By Vandana Gombar, BloombergNEF. This article first appeared on the Bloomberg Terminal.
The boost provided to the green economy by the US climate bill – officially the Inflation Reduction Act – will ease the way for Bank of America to reach its target of $1.5 trillion in sustainable financing by 2030. The challenge isn’t so much in reaching the target, however, but in making an impact, Karen Fang, global head of sustainable finance at Bank of America told BloombergNEF.
“We can accomplish our capital deployment goal just by financing wind, solar and EV projects in the US and developed OECD countries. But our focus should not just be the size. It is also on additionality and impact,” she said in an interview at her office in New York. “Anything new and innovative is harder to do. Risk-adjusted returns may be lower, but we have to lean in.”
Fang said that leaning in means that the bank is “not charging the full value we are entitled to charge in some of these catalytic projects. We could be charging more, but we’re trying to give them the sharpest pricing. It is commercial financing in the lowest range possible.”
Bank of America managed $250 billion in sustainable financing in 2021, the first year of the commitment. This year, there were strong headwinds emanating from macroeconomic challenges and the Russia-Ukraine war in the first quarter. “Our second quarter was better than the first. I expect the second half of the year to be better than the first half,” Fang said. She expects a big jump in 2023, when the new US climate law starts making an impact.
“We have the ambition to be the world’s top green project finance lender, arranger and underwriter,” she said. The bank wants to support the first mega-scale carbon capture project as well as the first mega green hydrogen project.
Fang heads a global team that has doubled in size over the past year to 35 people spread across developed and emerging markets to fulfill its “role as a catalyzing agent for newer technologies, and for emerging markets.”
Bank of America supports decarbonization ventures through multiple channels. It is an investor in the Breakthrough Energy Catalyst program backed by Bill Gates. The program is focused on direct air capture, green hydrogen, long-duration energy storage and sustainable aviation fuel. “More of these projects should become easier to fund in the near future, thanks to the Inflation Reduction Act,” Fang said.
The Bank has its own Sustainable Finance Taxonomy. It does no direct financing of petroleum exploration or production activities in the Arctic, construction of new coal-fired power plants and thermal coal mines or expansion of existing plants and mines.
The following Q&A has been lightly edited for length and clarity.
Q: What do you see changing in the world of sustainable finance with the US Inflation Reduction Act?
A: I think it will provide a massive boost to sustainable finance. It will help bridge the gap on some of the newer technologies. Wind and solar are more mature, proven renewable technologies that are getting a lot of capital and already starting to break even in many parts of the world. The new things needed – green hydrogen, carbon capture, biofuels and even better EV batteries as well as EV charging – all these things needed a push. Our initial read is that there are a lot of incentives in this bill that can help reduce the green premium.
Many rules, regulations and clarifications now need to come through. What does final EV assembly mean? How do you calculate the American manufacturing component? How do developers qualify for the wage-related bonus? What is the documentation required? The Princeton University analysis shows US doubling its annual wind build, and a five to six times increase in solar build due to the additional momentum provided here. Tax credits that are transferable and direct pay will broaden the investor base. We will see more supply of capital, and more projects from developers.
I think our teams will be very busy in the fourth quarter and beyond. Given our significant market share in this space, we have to see how to allocate our capital thoughtfully. How do we go where we are really needed? It is easier to scale wind and solar. But how do we really lean in and help the first mega-scale carbon capture project, or the first mega green hydrogen project. That will be our focus.
Q: Allocating capital “thoughtfully” – what exactly would that entail?
A: It’s always about impact and return. If the market can absorb some of the easier projects from more mature technologies, our added value and impact will be larger in newer technologies. We want to fulfill our role as a catalyzing agent for newer technologies, and for emerging markets. We have a goal to mobilize and deploy $1.5 trillion in sustainable financing by 2030. In 2021, the first year of this commitment, we mobilized and deployed approximately $250 billion. This year the market faced a lot of challenges, given all the macroeconomic headwinds, geopolitical tensions and supply chain shortages. We can accomplish our capital deployment goal just by financing wind, solar and EV projects in the US and developed OECD countries for example. But our focus should not just be the size. It is also on additionality and impact. Anything new and innovative is harder to do. Risk-adjusted returns may be lower, but we have to lean in on things because our job as a structuring and distribution agent is to make the projects more bankable and to get more investors involved. In this capital-constrained, higher-interest-rate environment, we have to be very thoughtful about where we put our dollars and our human resources, in order to balance our footprint in technology and geography.
Q: Are you taking on a level of venture risk that you have not taken on before?
A: We assist in decarbonization ventures through many channels. An example is the Breakthrough Energy Catalyst program that we invested in with Bill Gates and his team and a few other anchor partners. The program is focused on key emerging decarbonization technologies: direct air capture, green hydrogen, long-duration energy storage and sustainable aviation fuel. More of these projects should become easier to fund, thanks to the Inflation Reduction Act.
Q: Is the Inflation Reduction Act a tailwind that can remove all the headwinds?
A: We are doing this analysis right now. Your question is a good one but it’s a hard one. The UN estimates that we need $3-5 trillion per year through 2050 to accomplish net zero. McKinsey will tell you it is $275 trillion by 2050 so that equates to around $9 trillion a year. Even ignoring the recent impacts of the war in Ukraine, global inflation and broad-based rise in interest rates, risk of recession and supply chain shortages, we were already massively underfunded for decarbonization. The Inflation Reduction Act gives a boost and offsets some of the headwinds, but it cannot completely wipe them out. We are facing a massive shortage of funding globally and there isn’t a very clear global plan on how to close this gap to achieve net zero.
