By Katie Sullivan

Financial institutions are starting to see the “top line,” money-making reality of delivering sustainability to corporate and retail clients. There’s nothing like a new and successful product or service rollout to get a banker’s, insurer’s or asset manager’s blood pumping. Green products that gain traction in the marketplace will delight clients, add value, build careers and boost the bonus pool.

With a remarkable eco-Zeitgeist capturing the public and corporate imagination worldwide, financial institutions are rushing to market with new or re-packaged product and service offerings from green auto insurance to innovative pro-eco mortgages and new sustainability­backing investment funds. We’ve taken a tour around the world of financial services to assess what’s in the market, what the key trends are, who’s innovating and what products and services are persuading clients to lend, buy, invest or insure.

Consumers are witnessing a flood of new financial products and services geared towards rewarding or stimulating environmentally-sustainable behavior and practices. No longer relegated to niche markets, these green financial offerings are appearing across all regions and banking sectors. The speed at which new products are being launched, along with the range of different product designs and features, has made it challenging for financial sector stakeholders to keep abreast of developments, along with their drivers and trends.

This briefing summarizes the find­ings of a more comprehensive United Nations Environment Programme Finance Initiative (UNEP FI) study, exploring currently available or proposed green financial products and services. The study’s scope includes the North American market and key international markets, with a focus on green financial product and service development in Europe, Australia and Japan. The full review and inventory of products leads to the identification of best practices, lessons learned and, as often as possible, factors that helped create successful (or failed) green financial products and services. This inventory and analysis, classified largely by sector, aims to provide the global financial community with a toolkit that can help financial institutions identify and evaluate environmental market opportunities that meet their business needs.

Drivers & Trends of Green Product Development

The demand for environmental products and services, particularly green financial products and services, is on the rise in North America. Comparing this green evolution of North America’s attitudes to those abroad, it becomes apparent why North America’s financial institutions have been slower in offering green banking products and services. However, this comparison indicates the direction in which new product and service offerings are headed.

Three overarching drivers and trends are behind the emergence and growth of green product and service demand.

Environmental Knowledge & Media Coverage: The information age has enabled an unprecedented understanding of the severity, sources and implications of various environmental challenges. Higher levels of media coverage about these issues, along with multinational environmental campaigns and outreach initiatives, have helped improve the general public’s understanding of the issues.

Environmental Awareness & Public Opinion: A relatively high degree of environmental awareness and government support for environmental sustainability in Europe has driven ever-growing consumer demand for “eco-friendly” products and services. Recent opinion polls, corporate initiatives and shareholder actions suggest a similar environmental awakening is building momentum in North America.

Environmental Regulation & Legislation: Regulatory actions, particularly those which provide price certainty in environmental markets and those that prohibit unsustainable practices, can significantly stimulate demand for green products and services among bank clients. In Europe, proactive governmental policy, such as the European CO2 Emissions Trading Scheme, German feed-in-tariffs for renewable energy and Dutch Green Funds, has helped trigger both demand for, and development of, greener consumer options.

As environmental understanding and awareness grow in North America, along with the emergence of more stringent environmental regulation, so too will the demand for products and services aimed at fostering environmental sustainability. This demand will also expose new business opportunities, leading to a diverse array of products and services in many sectors.

Organizations that have the foresight and capacity to tap into this desire by consumers to affect positive environmental change may experience benefits ranging from improved corporate image to increased growth and competitiveness in the marketplace. Given their intermediary role in the economy and far-reaching customer base, financial institutions will be well-positioned to benefit from the design and marketing of new green products and services, while furthering their contribution toward sustainable development.

Review of Green Products & Services

Until a few years ago, most traditional banks did not practice green banking or actively seek investment opportunities in environmentally friendly sectors or businesses. Only recently have these strategies become more prevalent, not only among smaller alternative and cooperative banks, but also among diversified financial service providers, asset management firms and insurance companies. Although these companies may differ with regard to their stated motivations for increasing green products and services (e.g., to enhance long-term growth prospects, or sustainability principles on which a firm is based), the growth, variation and innovation behind such develop­ments indicate that we are in the midst of a promising drive toward integrating green financial products into mainstream banking.

Green Mortgages: In general, green mortgages, or energy-efficient mortgages (EEMs), provide retail customers with considerably lower interest rates than market rates for clients who purchase new energy efficient homes or invest in retrofits, energy-efficient appliances or green power. Banks can also choose to provide green mortgages by covering the cost of switching a house from conventional to green power, as well as include this consumer benefit when marketing the product. These retail products come in different designs, some of which have met more success than others.

Green Home Equity Loans: Reduced- rate home equity loans, sometimes referred to as “second mortgages,” can help motivate households to install residential renewable energy (power or thermal) technologies. In designing and offering these incentive-based products, a number of banks have also partnered with technology providers and environmental non-governmental organizations (NGOs).

Green Commercial Building Loans: Attractive loan designs and arrangements have started to emerge for green commercial buildings, characterized by lower energy consumption of approximately 15-to-25 percent, with reduced waste and less pollution than traditional buildings. Some appraisers are now recognizing reduced operating expenses, improved performance and longer lifetimes associated with these green functions and features. Lower project costs improve net operating income, a key factor when evaluating property using the income approach.

Green Car Loans: With below-market interest rates, many green car loans encourage the purchase of cars that demonstrate high fuel efficiency. The number of these products has increased in recent years, with the majority being offered in Australia and Europe. Most green car loans are being offered by credit unions as innovative vehicle lending has proven to be an ideal niche for smaller financial institutions.
Green Cards: A broad family of green products includes debit and credit cards linked to environmental activities. Most green credit cards offered by large credit card companies offer to make NGO donations equal to approximately one-half percent of every purchase, balance transfer or cash advance made by the card owner. Annual percentage rates for affinity cards normally range between 15-to-22 percent, and many also charge annual user fees. Over the past year, tying cards to a GHG offset program has become increasingly popular among European financial institutions. This supplementary service can be implemented at little cost to the financial lender with the potential for sizeable financial and reputational returns. In recent months, some banks have announced ambitious green credit card designs, including the Barclaycard Breathe (See 'Examples of Green Credit Card Designs' below).

