Green is the New Black for Lenders

Protesting bank-financed mountaintop removal

“It’s one thing if your potential borrower is dumping cyanide in a river.  But if they’re dumping carbon dioxide into the air, which is not exactly illegal — what do you do?”

For a lender, this is an obvious ethical dilemma.  I think most lenders would agree that they wouldn’t want to finance a business that is doing something illegal (i.e. dumping cyanide in a river).  But there are plenty of lenders who finance profitable businesses that are 100% legal, albeit in some sort of moral “gray area” (i.e. dumping carbon dioxide into the air).  According to this article published on Monday by the New York Times (NYSE: NYT) from where I got the above quote, banks are starting to move away from making loans in that gray area.

Land deforested for palm oil production

According to Tom Zeller, author of the Times article, Wells Fargo (NYSE: WFC), Credit Suisse (NYSE: CS), Morgan Stanley (NYSE: MS), JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C) have all recently reconsidered lending to companies in the business of mountaintop removal—a method of extracting coal from mountains.  Similarly, HSBC (NYSE: HBC) has reconsidered its lending relationships with producers of palm oil, which involves cutting down tracts of forests.  It’s not that these businesses are bad borrowers, but that in an age where banks are scrutinized more and more everyday, banks simply do not want the headache of dealing with questions of environmental hazard.

For years now, the commercial real estate industry has debated whether or not implementing green building technologies is economically feasible.  That debate over the cost vs. benefit of green building has resulted in an extremely slow implementation of such technology relative to the rate at which scientists and engineers are developing green building products and systems.  Even slower is the rate at which real estate lenders are gearing up to finance green building projects.

If this Times article is any indication of where lenders are headed, however, it won’t be long before commercial real estate lenders only originate new loans to buildings that are sufficiently green.  At that point, owners of assets that are not environmentally friendly may have to resort to more expensive debt alternatives.

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