MEETINGCONSUMER DEMAND FOR A BETTERWORLD€¦ · Elliott, Aaron Fine, Ugur Koyluoglu, Anders Nemeth and Michael Zeltkevic. ... help consumers achieve their articulated desires, and

Financial Services

MEETING CONSUMER DEMAND FOR A BETTER WORLD FINANCIAL INNOVATION FOR A TRIPLE WIN FOR CONSUMERS, BANKS AND THE PLANET

AUTHORS

Ege Gurdeniz, Engagement Manager

Mark Ames, Partner

ACKNOWLEDGEMENTS

The ideas in this report reflect the collaborative effort of many contributors across Oliver Wyman. The primary authors were Ege Gurdeniz and Mark Ames, supported by Sarah Alexander, Banna Girmay, Daniel Hermansson and Timothy Taylor. In addition, the authors received invaluable input from many partners across the firm, but in particular wish to acknowledge the help of Douglas Elliott, Aaron Fine, Ugur Koyluoglu, Anders Nemeth and Michael Zeltkevic.

Copyright © 2016 Oliver Wyman 1

TABLE OF CONTENTS

INTRODUCTION 2

IMPACT CROWDFUNDING 7

POINT IMPACT: A NEW WAY TO USE CREDIT CARD POINTS 15

GREEN MORTGAGES 17

CHANGE FOR CHANGE: POOL YOUR CHANGE FOR IMPACT 23

SOLAR-PLUG 25

CONCLUSION 32

INTRODUCTION

Banks play a vital role in the evolution of societies and economies. By facilitating commerce,

creating liquid markets, brokering transactions and acting as intermediaries, banks

influence the flow of capital and significantly impact society’s purchases and investments. As

a result, from the emergence of Florentine moneylenders in the 1400s to the development

of the modern mortgage in the 1930s and the invention of mobile payments in the 2000s,

banks have helped shape societies and economies through the financial resources and tools

they provide.

Because of their crucial role, banks could find themselves at the center of one of the greatest

challenges today: the transition toward a world where financial gains and personal utility are

reconciled with social and environmental impact.

GLOBAL ISSUES AND THE NEED FOR CHANGE

The world is facing many pressing issues including climate change, global poverty, pollution,

water scarcity, energy crises, gender and racial inequality – the list is long. On the other

hand, the resources dedicated to address these issues appear slight and often fleeting in

comparison. Putting a cost on solutions to such issues is a difficult task, but we note that

achieving the United Nations’ 2030 Sustainable Development Goals, which would address

many issues on the long list, is estimated at a daunting cost of some $4.5 trillion per year.2

It is becoming increasingly clear that aid and public capital provided by governments, non-

governmental organizations, development banks and non-profits alone will not be sufficient

to meet this massive funding requirement. While certain members of government might be

so inclined, political constraints put real limits on the amount of capital that can be directed

to such efforts. A central assertion of this paper is that a new flow of mainstream private

capital can be enabled by innovative financial tools that empower consumers to redirect

their capital towards investments and purchases that not only generate personal utility and

financial gain, but also positive social and environmental impact – effectively shifting some

of the burden off of government and philanthropic institutions.

“Behind each great historical phenomenon there lies a financial secret.”

– NIALL FERGUSON THE ASCENT OF MONEY: A FINANCIAL HISTORY OF THE WORLD1


THE RISE OF THE CONSCIENTIOUS CONSUMER

Billions of people now have near real-time awareness of global events through the Internet

as events resonate and amplify through Facebook, Twitter, YouTube and other social media

platforms. This unprecedented exposure presents to people the causes and implications of

these global challenges, inspiring many to recognize their own role in solutions and spurring

meaningful change in individual behavior.

Indeed, recent studies and surveys suggest that consumers have an increasing desire to

take social and environmental factors into account when deciding where to shop, what to

buy, and which investments to make. However, consumer decisions are driven by many

layers of complex factors, so people might often say one thing but do another, and the

absence of financial tools designed to support conscientious decisions does not help to

close any gap between intention and action. Conversely, the availability of such tools could

help consumers achieve their articulated desires, and even actively encourage them to

incorporate social and environmental values in their purchasing and investment decisions.

