Green Financial Products
It seems everywhere you turn, you can see the world trying to “go green.” Smart cars have been introduced to reduce emissions and many supermarkets offer customers reusable bags for their groceries. Also manufacturers are pushing “energy efficient” versions of common household items. Even schools are educating students about the importance of preserving the environment around them through acts such as recycling.
Financial institutions around the globe are beginning to catch the green wave as well, by offering green products and services in an attempt to appeal to more environmentally-friendly consumers such as green car loans, energy efficiency mortgages, alternative energy venture capital, eco-savings deposits, and “green” credit cards. In an age where environmental risks and opportunities abound, so too have the options for reconciling environmental matters with lending and financing arrangements.
What is a “Green” Product or Service?
In order to qualify as a green product or service, the item must offer the customer a transparent option to reduce the indirect impacts of their banking activities, reduce negative environmental impacts or provide environmental benefits.
Retail banking covers personal and business banking products and services designed for individuals, households and SMEs, rather than large corporate or institutional clients and services in the retail space include loans and mortgages, debit and credit card services, and insurance, among others. We will see two of the most popular green products in retail banking sector.
One of the most popular forms of a green banking product is a green home mortgage. Green home mortgages, or Energy-Efficient Mortgages (EEMs) as they are commonly known, offer a remarkably lower interest rate for customers who purchase new energy efficient houses or invest in green power. In order for a financial institution to make this option more attractive to customers, it should promote green mortgages by covering the cost of switching a house from conventional to green power.
Green Credit Cards
Green credit cards are another new initiative. The incentives of having a green credit card are hard to measure, even infinite. Many banks in Europe offer emissions offset programs, provide discounts and grant low borrowing rates to customers who purchase green products and services. Some banks offer to donate card-member rewards to organizations that are dedicated to improving the environment or allowing cardholders to redeem these rewards for “green” products.
Opportunities in Retail Banking
Opportunities in the retail banking sector are the most diverse. A variety of “green” retail financial products and services have been introduced, mostly appearing in Europe, meeting the needs of more environmentally-oriented customers. However, the real innovation in the area of retail banking is not simply the introduction of new “green” products for retail clients, but the integration of environmental incentives into mainstream offerings. These should be aimed at encouraging private consumers and SMEs to pursue more sustainable choices and practices, without requiring them to dramatically alter their lifestyles or business approaches. This challenge can arguably be met through innovative designs, strategic marketing or outreach initiatives, and building on lessons learned by others.
Corporate and investment banking sees banks provide banking solutions to large corporations, institutions, governments and other public entities with complex financial needs, international in scope. Financial institutions providing corporate and investment banking can underwrite liability issues, both on their own behalf and for corporate and public sector clients. Also they can manage funds and offer advice to corporate mergers and acquisitions as an equity supplier. These banks act as financial intermediaries, raising capital (equity and debt) by trading foreign exchange, commodities and equity securities. This space regularly involves sophisticated money management instruments such as derivative products and trade in foreign exchange. One of the typical examples is project finance.
Comprised of a mix of equity and debt, project finance refers to loans offered in wholesale banking to fund large infrastructure projects. These targeted projects are typically found in sectors such as telecommunications, petrochemicals and natural resources. Specialized service divisions are dedicated to long-term financing of clean energy projects. Some banks also specialize in one (or several) renewable technology where regulatory framework and government policy encourages the early adoption of clean technologies. These targeted projects obtain loans that are repaid to the bank, or a banking syndicate, through the project revenue generated.
Opportunities in Corporate and Investment Banking
Europe established the innovative project finance infrastructure and be a leader of green project financing. Though to a lesser extent than what is occurring in Europe, North American banks are becoming increasingly involved in securing and contributing to “green” project financing arrangements. The emergence of innovative project finance instruments for large renewable energy projects is being driven by increased public attention to environmental sustainability and national energy security, and the expansion of regional “green” power markets. Valuable designs and lesson learning opportunities are also emerging outside the traditional private banking space with respect to financing priority. In particular, EcoSecuritization techniques are now being employed to gauge the feasibility of financing this ‘natural infrastructure,’ which may enable the introduction of a new debt instrument that uses the entire spectrum of natural assets as security.
Asset management has become one of the fastest growing sectors in the financial industry and represents a core business unit of current banks. This space focuses on supporting financial advices to clients on estate planning, mutual funds, taxes, international financial planning and full-service and discount brokerages. Asset managers are likely to specialize in the area of advisory or discretionary management on behalf of investors. These services normally require rigorous financial analyses, combined with asset and stock selection, plan implementation, and regular monitoring and reporting of investment activity.
Opportunities in Asset Management
The scope of risk management is expanding, whereby the extent to which these institutions are concerned with managing operational and compliance risk. Challenges and opportunities exist for those who incorporate the entire spectrum of risk related issues into their business practices. Risk aside, the most forward-looking firms are also likely to provide broad consideration to environmental issues when financing companies through the capital market in the sectors of clean technology and carbon credit development services.
The insurance sector can generally be divided into two categories: Life insurance and Non-Life Insurance. “Green” insurance falls under the latter and typically encompasses two product area. One is those which allow an insurance premium differentiation on the basis of environmentally relevant characteristics. The other is insurance products specifically tailored for clean technologies and emissions reducing activities.
Opportunities in Insurance
Similar to investment funds, insurance is a space where “green” versions are likely to grow significantly, over the coming years. Currently available products include some of the following features: insurance premiums linked to vehicle usage; coverage for LEED-certified buildings; carbon neutral home/auto insurance; coverage for price volatility and Kyoto project risks; and ad-hoc insurance products for renewable/clean energy projects. Other insurance product ideas, not explored above, may soon be available to cover climate-related losses to companies.
Many “green” financial products and services, reviewed above, either remain in the nascent stage of development/implementation or data related to their success/failure has not yet been generated or reported. Easing customers into the world of green financial products and services requires a financial institution to become more aware of any obstacles, such as insufficient product information, that could stand in their way of appealing to customers. As environmental understanding and awareness grows in Rep. of Korea, so too will the demand for products and services aimed at facilitating the advancement of environmentally sustainable lives, livelihoods and communities. At the same time, this demand will also expose new business opportunities, while leading to an increased diversification of products and services found in multiple sectors. Consequently, organizations that have the foresight and capacity to tap into this desire by consumers to affect positive environmental change will likely experience widespread benefits; from improved corporate image to increased growth and competitiveness in the marketplace.