Green Banks Can Help Make a Business Case for Sustainability

One of the most overlooked aspects of the Inflation Reduction Act is the $27 billion allocation for a federal “green bank” equivalent via the Greenhouse Gas Reduction Fund. This first-of-its-kind federal program will provide competitive grants of public funds to mobilize financing and private capital for clean energy infrastructure and climate projects that reduce greenhouse gas emissions and lower the cost of clean energy.

This federal funding couldn’t come at a better time for climate and clean energy technology development. Instability in the global banking industry has impacted climate tech startup companies, their partners, investors, and customers.

Many of these startups that are building innovative climate and energy technologies, as well as developers and their corporate partners, will be looking to other financing sources if large and regional banks tighten lending rules as expected. This is where federal, state, and local green banks can fill some of that funding gap.

Funding’s Pivotal Role

Both green banks and tax incentives can fund corporate sustainability strategies. With nearly $370 billion in sector-agnostic clean energy funding already available, corporate executives would do well to ask their tax departments to evaluate the financial viability and business cases for using these funds in the company’s broader organizational sustainability strategies.

Green bank funding will play a pivotal role in supporting sustainable business goals. Once the US Green Bank establishes a proven track record of successful transactions, other lenders and private finance organizations—as well as sustainability-focused investors—can lend to green banks, and acquire or participate in green-bank originated loans.

This has the potential to amplify the return-on-investment for public funds by strengthening the green bank’s portfolio, which may lead to more and private capital investment. The green bank funding incentives not only will help companies achieve their broader ESG objectives, but they also will promote projects specifically around climate and clean infrastructure development.

Green banks have been around for years and exist in countries around the world. The US hasn’t had one at the federal level, despite more than 20 state and local green banks operating today. From 2011 to 2022, cumulative public–private investment effected by US green banks has surpassed $14.85 billion, including $4.2 billion of public capital and $10.66 billion of private capital, according to the American Green Bank Consortium annual report.

For every dollar of public funds invested, green banks have on average attracted more than 2 1/2 times that amount in private funds. That multiple is expected to be even greater as federal, state, and local green banks gather steam.

While green bank funds often take the form of low-interest rate loans, the public money usually has favorable terms. Repayment terms and loan lengths typically are written to encourage private investment rather than generate high rates of return. This can encourage companies to take out green bank loans and pursue sustainability projects that may otherwise have trouble attracting capital from private banks and other lenders who could view these projects as increased credit risks.

EPA’s Role as ‘Banker’

The Environmental Protection Agency will allocate the funds, making $20 billion available through competitive applications from community financing institutions such state and local green banks, community development financial institutions, credit unions, housing finance agencies, and others that meet certain criteria. Those institutions in turn will lend that money to companies—from sole proprietorships to startups to corporations—with an emphasis on reducing pollution and energy costs in low-income and disadvantaged communities.

The EPA will allocate the remaining $7 billion through competitive grants to states, Native American tribes, municipalities, and eligible nonprofit entities to deploy residential rooftop solar, community solar, and associated storage and upgrades. The EPA announced last month that it expects to release Notice of Funding Opportunities for these competitions in early summer 2023.

Let’s say an interregional, state, or local community wants to build offshore wind turbines to supply its clean power needs and lower consumer energy costs. To get the power generated from the turbines to shore will require an undersea pipeline that must be connected to the power grid and an onshore battery facility to store any excess energy generated. It’s exactly this kind of project—any part of it, really—that could tap into green bank funding.

Scaling up federal, state, and local green bank operations will require upskilling in many areas, not the least of which is raising awareness within companies that this type of financing is available. It’s important for companies to know that greenhouse gas reduction funding can be one of many potential funding sources and can be combined with tax and other incentives to help make the business case for sustainability strategies.

Syncing Up Tax With Sustainability

Many company executives may not realize the disconnect between tax and sustainability goals in both strategy and execution. Even the most well-informed CFO may not be aware of all available financing and tax benefits.

An upcoming EY Sustainability Tax Pulse survey of global tax and finance department leaders found that only 41% of senior tax leaders are “very confident” their tax function has maximized its use of sustainability tax credits and incentives throughout the supply chain. The same study showed 94% of senior finance and tax leaders reporting that a lack of consultation leads to decreased tax credit eligibility.

Coordinating with the tax department is key to staying abreast of tax credits and incentives that could help offset planned investment and growth costs. The knowledge that tax leaders have of federal green financing and tax incentives (not to mention other tax credits and programs), can offer tremendous value to company leaders.

Whether initiatives are current quarter or long term, a synthesized sustainability tax perspective can help companies see further and grow faster. Green banks and tax incentives are intended to improve return on investment for sustainability initiatives by leveraging available financing and funding opportunities. This requires giving tax a valuable seat at the table in ESG and sustainability efforts.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kristen Gray is EY Americas’ sustainability tax leader. The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or others member firm of the global EY organization.