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Greenwasher: US climate bill gives banks a green win

A US climate bill filled with green credits will create business for banks and provide relief from the backlash against ESG products.

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The Inflation Reduction Act of 2022 is named in the Washington tradition of giving legislation a title that reflect the goals of its sponsors – in this case a desire for Democrats to be seen to tackle inflation.

The biggest portion of the bill is actually devoted to tackling climate change, in the form of $369 billion of spending, mostly in the form of tax credits for green initiatives.

Climate change activists can debate whether US politicians should have chosen incentives rather than sanctions to promote reform, but there is no question that the bill will generate business for banks.

Existing green banks set up by states in the US have generated $3.70 of private investment for each $1 of public money invested

Some of this will be indirect, as in the expected effect of $27 billion set aside for the first national green bank in the US, to be called the Greenhouse Gas Reduction Fund. Existing green banks set up by states in the US have generated $3.70 of private investment for each $1 of public money invested, according to a study last year, and a federal initiative may have a bigger multiplier effect.

There are also provisions that will promote greater investment in green technology and a related need for finance. A production tax credit for renewable energy will be extended for 10 years, for example.

Opportunity

Henrik Andersen, chief executive of Danish wind turbine manufacturer Vestas, was quick to highlight this certainty on US tax treatment as an opportunity after the company’s second quarter results on August 10, and the firm’s shares rose by 9% on the day.

Vestas is the leading manufacturer of onshore wind turbines. Contracts for European firms in the US could also help European banks to win new financing business in a market where many have been in retreat.

Green manufacturers based in Europe, such as Vestas and Siemens Gamesa, are also frequent issuers of sustainability-linked debt and European banks will hope that this business remains relatively sticky, even if expansion in the US proves to be one of the biggest opportunities in the coming years.

Vestas signed a €2 billion sustainability-linked revolving credit facility last year that included Citi and JPMorgan but was otherwise dominated by European banks, led by HSBC and SEB, for example.

The biggest banks in the US will nevertheless be confident that they will be among the main beneficiaries of the expected increase in domestic spending designed to tackle climate change.

Firms including Exxon Mobil and Occidental Petroleum that are also significant clients for Wall Street banks have been celebrating a bill that could have been designed to dovetail with their business strategies.

Boost

Tax credits for carbon capture and use of hydrogen or biofuels will give a boost to the biggest oil and gas firms that have committed to green transition spending, while putting smaller energy companies without renewable investments at a disadvantage.

The oil and gas ‘supermajors’ – as they are known in a grouping that also includes European firms BP, Eni, Shell and Total – are throwing off so much cash at the moment that they may have limited short-term financing needs.

But their long-term project financing and any acquisitions of smaller firms will involve use of the leading Wall Street banks.

Tax credits for carbon capture and use of hydrogen or biofuels will give a boost to the biggest oil and gas firms that have committed to green transition spending

The biggest energy firms are also users of derivatives to both hedge exposure and turn a trading profit.

The commodity trading boom that was given a boost by Russia’s invasion of Ukraine seems set to continue, with volatility in key markets such as oil and gas still at elevated levels. Banks that are counterparties to these trades should also continue to benefit.

Wall Street banks can expect further public pressure from officials in energy-producing states such as Texas and West Virginia over their endorsement of ESG principles, but the US climate change bill will deliver new business that should soften any pain.