement achieve their Nationally Determined Contributions (NDC) on climate change. It’s expected that with green bank financing, more jobs will be created, and air and water quality will be improved in many places around the world.
What green banks do that regular banks don’t
Green banks are different from regular banks in that they only fund businesses and programs that are guaranteed to have a positive social impact. Whereas regular banks, especially big multinationals, have long been found to invest in environmentally damaging businesses such as fossil fuel companies, industrial farms, and logging companies. Also, green banks fund businesses to help them attract more investment, not to get profit. They exist because traditional banks are reluctant to invest in the new clean energy technologies that would make fossil fuels obsolete in the future.
So far, green banks have helped establish climate-resilient infrastructure and more efficient water and waste management systems. They’re driving the world towards net-zero emissions while big banks are driving us away from that goal. Green banks operate in accordance with the objectives of the Paris Agreement, which have been put in place to prevent catastrophic climate disasters from happening. And because most green banks don’t work for-profit, they can choose to take the long view and invest in projects that have positive social outcomes.
Advantages and disadvantages of green banking
Green banks have advantages and disadvantages, just like all other banks. Here’s a breakdown of what green banks are good at and which aren’t.
Advantages of green banks
Willing to take risks
It’s in the DNA of green banks to take risks and invest in promising new technologies that could help solve the world’s environmental problems. This trait helps them stay open to innovation and enables creative working relationships with their business partners. By making funding available to any innovative company with a climate solution, green banks lower the barriers to entry for innovators and give them the means to implement solutions that can help their communities become resilient to climate change. Their risk-taking nature allows everything from biogas power generators to electric vehicles to be given a test run.
Scalable with extra funding
Green banks are funded by a mix of private and public investors, making them scalable as required. Most are not limited by the need to generate revenue or pay dividends to shareholders, releasing much needed time and effort to identify innovative companies and fund them. Green banks are also unique in that they offer low-cost capital to clean energy companies and other climate innovators at low-interest rates and extended-term lengths. The result is that clean energy becomes more affordable and accessible for people to use.
Green banks use metrics to measure and track their performance. Every piece of information about a project, from emissions saved to jobs created to, in some cases, returns on investment, is carefully analyzed and reported. This gives investors a transparent picture of the impact of a project. It also increases their trust in the green bank because they know how their money is being used. It’s a marked difference from big banks whose policy is to keep their investments a secret from their customers.
Specific focus on emissions
The ultimate goal of green banks is to help communities meet ambitious emissions targets. They’re the only banks on the planet that have this mission, making them an asset and reliable partner for companies developing climate solutions, especially in places where funding may be hard to secure. Green banks also make trustworthy partners for eco-conscious private investors who want to see their money work for the values they believe in.
Disadvantages of green banks
Financial stability could be an issue
While green banks may receive funding from both public and philanthropic sources, there’s a risk that the money could dry up due to unforeseen reasons. Unlike traditional banks that have profit generating mechanisms, green banks rely on fundraising and government budgets to build capital reserves. It’s already been documented that some green banks had difficulty securing initial funding. Green banks are still a new concept and public buy-in can be slow at times.
Problems with project continuity
If green banks cannot maintain financial stability, it could jeopardize the continuation of projects they’re funding. This poses a huge risk to both the company that’s receiving the funding because there is no guarantee that a backer, other than the green bank, will be interested in investing in the business.
What is the most environmentally friendly bank?
Aspiration is the most environmentally-friendly neobank that’s known by customers and investors alike to prioritize the financing of green initiatives. It does not fund any fossil fuel companies and has taken a clear stance against activities that may harm humans and animals.
For those looking to invest in ethical stocks, its Redwood Fund invests in socially responsible businesses that use renewable energies, encourage diversity in the workplace, and adhere to sustainability reporting processes. On a more personal level, Aspiration offers services unrivaled by any other bank. Customers can contribute towards tree planting with every transaction they make by allowing the app to automatically round up every transaction to the nearest whole dollar and using the difference to donate the trees. And for those who drive, Aspiration offsets the carbon dioxide from every gallon of gas that you purchase. Aspiration was born out of a mission to make a difference through ethical banking. It’s trusted by millions of customers to keep their money safe while also making the planet a better place.
What’s the future of green banking?
Green banking is still a young initiative with many more decades, maybe even centuries, to go. As the world becomes more reliant on clean energy programs, green banks will gain prominence as the primary financiers of new and affordable climate technologies. They may even replace traditional banks as more and more people become wary of their unethical and harmful business associations.
For the near future, green banks will most likely continue financing solar and wind farms, as well as solar-powered electricity microgrids. We may also see them invest in building materials that are sustainable and climate-resilient. In the long run, green banks could get more involved in water and waste management. Water scarcity is quickly becoming a problem in many parts of the world, not to also mention the problem of water pollution caused by poor waste management and chemical leakage from industrial areas.
There are already signs that more green banks will be founded in a few years’ time to tackle these challenges. The State of Green Banks 2020 report found that many municipalities in the US and other countries are keen to start their own green banks to finance solutions that can improve air, water, and soil quality in their communities. It’s great news because the wider the green bank network grows, the faster we will be able to institutionalize climate positive actions globally.