NEED FOR THE RIGHT TOOLS

The development of the 30-year, fixed-rate mortgage in the late 1930s is considered by

many the key factor transforming America “from a nation of urban renters to suburban

homeowners”3. By providing an affordable financing product tailored to the needs of the

consumer, banks and the invention of the modern mortgage led to a steep increase in

homeownership. This and other historical examples demonstrate the importance of banks

and the investment tools they provide in driving systematic change in consumer behavior.

Let us assume then that, if presented with the appropriate tools, consumers would act to

align their financial decisions with social and environmental values. What kind of financial

tools or products would be needed in this case? A small investor might wish to fund a very

specific enterprise that would have a particularly favorable social impact. This would require

a financial tool that allows retail investors to make small investments in private enterprises

with specific social/environmental goals. A family might want to buy an energy efficient

home, say with solar panels and geothermal, in order to reduce their dependency on

coal-generated electricity. This would require a mortgage product that makes these costly

“green” upgrades financially more attractive to the family. There are many other instances

where consumers might consider incorporating social and environmental values when

making a financial decision. The availability of appropriate financial products – or lack

thereof – might be a key factor determining what kind of decision is made.


AN OPPORTUNITY FOR FINANCIAL SERVICES

The Financial Services (FS) industry has the opportunity and ability to catalyze this desired

change in consumer behavior while simultaneously building economic value for its

stakeholders – both in the short and long term. By offering retail banking and investment

products tailored to support purchases and investments that have positive social and

environmental impact, FS companies could cater to the demands of conscientious

consumers and create new platforms for direct revenue generation.

In regards to short term economics, it is a mistake to think that such products would require

an altruistic allowance for smaller profit margins. Indeed, we see quite the opposite as

improved consumer segmentation and targeted products typically result in a competitive

advantage. Furthermore, appealing to consumers’ social and environmental values could

meaningfully differentiate and strengthen a company’s brand, which can create economic

value through increased customer acquisition, trust and loyalty – this will be especially

important as competition increases from Silicon Valley financial technology companies.

Improved brand perception can help FS companies particularly when engaging customer

segments such as the millennial generation, many of whom have articulated a desire to

make the world a better place through their financial choices.

However, we must be careful to complement optimism with a healthy amount of caution

in these matters as there will be significant challenges along the way, as with any effort

involving innovation and new markets. These challenges and pitfalls are discussed

throughout this report and are not to be underestimated; though, neither should the

potential rewards on the other side.

FOOD FOR THOUGHT

In this report, we present five ideas for products that financial institutions could offer to

cater to this growing demographic of conscientious consumers. Three of these would

necessitate significant market transformation within their relevant industries, requiring

meaningful and continuous collaboration among the financial services industry, the private

sector (e.g., technology, manufacturing, utilities) and the public sector. If successfully

implemented, these ideas have the promise to create new investment and lending products

tailored towards social and environmental impact.


MARKET TRANSFORMATION IDEAS

IMPACTCROWDFUNDING

GREENMORTGAGES

SOLAR-PLUG

Establish specializedcrowdfunding platforms that allow mainstream investors to invest in enterprises with social/ environmental impact goals.

Consider the home’s green features when pricing a mortgage, and securitize“green mortgages” to create a new form of green bond.

Develop a specialized lending product for electric vehicle and solar energy bundles, and securitize these loans to create a new form of green bond.

The other two ideas represent “low hanging fruit” in the sense that they demonstrate how

existing capabilities and products within financial services could be leveraged and upgraded

to achieve substantial impact. Given the starting point for these ideas is existing capabilities,

mostly small technical upgrades would be needed for implementation. As a result, these

ideas could begin delivering meaningful impact relatively quickly.

BUILDING ON EXISTING CAPABILITIES

POINT IMPACT:A NEW WAY TO USECREDIT CARD POINTS

CHANGE FOR CHANGE:POOL YOUR CHANGEFOR IMPACT

Use credit card points to crowdfund social and environmental impact loans; get points back when the loan is repaid.

O�er option to “round up” customers’ credit and debit card transactions to the nearest dollar, and pool this virtual “change” to crowdfund an impact project.


Although we discuss these five ideas mostly from a US perspective – especially when

presenting potential challenges – we believe that they can indeed be applied in other

regions of the world, with of course varying benefits and challenges based on the

particular location.

