Nearly all banks today make claims to be helping to save the planet in one way or another. One that has consistently done more than most when it comes to shifting the balance within the financial services industry is Bank of America, and it wins the award for North America’s best bank for sustainable finance.
The bank has its own commitments – to be net zero in terms of greenhouse gas emissions across financing, operations and supply chain by 2050, with interim targets for each by 2030. In 2021, it announced a target to deploy $1.5 trillion in sustainable finance by 2030. So far, it stands at about $600 billion.
BofA is one of the leaders in environmental, social and governance-related debt issuance, both in its own account and in helping bring other borrowers to market through bonds and loans. But while green bonds often get the attention, there are many other innovative deals being brought, such as those that use the transferable tax credit provisions of the US Inflation Reduction Act (IRA) of 2022.
Karen Fang is BofA’s global head of sustainable finance, having originally been recruited to its markets division by former chief operating officer Tom Montag in 2010. She has been in her current role since 2020, as part of chief executive Brian Moynihan’s drive to put in place an approach to sustainable finance that spanned the firm’s eight business lines.
Fang says that one of the reasons BofA has been so successful in sustainable finance is its top-down approach, starting with Moynihan, who is regularly praised by peers for his commitment to the topic.
“When large companies do this, it can be very complex,” she says. “We made it fairly straightforward. Brian established an enterprise-wide position to help streamline strategy and implementation of the firm’s work in sustainable finance in 2020; and I had the privilege to lead this work given my connectivity across the firm.”
Moynihan is heavily involved in broader climate initiatives in his role as co-chair of the Sustainable Markets Initiative alongside King Charles III, although this sort of profile does little to assuage the many critics of the banking industry when it comes to climate matters.
Speaking at a recent event in Wellesley, Massachusetts, Moynihan was ambushed by protesters from Climate Defiance, who called for him to stop financing fossil fuels. That the bank is one of the biggest financiers of traditional energy industries is beyond question; that it is also working obsessively to find ways to move to a greener economy without simply turning off the lights is equally certain, but gets less attention.
For Fang, one of many highlights of the year’s activity was the bank’s advisory work for IRG Acquisition Holdings, a vehicle jointly owned by Invenergy, Blackstone and Canadian pension fund CDPQ, which was buying a 1,365-megawatt unregulated renewables portfolio with an enterprise value of $1.5 billion from American Electric Power.
“We don’t want to be just underwriting and distributing,” says Fang. “These have cyclicality, but we want to make sure we have real skin in the game, especially through project finance.”
The IRG deal, which was mostly wind and some solar, comprised 14 separate projects in 11 US states. What made it innovative was the structure of the financing, which took advantage of provisions in the IRA that expanded the investment tax credit and production tax credit (PTC) regimes for the renewable energy industry.
At the end of 2023, BofA had a tax equity portfolio totalling $14 billion, backing some 45.6 gigawatts of installed wind and solar capacity in the US
Importantly, the IRA allows taxpayers to monetize their tax credits by transferring them to third parties for cash, and it was this feature that the IRG deal used, by transferring some $580 million of PTCs to BofA. In doing so, it became the first big transferability transaction since the IRA was introduced. BofA was transferability underwriter, placement agent and financial adviser.
This was revolutionary. Before the IRA, the only way to monetize tax credits was through tax equity, a complicated structure whereby outside investors – typically big insurers or banks – would contribute to the costs of a project in exchange for tax credits and a share of the project returns.
The IRA’s additional provision of transferability of tax credits simplified this enormously. The transfer can be done only once and must be for cash, but it is generally bought at a discount and opens up a project financing method that was previously only viable for the very largest situations.
It also makes it much easier to use when a project is already operating, unlike tax equity, which is typically put in place when a project is first conceived.
“We recognized that the IRG deal could be a model for how transactions like this could be done, and it offers a new tool for developers to get their projects financed,” says Fang. “Our client was able to borrow cost-effective debt against our tax credit purchase commitment, bringing much needed upfront capital to the project.”
The transaction was indeed a template. Billions of dollars have been transferred through other deals since then, helping to drive record US renewable energy financing in 2023. BofA is working on new deals in the areas of battery storage and carbon capture.
Tax equity deals are still happening too. In December 2023, BofA financed an $85 million transaction, the bank’s fifth, to help fund Lightsource’s 188MW Honeysuckle Solar project in Indiana, as well as being one of the banks raising the debt finance. Earlier in the year, it had closed a $75 million tax equity deal with DSD Renewables to fund various projects.
At the end of 2023, BofA had a tax equity portfolio totalling $14 billion, backing some 45.6 gigawatts of installed wind and solar capacity in the US.
