Banks Should Finance Energy Efficiency Loans, Not Subprime Mortgages
Wall Street is on the hot seat these days and no wonder. Between record high bonuses and their staunch opposition to proposed consumer financial protections, Wall Street institutions appear blithely indifferent to the economic turmoil on Main Street.
Banks and other financial institutions could refurbish their tarnished reputations by using their smarts to innovate new financial products that actually help average Americans while addressing some of the nation's greatest challenges: unemployment, economic competitiveness, national security and climate change.
That may sound like a tall order, but the clean energy solutions to the climate challenge not only reduce pollution, they create jobs, promote American innovation and technology, and boost energy independence.
To get moving on those clean energy solutions today, we must first close the climate investment gap -- and that will require financial innovation. Technology is not our main stumbling block. We have proven carbon-reducing technologies, but bringing them to the scale required necessitates vast amounts of private capital.
Take energy efficiency, the veritable low hanging fruit and our best near term solution to the climate challenge.
A recent study by the McKinsey Institute found that leaving no stone unturned on the energy efficiency front could cut the United States' projected energy use by nearly one-quarter in 2020, and save $1.2 trillion while we're at it.
Even better, investing in that level of energy efficiency would create hundreds of thousands of jobs for workers needed to perform retrofits ranging from sealing the nation's leaky attics to replacing energy-guzzling industrial equipment in factories.
But here's the rub. Energy efficiency improvements involve upfront cash outlays, and even though the returns are guaranteed, it's tough to get that capital outlay.
Many states have energy efficiency programs that provide cash rebates to homeowners and businesses for energy efficiency improvements, but those programs get tapped out quickly each year. The jobs bill includes money for a nationwide energy efficiency rebate program, which could help, but is not a sustainable solution in this deficit-conscious era.
Pennsylvania has a different solution. It runs a unique market-based lending model called Keystone Home Energy Loan Program (HELP), which provides homeowners with low cost loans for Energy Star rated and high efficiency heating, air conditioning, insulation, and windows and doors. Unlike the vast majority of energy-efficiency programs, HELP is capitalized primarily by investments made by the State Treasurer, exercising his authority to seek prudent opportunities to invest funds.
Over four years the program has enabled more than 4,800 homeowners to cut their costs and energy use by providing $24 million in energy efficiency financing. Keystone Help is a superb program, but its ability to reach Pennsylvania's more than five million households is clearly constrained by a lack of financing mechanisms.
To increase its capacity, the Pennsylvania Treasurer's Office is seeking a financial institution to buy its $24 million in loans and repackage them as securities -- much like the home mortgage market.
But, as Treasurer Rob McCord said at last month's Investor Summit on Climate Risk at the U.N.,"You can sell low-credit subprime mortgage backed securities, but it's impossible to sell high-credit home equity loans where people have reduced their cost of living and should be able to finance the loan with their reduced utility bills."
Given the state's energy efficiency loan default rate of 0.49%, the guaranteed cash flow from energy savings is a far safer bet than future income [based on real estate], argues McCord, which is how many mortgage-based securities guarantee payments. Compare the negligible default rate for energy efficiency loans to the 12% default rate for home mortgages in 2009, yet banks are still repackaging mortgages with a double B rating and selling them as securities.
Energy efficiency financing is but one example of how short-sighted financing strategies are tying our hands in fighting climate change. Trillions of dollars in investment is needed over the next 20 years to deploy energy-saving, low-carbon technologies on the global scale needed. The vast majority of this money -- upwards of 90 percent -- must come from private investors with the deepest pockets.
Leveraging that kind of money is going to require lots of financial innovation and the best and brightest on Wall Street should be putting their minds to it.
Ultimately, however, to really scale up capital to address the climate challenge, government policies that limit and put a price on carbon emissions are what we need. But in the interim, there is no shortage of what banks could be doing to expand the carbon-reducing, job creating benefits of programs like Keystone HELP.