Early Steps toward Green Finance: The Evolution of Green Finance-A System of Public and Private Sector Financing Options to Promote Sustainable Development-Will Be Crucial in Supporting Environmentally Sound Development Practices
Thus far government incentives and small, local and boutique financial institutions have led the way in embracing green development and creating targeted green lending programs. Some larger lenders are recognizing the market potential of this sector as well, and several are making major commitments to support green development. However, as an industry green financing is still maturing.
Banks are finding ways to go green
Many banks are adopting green practices. According to the 2008 IBT Market Pulse Survey, nearly three-quarters of financial institution executives surveyed said they plan to build a new branch or undertake major remodeling in the next year or two, and 75 percent of those are considering green building materials and practices. These executives reported that the move to green practices is led by a sense of environmental stewardship, a need to lower operating costs and a desire to be responsive to an issue that is important to their customers. By serving as role models for other green development projects, banks are providing education about sustainable buildings and demonstrating how to incorporate the savings from these buildings into standard underwriting practices.
In addition to implementing green practices in their own construction efforts, financial institutions are providing support for green development through financing for environmentally conscious multi-family and commercial developments, small businesses, and single-family home mortgages. They are also making loans for energy-efficient home improvements and helping to market the green development model by educating their partners about the green model.
Smaller community banks have thus far been the real leaders in supporting green development. These institutions are more likely to offer favorable loan terms for green development. Incentives include reduction in interest rates and closing costs, higher loan-to-value ratio, or a longer amortization period for commercial or multi-family projects that adopt green principles. New Resource Bank, a community bank founded in 2006 in San Francisco, was the first bank in the country to focus specifically on supporting green businesses and sustainable personal banking. The Bank provides one-eighth of a percent discount on loans for projects that are built to U.S. Green Building Council standards and a no-downpayment lending program to homeowners to install solar panels. It also offers a Solar Certificates of Deposit (CD) solely used to fund solar projects. Recognized by the U.S. Environmental Protection Agency in 2009, New Resource Bank is often regarded as an example of what community banks can do to support environmentally conscious building. Other "green" community banks include First Green Bank in Eustis, Florida and Green Bank in Houston, Texas.
Multi-family and commercial development
A number of banks are now offering construction and permanent financing to support environmentally conscious and green certified commercial and multi-family development. Wells Fargo has loaned over $2 billion to LEED-certified projects, and Bank of America has pledged $20 billion to support environmentally sustainable business activity over the next 10 years, with a key focus on financing LEED-certified projects. Most of the larger institutions are likely to offer standard loan terms for green projects; but by using underwriting models that account for increases in net income connected with the savings gleaned from green development practices, they are able to provide better financial terms for borrowers.
A growing number of financial institutions are exploring creative products to promote energy-efficient single-family housing development and mortgages. Energy-efficient mortgages have become the most common green finance product. They qualify borrowers for slightly larger loans by adding projected savings on utility costs back to the borrower's income. …