LOOKING AHEAD: A WIN-WIN-WIN OPPORTUNITY

With the ideas presented in this report, we aim to demonstrate that engaging and

empowering consumers with products that generate positive social and environment impact

represents a triple-win opportunity: consumers who want to make conscientious purchasing

and investment decisions get the financial tools they need; banks evolve new profit streams

while strengthening loyalties and broadening their customer base; and the world gets much

needed support in the collective effort towards a more sustainable future.

Of course, tackling global issues will require more than just the five ideas discussed in

this report, and financial institutions have been leading a range of efforts to contribute to

solutions. Our goal here is to offer a complementary perspective that encourages further

innovative thinking and constructive debate on the topic, and help the FS industry fulfil its

full potential to drive positive social and environmental change.

We recognize that operationalizing such ideas and driving meaningful change may require

institutions to overcome organizational and operational challenges, legal and regulatory

requirements, and competing business priorities – such obstacles are unavoidable, but

not insurmountable. There is growing literature around how institutions can align business

strategy with social and environmental innovation to achieve growth. For example, the 2016

“Social Innovation: A Guide to Achieving Corporate and Societal Value” report published

by the World Economic Forum in collaboration with Oliver Wyman presents a practical

framework to help institutions incorporate social innovation in their business strategy. Our

desire and commitment is to continue this kind of innovative thinking, work with the FS

industry and other stakeholders to overcome any challenges, and ultimately capture what

we see as a triple-win opportunity: for consumers, for banks, and for the planet.


IMPACT CROWDFUNDING

INTRODUCTION: ADDING IMPACT TO CROWDFUNDING

Rewards-based crowdfunding is an Internet-based, alternative form of financing where

a large number of supporters can fund projects on platforms such as Kickstarter and

Indiegogo. In return for their monetary contribution, supporters typically receive non-

monetary rewards such as t-shirts or invitations to launch events.

Crowdfunding has turned raising money for a purpose into a social activity in which

millions of Internet users can seamlessly participate. Enabled by social media and inspired

by collective responses that can occasionally “go viral”, crowdfunding’s success has

demonstrated people’s desire to support projects aligned with their interests and values.

The empowering features of crowdfunding have made it a popular way to finance a wide

range of projects from film to technology. As a result, total funds raised worldwide through

crowdfunding reached $16 billion in 2014, a 167% increase from 2013.4


Exhibit 1: Rewards-based crowdfunding

Large group of supporters pledge funds.Pledged funds are pooled towards stated project goal on a crowdfunding platform.

Projects across a wide range of areas such as film, technology and music are funded.

Non-monetary rewards

Source: Oliver Wyman

Another form of crowdfunding is “securities-based crowdfunding” which allows companies

to raise equity or debt capital from a large number of investors. This form of crowdfunding

involves the offer and sale of an investment security, which aims to produce financial returns

for investors. Securities-based crowdfunding platforms exist today, but have had limited

reach since only accredited investors5 – the wealthiest and most sophisticated – have

been allowed to participate. However, the Jumpstart Our Business Startups ( JOBS) Act is

attempting to change this by creating a regulatory framework that allows non-accredited

investors to participate in this form of crowdfunding. By allowing mainstream participation,

the JOBS Act aims to unlock a new source of capital for small and early stage companies.

One category of companies which can particularly benefit from this new source of capital is

“impact enterprises” – companies conceived with the specific intent to generate

social/environmental returns in addition to financial returns. A potential new application

of securities-based crowdfunding – referred to as “impact crowdfunding” here – could allow

impact enterprises to raise capital from a large number of small investors who not only seek

financial returns, but also social/environmental returns. This new source of capital could

help small and early-stage impact enterprises address the funding gap they currently face.


Exhibit 2: Impact crowdfunding

Large group of small retail investors pledge funds.With the proper crowdfunding platform, regulatory framework and financial expertise, funds are pooled in an investment vehicle.

Impact enterprises that generate financial returns in addition to social and environmental returns are funded.

Monetary rewards

+


The JOBS Act, and consequently impact crowdfunding, do bring considerable risks. Allowing

inexperienced investors to invest in start-ups could lead to large losses, fraud and investor

scams if proper measures are not taken. Furthermore, although investors seem to have a

growing desire for impact investments6, it is unclear whether this desire will translate into

action when presented with a new investment tool such as impact crowdfunding.

