Dems’ spending bill taps small banks for climate justice

By Avery Ellfeldt | 12/06/2021 06:49 AM EST

Solar installation.

Workers install solar panels on a house in Williamstown, N.J. The $1.7 trillion social spending package moving through Congress includes incentives to expand solar power to lower-income communities. AP Photo/Mel Evans

President Biden has promised to steer money toward front-line communities as the United States makes historic investments in climate resilience and mitigation.

But the process of actually getting the money to these families and small businesses presents its own challenges. A $29 billion provision tucked inside the massive reconciliation bill passed by the House in November aims to help Biden meet that goal.

It would do so by establishing a "Greenhouse Gas Reduction Fund" that for the first time would infuse green investments into a vast network of local financiers — some of which have decadeslong connections with the very communities that are already, and disproportionately, feeling the effects of rising temperatures.

Among them are Community Development Financial Institutions, or CDFIs. The roughly 1,200 banks, credit unions, loan funds and more are designated by the Treasury Department as such because they share one key purpose: boosting access to capital in low-income communities and communities of color, where traditional lenders often avoid doing business.

Historically, most of those organizations have focused on issues such as affordable housing, small business development and poverty — rather than energy efficiency or climate change.

But as temperatures rise, that balance is shifting. And sources say there’s a newfound recognition in Washington and beyond that community-focused lenders present an enormous opportunity to deploy green investments where they’re needed most.

So much so that a key measure in Biden’s "Build Back Better Act" was tweaked to help them do it.

What’s still up for debate, however, is how the money should get to those institutions — and who should be tapped to make it happen.

“The bottom line is we have two important goals. Obviously, we want to deploy clean energy technology as quickly and efficiently as possible. And we also want to make sure that … communities that have been overlooked in the past are not overlooked” again, said Sen. Chris Van Hollen (D-Md.), one lawmaker pushing the measure.

As such, he added, “CDFIs have an essential role to play in the Build Back Better agenda, right? I mean, [especially in] making sure that communities that have often been overlooked when it comes to important investments have that capital available to them.”

‘We’re seeing it increase every day’

So what are Community Development Financial Institutions? And what do they have to do with global warming?

Many of the banks, credit unions, loan funds and more have existed for decades — dating back to President Johnson and his administration’s “War on Poverty” in the 1960s, or even earlier.

But the Treasury Department officially created the legal label in 1994 when it established the CDFI Fund, a government agency that provides money to organizations whose primary goal is to make available capital to communities that have historically been shut out of financial markets.

To earn the designation, at least 60 percent of an organization’s financing activities must serve low- to moderate-income communities or communities of color.

During the last few decades, that’s meant working with different funding sources to boost the well-being of communities in all 50 states, the District of Columbia, Puerto Rico and Guam — a feat that’s entailed tackling issues under the traditional "community development" umbrella.

Think: housing, business development, public health and education, said Eric Hangen, a community development expert and senior research fellow at the University of New Hampshire’s Carsey School of Public Policy.

But the sector’s focus is expanding — and fast.

“Increasingly, what folks in the community development world are realizing is how much environmental sustainability and climate resilience impacts those kinds of outcomes,” Hangen said. “Whether you’re talking about the energy burdens that people are paying to heat their homes or to drive to work, or the impacts that climate disasters are increasingly having on people’s livelihoods and on their housing.”

Neda Arabshahi, who directs the Center for Resiliency and Clean Energy at Inclusiv, a CDFI intermediary, echoed that point. But she added there’s also a growing awareness among community-based lenders that green loans perform “exceptionally well.”

As a result, while some of the organizations have been involved in solar lending and other clean energy projects for years, there’s a rising tide of new ones funneling more attention and resources into the issue.

“We’re seeing it increase every day,” Arabshahi said.

While that may be the case, some CDFIs still face barriers to expanding their green portfolios. Those obstacles include hiring and training staff to develop and run new loan products, and forming partnerships with the installers or service providers of heating, ventilating and air conditioning systems; solar panels; and more.

Most, if not all, CDFIs already have robust vetting and risk assessment processes in place when it comes to examining, for example, mortgages or auto loans. But Arabshahi said many still are working to build the same sort of capacity and expertise when it comes to clean energy.

Additional federal funding focused specifically on global warming could help chip away at those obstacles.

“If there’s a dedicated resource to help spur climate change [investments], CDFIs are poised [to help] because we know how to make money move, we know how to make it move at scale, and we know how to make system change where it wouldn’t naturally go on its own,” said Sara Morgan, the executive vice president at Fahe, a CDFI that’s been serving communities across Appalachia since 1980.

“We’re positioned to do something that hasn’t been done yet, because that’s the work we do every day,” she added.

The most ‘powerful tool ever’

That’s where the Greenhouse Gas Reduction Fund would come in.

The idea of establishing a federal fund that would accelerate nationwide clean energy financing dates back years. It just went by a different name.

Climate hawks more than a decade ago started calling on Congress to establish a centralized, nonprofit institution that could leverage public funding to unlock hundreds of billions of dollars in green investments. It would do so, the idea went, by funneling money into the growing national network of state and local green banks.

Green banks are different than CDFIs in several ways. Most are much newer institutions, their primary focus is climate change rather than community development, and they don’t take deposits from customers. Also important: While a handful were founded with the goal of investing in low-income communities, many were not.

The vision for a national green bank has shifted over the years. As recently as last February, for instance, Van Hollen and Sen. Ed Markey (D-Mass.) proposed legislation that would set aside as much as $100 billion to create a “Clean Energy and Sustainability Accelerator.”

