A slightly different version of a green bank has just been added to what is a growing list - by the US state of New Jersey with their launch last week of an “Energy Resilience Bank”. Although not branded as green (the New Jersey government is of the climate-denying Republican variety, after all!), this is essentially a climate change adaptation bank, established in response 2012's Hurricane Sandy.
The Energy Resilience Bank will provide loans and grants for projects contributing to energy resilience - in sectors targeted as being of critical importance to keep operative during extreme weather events. This includes public facilities, non-profits and small businesses in the sectors of wastewater and water treatment, healthcare, transport and education. Privately-owned utilities are not (yet) covered. Energy resilience technologies eligible for funding include distributed generation and energy storage, which allows entities to operate as “islands" even if the central grid is down due to storm damage - now that is a cool idea and a big hint of how we are going to have to manage our power grids in what is going to be a world of much more extreme weather events. Funding will go to both new resilient systems and resilient retrofits.
So, where is the opportunity for green bonds here? There are a few.
First, while most green bonds so far have been issued to fund climate change mitigation projects, this first energy resilience bank reminds us that adaptation is also a key part of the climate change investment challenge - and therefore also provides a vast opportunity for green bond issuance. UNEP estimates that we need US$1.4trn annually in climate adaptation investment - yes, that's investment, not cost. That’s a lot of potential green bonds! Have a look at our climate bond taxonomy for more details of qualifying investment categories for adaptation.
Second, green bonds provides a way for the Energy Resilience Bank to scale up its loan programs and raise capital beyond the US$200m of initial public funding. There are two options here: the bank can issue green bonds backed by the entity, or it can issue green asset-backed securities by packaging together its energy resilience loan portfolio once a sufficient size of lending has been achieved.
On the bank launch webinar we listened into, we were excited to hear securitisation mentioned as a potential avenue for funding for the bank once a portfolio sizeable enough for bond markets is reached. Using 'green' securitisation to tap into the capital pool of some US$80 trillion that institutional investors have under management provides a welcome recapitalisation option in a time of constrained public balance sheets. The exciting potential of green securitisation has been recognised by other green banks – for example, the Green Bank of Connecticut securitised part of their loan portfolio of low-carbon and energy efficiency loans earlier this year.
Providing assurance to investors of the green credibility of such energy resilience asset-backed securities is important, and becomes more challenging as green bond issuance moves to less established investment areas like climate change adaptation. Non-commercial loan programs like the one of the Energy Resilience Bank, however, provides a great structure to provide additional assurance through a self-funded certification program. Loan eligibility could be conditional on climate certification, but as the loan terms offered by the Energy Resilience Bank are very attractive compared to commercial loans (2% interest for entities with bond rating of BBB-, 3% for those at BBB- or unrated, no collateral required) the cost of obtaining the required certification would be more than recovered.
We look forward to seeing how New Jersey’s program expands and hope that they will take advantage of the green bond opportunities of their business model. There are green bond opportunities a-plenty, and in a US state where climate change scepticism prevails in government! That is exciting stuff.