Exhibit 3: Two sides of the coin – Impact crowdfunding

POTENTIALBENEFITS

RISKS ANDCHALLENGES

• Enable impact enterprises to raise capital from a broad set of investors, using a new channel

• Allow the small, conscientious investor to participate inimpact investing

• Leverage social media and the internet to spread the word on impact investments

• Promote collaboration betweenthe FS industry and financial technology companies

• Investors can experience high loss rates due to the inherently risky nature of financing start-ups

• May increase fraud and investor scams due to presumed naiveté of many inexperienced investors

• Nascent and untested nature of the new financing method might deter participation

• Lack of data and track record regarding investments mayreduce transparency



The financial services industry may have much to gain from tackling these risks and

challenges. By offering impact crowdfunding solutions, financial institutions can engage

a new and growing group of investors, thereby expanding their client base. Related

commissions would represent a new revenue stream. As a technology-enabled and

socially/environmentally minded investment tool, impact crowdfunding also can also

significantly enhance an institution’s brand and increase loyalty. As competition for

consumer attention increases with the rise of Silicon Valley financial technology companies,

engaging younger demographics through such innovative and meaningful efforts will

become increasingly important for financial institutions.

INVESTORS SAY THEY WANT TO HAVE IMPACT

Studies show that consumers increasingly think of social and environmental values in the

context of investment decisions. According to a 2013 survey, 60% of US consumers say a

company’s social and environmental commitments are an important consideration when

deciding where to invest.7 According to another survey, 67% of high and ultra-high net worth

young adults have indicated that “investment decisions are a way to express [their] social,

political and environmental values.”8

These and many other studies demonstrate the promising desire many people have to align

investment decisions with social and environmental impact. However, these studies usually

reflect what people say, and not necessarily what they do. With limited availability of such

investments, we still do not have concrete evidence regarding whether actions will follow

words. Therefore, we also need to look at other relevant trends and related products in order

to better gauge the potential of impact crowdfunding.

EXAMPLES OF AVAILABLE TOOLS

Although platforms specifically dedicated to impact crowdfunding do not exist today,

Internet users are already leveraging other available tools to finance impact enterprises.

A specific example is the LowLine, which is a Kickstarter campaign that aims to “transform

an abandoned New York City trolley terminal into a vibrant community green space using

new solar technology.” The LowLine team surpassed its funding goal of $100,000, and

raised ~$155,000 from over 3,000 supporters.9 These supporters effectively participated in

something similar to impact crowdfunding, but without the expectation of direct financial

returns. Instead, the reward for their contributions ranged from acknowledgments on the

LowLine website to t-shirts and other trinkets.


A broader example is Kiva, which allows users to crowdfund microloans to underprivileged

entrepreneurs by contributing as little as $25. If the loan is repaid, Kiva users may get their

money back without interest. Again, there is no expectation of financial return. As of 2015,

1.4 million Kiva lenders have crowdfunded $785 million in Kiva loans.10 The $136 million lent

in 2014 alone represents an 18% compound annual growth rate since 2010.11

These are a few examples of how Internet users are leveraging available tools to finance

impact enterprises, without expecting direct financial returns. Indeed, these examples

merely represent a fraction of total capital raised every year for countless efforts. It is also

possible that these examples reflect a reallocation of existing charitable donations rather

than a net increase in socially/environmentally impactful financing. So, while these select

stories may not be sufficient to prove the more general rule, they are certainly encouraging

signs showing that crowdfunding could actually be a tool that enables and accelerates the

incorporation of mainstream capital in impact investing.

ADDRESSING THE FUNDING GAP FOR SMALL AND EARLY-STAGE IMPACT ENTERPRISES

The primary participants in impact investing are currently institutional investors,

development banks, international organizations, foundations and ultra-high net worth

individuals who often seek large and relatively safe investments in mature impact

enterprises. According to J.P. Morgan, 91% of capital invested in impact enterprises in 2014

was invested in post-venture stage companies (growth, mature or publicly traded) whereas

only 9% was invested in early-stage enterprises (start-up or venture stage). The average

investment size during the same period was $72 million.12

On the other hand, according to a Duke University survey, 50% of impact enterprises in

the US were targeting to raise less than $2 million in capital over three years (2014-2016).13

Similarly, a Social Enterprise UK survey showed that social enterprises seeking financing in

the UK most commonly aimed for between £10,000 and £50,000 in 2015.14 There is a clear

mismatch between the supply and demand for impact investments. Impact crowdfunding

could potentially reconcile this mismatch.