Q: What are Bank of America’s sustainable financing numbers looking like this year so far?
A: Our second quarter was better than the first, which is no surprise given market conditions. Global investment banking and capital markets are down year-over-year, but we see improving market conditions and a pick-up in activity levels. Our regional banking unit, which is more domestic, is a bright spot and showing strong year-over-year gains in sustainable finance activities. In addition, our consumer EV lease business has won three major mandates from strategic EV manufacturers, and we see continued growth there. For 2022, I expect the second half of the year to be better than the first half.
Q: To get a sense of what is your biggest opportunity and challenge, I want to ask you what you are spending most of your time on?
A: The next couple of months will go into digesting the Inflation Reduction Act and getting a handle on the size and scope of the business opportunities it will enable. We go where our clients go. So, if all the large oil and gas companies are thinking about methane leakage prevention – because that’s a real stick in the new law – we are going to try to help enable more of these projects. I am excited about carbon capture and sequestration, and am excited about some of the larger scale projects we are working on in the country. We are getting together with a lot of corporate clients as well as investors to strategize. There is a lot more momentum now. We have a few major initiatives in each of our eight lines of business. I think we’re going to penetrate the consumer and small business space even more with an increased product mix. We are also driving thought leadership across international alliances and task forces, whether it’s the Sustainable Markets Initiative that our CEO Brian Moynihan co-chairs with the Prince of Wales or the GFANZ [Glasgow Financial Alliance for Net Zero], or the United Nations GISD [Global Investors for Sustainable Development].
Q: Does it worry you sometimes that no one quite knows how to get to net-zero emissions but everyone is signing on to it?
A: What’s the alternative? You don’t commit to net zero and you wait until you have a perfect pathway and when all new decarbonization technologies are ready? That would probably be one or two decades down the road and too late. You have to start from somewhere, and without a north star, it is very difficult to organize 193 countries, tens of thousands of large companies, countless small to medium-sized companies and billions of consumers. As global temperature rises, think about migrants, refugees, food security and political implications. I don’t think we fully understand the impact of climate risk yet. The transition risk analysis is not yet fully developed either. It is so complex and without some kind of grand pledge to reach net zero, we just can’t organize the world. We are already facing irreversible damage. This is why it is so important to commit to a goal that’s higher than all of us combined.
Q: Is this work something very personal for you?
A: It’s very personal. I’m just a lucky kid from China who somehow made it. There are so many people that don’t. In addition to poverty and lack of access to education and capital, they also have to face climate change. It’s personal because I’m thinking about children in emerging markets. A lot of the climate vulnerability is in the developing economies. I do feel a lot of responsibility. Climate disasters are happening at a much faster pace. I’m a banker. I need to do what I can – being a good financial engineer, being a thoughtful capital director – to make sure funds flow where I think they can make a difference.
Q: Capital flows are also guided by returns. Would you be similarly driven by returns?
A: Yes. We are not a public sector entity. We are not a non-profit organization. We are a regulated bank that needs to think about risks and returns, as well as capital and liquidity. However, I can tell you that for some of the financing that we are doing, we lean in from a pricing standpoint. Many of these emerging markets have currency risk, convertibility risk, economic volatility, political risk and social risk. Some of these are difficult to mitigate completely. That is why blended finance structures are really needed, and why we work with multilateral development banks and agencies to blend our capital.
Q: So are you leaving money on the table?
A: We’re not charging the full value we are entitled to charge in some of these catalytic projects. We could be charging more, but we’re trying to give them the sharpest pricing. It is commercial financing in the lowest range possible. We are doing the best we can to support clients, but we also have to meet minimum return on capital requirements.
Q: What is the most challenging engagement your team has had in the last six months?
A: That would be the emerging markets. We can’t necessarily turn a blind eye to the sovereign or corporate credit risk of a lot of these emerging countries. The budgetary gap has widened because of the geopolitical situation, Covid-19, inflation and disruptions in the global supply chain. Then you add in technology risk, project risk and currency risk. We also see political insurance risk going higher. But these emerging markets are very important for decarbonization. We want to support these projects as much as we can. Those are some of the most challenging conversations.
Q: How big is Bank of America’s sustainable finance team?
A: My team size doubled in the last year. We added a lot of project finance experts because we want to do more green project financing. I now have a global team spread across the US, Asia, Europe and Latin America. We have the ambition to be the world’s top green project finance lender, arranger and underwriter. Barring any other surprises, 2023 should be a strong year, given the boost from the Inflation Reduction Act and our global footprint. I think a lot of emerging markets need help on just transition. We want to make sure we are very balanced between developed markets and emerging markets in our capital deployment and in our advisory work.
Q: From a sustainability perspective, does the Bank have a blacklist of regions, sectors, technologies, projects?
A: We have determined that we are currently unable to engage in a number of activities. They include direct financing of petroleum exploration or production activities in the Arctic, construction of new coal-fired power plants and thermal coal mines or expansion of existing plants and mines (with an exception for power plants that employ technology that is focused on complete or near elimination of atmospheric carbon emissions), financing for the manufacture of military-style firearms for non-law enforcement, non-military use and financing of private prisons and detention centers.
Q: Can you share some detail about the Bank’s internal Taxonomy?
A: Bank of America takes a very conservative view of what counts as sustainable finance activity. We have developed an internal Sustainable Finance Taxonomy and associated accounting methodology that aligns with the UN Sustainable Development Goals, the Green, Social and Sustainability Bond Principles and the EU taxonomy.