The most recent version of the legislation has changed even more.

For starters, it carries a different name. But it also would allocate $29 billion to EPA to create what would be referred to as the Greenhouse Gas Reduction Fund.

Within that lump sum, there would be a few different buckets. The largest among them is $20 billion for grants to “eligible recipients,” or nonprofit institutions, which would presumably include but wouldn’t be limited to a national green bank.

At least $8 billion of those funds would be dedicated to “low income and disadvantaged communities.”

“That’s a floor,” Van Hollen said. “Not a cap.”

The direct grant recipients then would be charged with deploying the dollars to a vast network of financial actors around the country. Per the legislation, that would include green banks, CDFIs, and other “community- and low-income focused lenders,” such as minority depository institutions.

MDIs are lenders that are primarily owned and operated by people of color and predominantly serve communities of color. Today, the 140-plus MDIs across the country make up only 3 percent of the banking sector.

But Nicole Elam, the CEO of the National Bankers Association, an MDI trade group, said in an interview that despite their size, the organizations are “one of the biggest and most significant providers of mortgages and small business loans in black and brown communities. That’s what sets them apart, is they’re located in these communities, they’re often making loans when other traditionally mainstream institutions aren’t.”

The focus of the legislation on this segment of the financial sector marks a departure from past versions of the bill. While getting capital to those institutions was part of the national climate bank’s “overall mandate” from the start, the legislation was tweaked to make it more explicit, according to Van Hollen and a Markey aide.

“I think it is fair to say that as we went through the process from the original bill to envisioning its implementation, we thought it was important to provide even clearer guidance as to the kind of things that could be envisioned,” Van Hollen said. “And so as we went along, I think we determined that CDFIs could be a very important vehicle for deploying these funds to these neighborhoods.”

Sources say that newfound focus has the potential to help bridge the gap between Biden’s clean energy goals and climate justice commitments.

“The convergence of green banks and CDFIs … represents a very, very, very powerful way of actually implementing and achieving what the president has laid out,” said Jeffrey Schub, the executive director of the Coalition for Green Capital, the main group that’s backed National Climate Bank legislation over the years.

“Nothing like this has ever been proposed before, not just in terms of scale, but intention and the model,” Schub added. “And so if you’re interested in achieving environmental, energy and climate justice, this is perhaps the most powerful tool ever proposed in legislation to sort of work toward those goals.”

‘You’re going to fail’

Though the Greenhouse Gas Reduction Fund’s potential for impact is clear, there’s less consensus over the details that would dictate its final form.

“There’s a lot of questions that obviously aren’t answered yet from EPA about how are they going to manage this fund, and what they are going to look for in the applications,” said Hangen, of the University of New Hampshire.

Among them: Whether EPA would issue multiple grants to multiple groups — potentially including CDFI network organizations — or just one large grant to stand up a national climate bank, as envisioned by the original legislation.

That point in particular has been a sticking point for the community-focused lending community, which has raised concerns with the prospect of creating a brand-new, Washington-based entity to deploy the dollars.

Proponents of that idea say a single, national nonprofit green bank would provide the best outcome for all participants because it would ensure maximum speed and efficiency.

“Our view is very strongly that the best outcome for all participants — green banks, CDFIs, low-income communities — is that all of this money should be funded to a single national nonprofit green bank,” said Schub, of the Coalition for Green Capital.

“By creating that centralized scale, you are then able to leverage the private capital, centralize those operations and capacity … and then therefore deploy the most money and have the greatest emissions reductions across the entire network,” Schub added. He did not respond to emailed questions about whether his organization plans to apply for funds under the program.

Van Hollen said the same. “EPA is empowered to set up the structure here. And there could be multiple entities that receive the funding. But I do think it’s useful to have at least one entity that keeps its eye on the national picture so it’s not simply thousands of subgrants by EPA,” he said.

Not everyone agrees. Inclusiv, for instance, thinks it would be best for EPA to issue grants to multiple nonprofit organizations — including, potentially, CDFI intermediaries like itself — that could utilize existing, community-rooted financial networks to deploy the capital.

“We are very supportive of competitive processes that allow for multiple approaches to driving climate finance," Arabshahi wrote in an email. "This ensures we have diversity in approach, voice and leadership but it also helps to build a robust learning environment which helps us all continue to grow our approaches.”

Arabshahi noted that Inclusiv is “considering options” to apply for an EPA grant both directly and together with other organizations.

She said using existing channels would mean that public funds would get invested into local communities “over and over again, instead of a national financing solution where a huge solar financier comes in and funds something, and all of that money goes back to its corporate headquarters.”

Others, including Elam of the National Bankers Association, took issue with the bill as written — as it would render depository institutions, such as community-focused banks and credit unions, ineligible for direct funding.

“Because climate justice issues disproportionately impact black and brown communities, the very communities that minority depository institutions serve, it only makes practical good sense that community banks … would be central to deploying the clean energy and climate investments in these communities,” she said.

“The only thing that we’re saying is don’t limit eligibility in such a way that you’re excluding players,” she added. “And don’t make it to where you have large players that are really dictating what happens to everybody else.”

Hangen, for his part, underscored the long history of exclusion in the environmental movement — and how important it is for low-income communities and communities of color to have a “voice in designing solutions that will work for them.”

“There’s never been funding like that before,” Hangen said. “And to make it work, the environmental sector and the community development sector are going to have to learn from each other to get it done.”

But ultimately, he added, “you can’t sit in an office in Washington and design that stuff. You’re going to fail.”