The amounts sought by individual impact enterprises are comparable to amounts provided

for projects through rewards-based crowdfunding platforms. For example, across the

~96,000 projects funded on Kickstarter since 2009, the average amount raised was around

$22,000. A few thousand projects received more than $100,000, just over 100 received more

than $1 million, and a few dozen received $3 million or more.15 These figures are comparable

to those reported in the Duke University and the Social Enterprise UK surveys in terms of

how much investment individual impact enterprises seek. Internet users have shown that

they are willing to meet the funding demands of projects this size, making crowdfunding a

good fit for impact enterprises.


“One can think of a charitable donation as an investment, just as debt and equity are investments. The difference is that the return on the donation is not financial. The donor does not expect to get its money back; it expects its money to generate a social benefit.”

– “A NEW APPROACH TO FUNDING SOCIAL ENTERPRISE”

RETHINKING RISK-ADJUSTED RETURNS

Risk-adjusted returns offered by small and early-stage impact

enterprises are often not sufficient to attract traditional investors

seeking risk-adjusted financial returns only. Therefore, impact

crowdfunding will likely attract investors who are not only seeking

financial returns, but are also weighing social and environmental

benefits, and thereby considering risk-adjusted total returns when

making investment decisions.

The notion that social and environmental benefits can be

considered a “return on investment” is discussed in a Harvard

Business Review article in the context of charitable donations. In

“A New Approach to Funding Social Enterprises” the authors argue

that one “can think of a charitable donation as an investment, just

as debt and equity are investments. The difference is that the return

on the donation is not financial. The donor does not expect to get

its money back; it expects its money to generate a social benefit.”16

The implications of this logic can be observed in the context of

impact investments. For example, according to Goldman Sachs

research and a US Trust survey, 72% of young adults indicated

they would be “willing to accept a higher risk in companies that

have a positive impact on society/environment.”17 This is a sign

that these individuals may be implicitly accounting for social and

environmental returns, in addition to financial returns, when

considering the risk-adjusted total return on their investment.

The story so far is encouraging: impact enterprises seem to be in

need of capital, and retail investors seem to be willing to supply

the necessary capital if given the appropriate investment tools.

Impact crowdfunding could be the tool that enables this flow

of capital. However, a legal framework is needed to allow and

regulate mainstream investor participation in securities-based

crowdfunding. This is where the Jumpstart Our Business Startups

Act (“JOBS Act” or “the rule”) comes into play.


SECURITIES-BASED CROWDFUNDING UNDER THE JOBS ACT

The JOBS Act, which was approved by the Securities and Exchange Commission (SEC) in

2015 and is expected to come into effect in mid-2016, allows both accredited and non-

accredited investors to participate in securities-based crowdfunding. The excitement

surrounding the JOBS Act is largely driven by this inclusive nature of the rule, which could

allow securities-based crowdfunding to become a mainstream tool. However, this source of

excitement is also the source of controversy surrounding the JOBS Act.

Allowing small and inexperienced (non-accredited) investors to invest in start-ups can

create substantial risk. Investors might experience large losses even in the absence of any

ill-intention, simply due to the high fail rate of start-ups. Since the JOBS Act eases certain

securities regulations to allow small businesses to raise capital more easily, it could also

increase the risk of fraud or investor scams. Investors may especially be susceptible to

fraud and scams if they are led to believe they are doing a good deed with positive social/

environmental outcomes. However, while easing certain regulations, the JOBS Act does

enforce a number of requirements to provide investor protection.