Emerging Market Opportunities for Green Financial Products

Given that most green financial products and services have only recently emerged, it is challenging to gauge with any level of certainty their current or potential success. However, while green financial product and service opportunities will vary across sectors and markets, a high-level overview of key opportunity areas can be performed.

Carbon Market: Carbon commodity products and services are developing at an extraordinary pace, particularly among European and Japanese banks. In these regions, setting up emissions trading desks, offering cutting-edge derivative products based on carbon assets, and investing and buying credits are all positioned to become mainstream in one or two years. North American financial institutions that familiarize their stakeholders with the complexities of the carbon market will likely improve their reputations, while ensuring that future carbon market opportunities are accurately identified and pursued.

Green Buildings: North America’s green commercial building sector is growing at an unprecedented rate. By the end of 2006, more than 6 percent of the United States’ non-residential construction, equivalent to approximately US $15 billion, was considered green, whereas only six years ago this segment was less than 1 percent. In 2009, it is estimated that green building development will actually reach a tipping point, and nearly two-thirds of U.S. builders will opt for green over conventional designs.

Clean & Environmental Technology: Over the coming decades, tapping into clean energy and environmental technology opportunities will continue to require innovative financing packages, developed through a long-term lens. Along with the market valuation of the environmental sector, global investment in clean technology companies has expanded rapidly in the recent past. By 2010, New Energy Finance predicts that the growing environmental industry will see approximately US $100 billion in private equity deals around the world.

The Bottom Line For Banks

Retail Banking: Opportunities in the retail banking sector are the most diverse. The real innovation in the area of retail banking is not simply the introduction of new niche green products for retail clients, but the integration of environmental incentives into mainstream offerings. These should be aimed at encouraging private consumers and subject matter experts to pursue more sustainable choices and practices, without requiring them to dramatically alter their lifestyles or business approaches. Though experience with green mortgage products has made the process of valuing energy savings clearer and more verifiable, these financial products have, perhaps surprisingly, fallen short of industry expectations. According to some industry experts, this reality is at least partially due to the lack of consumer awareness about the financial products.

Corporate & Investment Banking: Though to a lesser extent than their European counterparts, 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 attention to environmental sustainability and national energy security, and the expansion of regional green power markets, supported through government initiatives (e.g., Renewable Portofolio Standards, Product Tax Credits).

Asset Management: In terms of future product development, forward- thinking asset management firms will likely focus on the management and growth of green funds. As shown in Europe, funds aimed at supporting green business models can become mainstream and result in financial gain. In some cases, government policy has played a critical factor in the success of certain green funds, such as the Dutch Green Fund experience. In other cases, state-led initiatives were unnecessary for these green products to emerge or achieve success, such as the UBS (Lux) Equity Fund — Eco Performance experience.

About the Author and the UNEP Finance Initiative

Katie Sullivan is a partner of the United Nations Environment Programme Finance Initiative (UNEP FI), a strategic public-private partnership between UNEP and the global financial sector. UNEP FI works with more than 160 financial institutions that are signatories to the UNEP FI Statements and a range of partner organizations to develop and promote connections between the environment, sustain-ability and financial performance. Through a comprehensive work program, regional activities, training and research, UNEP FI carries out its mission to identify, promote and realize the adoption of best environmental and sustainability practice at all levels of financial institution operations.

Examples of Green Credit Card Designs:

mecu’s goGreen^® Auto Loan
In 2003, Australian credit union mecu took the lead in creating an innovative product package for its goGreen^® auto loan, a decision that quickly paid off. For each loan, the bank considers a greenhouse gas (GHG) rating associated with the vehicle type, and provides a low interest rate accordingly. In addition, for the term of the customer’s loan, the bank also commits to offsetting 100 percent of the car’s CO2 emissions. Since the inception of its goGreen^® auto product, mecu has seen a 45 percent increase in car loans.

Barclaycard Breathe
Barclaycard’s new climate credit card is designed to provide discounts and low borrowing rates to users, but only when they purchase environmentally friendly products and services such as energy efficient appliances or public transportation passes. The bank will donate half of Barclaycard Breathe’s after-tax profits to fund carbon emission reduction projects worldwide. The product was launched in association with Barclays “We’re in this together” campaign to help British households reduce carbon emissions by one ton between 2007 and 2010.

Lesson Learning Opportunities
A forest bond has recently been designed to fund large-scale reforestation in Panama, which will improve water flow management and transport along the Panama Canal by trapping sediment and nutrients along its banks. The project will see re-insurers underwrite a 25-year bond, while frequent users of the waterway (such as Walmart) and investors will purchase the bond. It is expected that the long-term nature of the forest bond will effectively match the need for long-term assets by traditional investors.

Important Environmental Issue:

In interviews, most banks currently consider climate change as the most important environmental issue they face. In response, carbon commodity products and services are developing at an extraordinary pace, particularly among European and Japanese
banks. The innovation displayed by the front runners in carbon finance is based on their capacity to identify opportunities for carbon asset generation across all types of financing activities.

North American banks, the majority of which have not started activities related to carbon finance and emissions trading, are likely to follow suit, especially once GHG emissions regulations are implemented across Canada and the United States. Once  subjected to a carbon constrained regime, North American banks will be driven to provide products and services to help clients meet compliance, while also participating in market speculation