EcoPerspectives Blog
Green Banks are Too Small to Fail: Green Investment and the Inherent Local Interest
By Ervin Yahr, Staff Editor for the Vermont Journal of Environmental Law
May 3, 2024
As the need for green infrastructure grows, so does green investment. Green loans and green banking itself are emerging fields in banking. They provide the private sector with an opportunity to fund green projects. Through both government and private investment, green banks have cropped up in the United States and around the world. Green banks are often non-profit, non-governmental entities that divert investment toward climate-conscious infrastructure, alleviating pressure on public budgets. In the U.S., most green banking is at a small, local scale, directly impacting the surrounding community. Green banking stands as an opportunity for private investment in green initiatives and infrastructure. Banks can offer green loans and small-scale community banking while they provide a unique opportunity to reinvest locally with a streamlined green consciousness.
Local green investment may be the solution for an equitable green future in the United States. Not only do local institutions understand their communities better than national institutions, they have greater access to stakeholders and private investors in the area. A national solution may not be the answer. “Many clean-energy projects require local expertise” claims Reed Hunt from the German Marshall Fund of the United States. With disproportionately high outputs, local green banks have already outperformed what could be expected by financial analysts. Through the “deep experiences and roots” in local low-income communities, small, local green banks have a unique relationship that a nation-wide entity could not hope to achieve. A national green bank can assist in green efforts, but it cannot replace the local touch that small green banks can achieve.
State legislatures must often incentivize private entities to support their local communities. The Federal Deposit Insurance Corporation (FIDC) encourages banks to get involved with their communities and report loan services and investment projects that serve both low- and moderate-income (LMI) members of their community. Institutions can now serve their communities through green infrastructure investments. Green or not, the FDIC insures banks under the Community Reinvestment Act (CRA). The CRA requires banks to meet the credit needs of their local communities and serve LMI neighborhoods. Investment in local infrastructure benefits the community at all income levels.
Banks vie for better ratings under the CRA which grants them longer periods of time between review and the possibility of an “outstanding” rating. Decorah Bank & Trust, for example, is one of only five banks in the state of Iowa with an outstanding CRA rating. Decorah Bank & Trust and its division, Greenpenny, maintain separate accounts for funds and investments. According to Maureen Yahr, the bank’s former CRA Officer, Greenpenny has sixteen loans that total over $5 million dollars that would likely pass CRA review. Greenpenny’s loans and investments go exclusively towards green projects, so CRA eligible loans are guaranteed to be green. Green banks can conform to CRA requirements and benefit their LMI communities without sacrificing climate considerations. Local banks have the greatest ability to achieve this as they are confined to smaller communities under consideration in the CRA and are better equipped to know what a community needs.
Small green banks are a tested and trusted model of generating and applying capital towards green investment. If the EPA or another federal entity created a national green bank, it would funnel federal dollars into smaller institutions with a foothold in underserved and low-income communities. Banks can invest Greenhouse Gas Reduction Fund loan money directly in low-income communities or qualified entities that serve these communities. The IRA did not clearly define low-income or disadvantaged community, but by working with local and state green banks already serving LMI neighborhoods, federal money could benefit a variety of people. The IRA also fails to directly name green banks as recipients for grants, but institutions that would qualify align with green banking principles. A national green bank can leverage its size to get better deals with a larger source of capital, but it will always funnel that money into smaller entities with a local focus.
Not only do local green banks understand their communities and know how to serve them, many small green banks have been able to leverage public money and gain private investment at unprecedented rates. Connecticut Green Bank’s 8:1 ratio of private to public investment is emblematic of what can be done with green banking, even at a small scale. While Connecticut Green Bank is exemplary, the national average for green banks is about 3:1 private to public dollars. Specifically, in 2019, for every dollar invested in green banks, $3.60 was invested in the green economy. Though lower than Connecticut Green Banks’ rates, this is nothing to balk at when there are trillions of dollars in investment ahead. Organizations and legislators look to Connecticut Green Bank’s successful investment strategies as a proof of concept for future larger-scale national green banking. By furthering the efforts of local and state green banks, a national green bank could be successful.