The rule requires all securities-based crowdfunding transactions to occur through an

SEC-registered intermediary (“intermediary”) such as a broker-dealer. Under the rule,

an intermediary could choose to build its own crowdfunding platform. Alternatively, a

crowdfunding platform could choose to register with the SEC. However, a more practical

solution could be a partnership between an intermediary and a crowdfunding platform

where the relative strengths of the two parties are leveraged across areas such as user

engagement, risk management, technology and finance. The SEC also expects that “some

brokers might acquire or form partnerships with funding portals to obtain access to a new

and diverse investor base.”18

Intermediaries involved in securities-based crowdfunding are required to carry out a number

of tasks to protect investors: providing educational materials for investors, establishing

communication channels to facilitate discussion around investment offerings, taking

measures to reduce fraud risk and making company disclosures available to investors, to

name a few. These requirements combined with limits on how much capital a company

can raise, and income-based limits on how much an individual can invest within a year are

intended to limit potential downside for investors.

The effectiveness of these measures in providing investor protection while facilitating a

favorable funding process remains to be seen. However, with a regulatory framework in

place, securities-based crowdfunding now has a legal steppingstone towards becoming a

mainstream tool. Helping it grow is up to the financial services industry.


TAKING THE NEXT STEP

Impact crowdfunding could play a vital role in directing

mainstream capital towards funding small and early-stage impact

enterprises. In fact, the SEC acknowledges this as one of the core

purposes of the JOBS Act: “We understand that Title III [of the rule]

was designed to help alleviate the funding gap and accompanying

regulatory concerns faced by startups and small businesses in

connection with raising capital in relatively low dollar amounts.”19

With investor demand for impact crowdfunding apparently

growing, and the necessary regulatory framework now in place,

financial institutions can take the next step towards establishing

impact crowdfunding platforms and seize the associated

business opportunity. Some institutions are already moving in

this direction. For example, in Europe, ING Belgium formed a

partnership with two crowdfunding platforms to allow small/

medium enterprises (SMEs) to raise equity through crowdfunding.

Although this partnership targets SMEs in general and not only

impact enterprises, it is a promising sign which shows impact

crowdfunding can become a reality if there is commitment from

financial services.

“We understand that Title III was designed to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses in connection with raising capital in relatively low dollar amounts.”

– SECURITIES AND EXCHANGE COMMISSION


POINT IMPACT: A NEW WAY TO USE CREDIT CARD POINTS

DORMANT POINTS

Credit card holders, when using their cards, often earn “points” that can be exchanged for

additional goods or services. However, it can take a significant amount of time to accumulate

sufficient points for any desired redemption option. While working toward a target balance,

card holders have “dormant points” – effectively a store of value that is not being used.

In many cases these can be several hundred or thousand points that sit in an account for

months or even years as the card holder works his/her way towards, for example, a 50,000

point airline ticket.

PUTTING UNUSED CAPACITY TO WORK

Taken in aggregate, these dormant points could be used to crowdfund a loan to an

enterprise with social or environmental goals. This “Point Impact” approach could be

structured similarly to a campaign on Kickstarter or Indiegogo, but where the card holders

would use their points to fund a project – and

they would get their points back once the loan

is repaid. This would allow card holders to use

their dormant points to have a positive impact

on society or the environment while they wait

to buy that airline ticket.

ENHANCING THE EXISTING INFRASTRUCTURE

Card issuers could leverage their existing

infrastructure to operationalize this idea. The

main enhancement required would be to build

the crowdfunding capability and the “point

lending” infrastructure so that card holders are

able to lend their points towards crowdfunding

a loan.


The card issuer could partner with an organization such as Kiva to identify the enterprises

that will be included in the crowdfunding campaigns. The partner organization could also

be responsible for the origination and servicing of the loan and the collection of payments.

However, the exact mechanics behind the end-to-end process (e.g., accounting) will depend

on the institutions involved and may take a number of forms.

THE IMPACT COULD BE SUBSTANTIAL

Using American Express’s program as an example, the card issuer was carrying a

“Membership Rewards liability” of some $7 billion based on outstanding points as of

December 2014.20 A mere 0.05% participation rate in the Point Impact program would

represent ~$4 million, enough to fund some 9,000 micro loans through Kiva; a 10%

participation level would correspond to ~$700 million, enough to build ~5,000 affordable

housing units.

While such a program may come with some cost, for example in terms of new systems and

potential loss of float income, the advantages gained by a firm evidencing such innovation,

along with the subsequent upsides in the form of branding and customer loyalty, would

seem to hold potential to dominate any marginal costs involved.

Exhibit 4: How point impact works

Cardholders lend points, which are pooled.1

The card issuer writes a check to the partner organization based on pooled points.

2Partner organizationmakes a loan to the impact enterprise involved in the campaign.

3$Points

Cardholders get backthe points they hadoriginally lent.6

The card issuer purchases points with the check received from the partner organization.

5Partner organization receives loan payments and writes a check to the card issuer.

4$Points



GREEN MORTGAGES

INTRODUCTION: ADDING COLOR TO YOUR HOME

A “green home” is one that is designed and built to minimize the structure’s impact on the

environment by efficiently using energy, water and other resources, protecting occupant

health, and reducing waste, pollution and environmental degradation.21 As a result of being

efficient, employing clean technologies and using high-quality materials, green homes can

have greater value and durability, reduce utility bills, and generate environmental benefits.

These qualities have fueled demand for green homes in recent years. In

2005, green homes’ share of single family housing starts was only 2%,

but by 2013 it was up to 23%. For 2016, green homes are estimated

to account for ~30% of new single family homes, representing

a ~$90 billion market.22 Clearly the market has changed

and continues to evolve; new homes are increasingly

expected to be green in order to engender demand

in the market place.

While the appeals of a green home

to a prospective homeowner are

numerous and fairly obvious, less

broadly appreciated is that

mortgages on such properties

tend to carry less default and

prepayment risk.


Some have speculated that this is due to smaller utility bills,

providing the homeowner greater liquidity within a fixed income.

But whatever the underlying reasons, data appear to show

that even after controlling for the usual underwriting variables,

“green mortgages” are less risky.

Despite the rapid growth of this market segment, and an

increasingly clear understanding of the data trends and risk

differentiation, customized mortgage options for green homes

have lagged behind. Government involvement has largely been

limited to the 1990s era Federal Housing Administration (FHA) and

Veterans Administration (VA) Energy Efficient Mortgage (EEM)

programs that mainly allow low and moderate-income homebuyers

to qualify for larger mortgages to finance energy efficiency

improvements. Unfortunately, the FHA and VA programs have

seen limited take-up at this lower, less expensive end of the green

homes market. The limited success of these older programs may

unfortunately have had an inhibiting effect on financial innovation

that could better and more comprehensively address the needs of

today’s green home market.

We highlight in this section the opportunity surrounding mortgage

products that are designed and priced specifically for green homes.

By offering mortgages differentiated for green homes, the prospect

is that banks could capture a larger share of a growing new market,

and do so at an attractive level of risk and return, without giving up

profits. This too could come with coincident branding advantages.

Of course, attempting to introduce a new “green mortgage”

product comes with challenges. It is hard to underestimate the

importance of the collaboration that would be needed between

banks and government sponsored entities, particularly

Fannie Mae and Freddie Mac. The product would require significant

procedural changes, such as the development of new underwriting

guidelines, additional collection and analysis of data on home

efficiency, use of renewable energy, etc. The potential cost and

effort associated with implementing these changes will likely be the

first roadblock that needs to be overcome. It will be critical to learn

from past experiences that have had limited success, to create a

truly innovative mortgage product that fully caters to today’s green

home buyer.

SHARE OF GREEN HOMES

2005

2%

2013

23%

2016estimation

~30%

Source: McGraw Hill Construction


Exhibit 5: Two sides of the coin – Green mortgages

POTENTIALBENEFITS

RISKS ANDCHALLENGES

• Enable customers to lower energy use, save money and reduce environmental impact by adopting green homes

• Establish a new, high-quality mortgage product that may create a new source of revenue

• Pave the way towards a new type of “green bond” based on pooled“green mortgages”

• Limited success of past e�orts highlight challenges that lie ahead

• Necessary systematic procedural changes can be costly and require significant e�ort

• Developing a secondary market for “green mortgages” will require support from Fannie Mae and Freddie Mac


Challenges exist, but this is common to most endeavors involving the introduction of a

new product, service or process that would require systematic change. Underneath these

procedural and operational challenges, we see a fundamental opportunity. As the green

home market continues to grow – primarily driven by increased customer demand – we

believe green homes will merit their own dedicated mortgages. The creation of such a

mortgage product can benefit home buyers, the financial services industry and the planet.

SHADES OF GREEN

A green home typically will include features such as high-performance windows that

minimize heat loss, energy-efficient HVAC systems, effective insulation throughout the

house and efficient lighting and appliances. Taking it further, a green home may employ

renewable energy systems such as solar (passive or active), wind and/or micro-hydro, smart

technologies such as “learning thermostats”, water catchment systems and others. New

architecture may highlight use of recycled materials and adhere to high construction and

material requirements that minimize occupant exposure to airborne contaminants.

Since there is a wide range of construction options, certification programs such as LEED

and ENERGY STAR, and efficiency rating systems such the Home Efficiency Rating System

(“HERS”) have emerged to assess “greenness”. These are very similar to the energy efficiency

ratings seen on appliances such as dishwashers and refrigerators, except applied to entire

homes. These ratings today are primarily a selling point for new homebuyers. However,

there is more to these ratings and green features than meets the eye.


MORE GREEN, LESS RISK

While green construction features often cost more money up front, improved efficiency

reduces utility bills and decreases exposure to energy price fluctuations over the life of the

structure. Such construction can also result in lower maintenance and repair costs, and

tend to carry health benefits for those living in green homes. The consequent financial

benefits last over time – by lowering monthly costs, homeowners can create an extra cushion

of savings to possibly cover mortgage payments when times are rough. It has also been

suggested that since a green home is an investment that comes with higher initial costs that

are covered by future savings, green homebuyers tend to be more calculating, forward-

looking and financially savvy. Green features may also improve resale value, which obviously

would represent more valuable loan collateral.

An increasing number of academics and industry participants have been exploring whether

the greenness of a home can impact mortgage performance. A 2013 University of North

Carolina (UNC) study23 shows that there is indeed a relationship between the “greenness” of

a home and mortgage performance, unexplained by other variables. The UNC study found

that ENERGY STAR certified homes have 32% lower default and 25% lower prepayment risk

compared to similar non-ENERGY STAR certified homes, after accounting for key factors

such as borrower credit score, neighborhood income, neighborhood unemployment rate,

size of the house, age of the house, loan-to-value ratio, debt-to-income ratio and other key

loan and household characteristics. The study also found a direct relationship between the

level of a home’s efficiency and mortgage risks. For each point decrease in the HERS score

(indicating higher efficiency) default risk is decreased by 4% and prepayment risk by 2%.

These findings show that a home’s greenness really represents additional factors that could

be used to better assess and price mortgage risk. However, despite much discussion, and for

a variety of reasons, the current mainstream mortgage market does not explicitly account for

green features of homes.

THE STATE OF THE GREEN MORTGAGE MARKET

As indicated in the introduction, the current market for green mortgages is almost

exclusively limited to Energy Efficient Mortgages (EEM), essentially experimental offerings

by the FHA and VA. These EEM programs allow borrowers to qualify for a larger mortgage

by including the cost of energy efficiency features in the loan. For example, if a borrower

originally qualified for a 150,000 loan under a conventional mortgage program, but needs an

extra $5,000 to add efficiency features to the home, he/she can qualify for a $155,000 loan

under the EEM program, thereby allowing borrowers to “stretch” their debt-to-income ratio.

EEMs were launched in the 1990s to encourage incremental efficiency upgrades to homes,

and they come with caps and limits on the potential increase in the loan size (e.g., $6,000 for

VA EEM24).


Today, EEMs remain an obscure segment of the mortgage market. Most lenders do not offer

them as there is limited demand and benefit: the customer base qualifying for the FHA and

VA programs is (by relative measures) small and the additional paper work increases costs.

Further, selling EEMs in the secondary market is problematic as neither Fannie Mae nor

Freddie Mac has programs for purchasing EEMs. From the borrowers’ perspective, while

the EEM might facilitate a slightly larger mortgage, it does not provide the kind of financial

advantage that would be a due consequent of lower risk.

A NEW KIND OF ASSET NEEDS A NEW KIND OF MORTGAGE

Mortgages for green homes need to be more than just a larger loan. To develop the right

product, lenders must build a fundamental understanding of this emerging segment, the

drivers of financial performance and the characteristics of the customers seeking these

investments. Based on this understanding, lenders could develop new underwriting

guidelines and incorporate new pricing variables that would systematically account for

green features of a house such as its energy and water efficiency, renewable energy use,

sustainable material use and water catchment capabilities.

With this deeper understanding, lenders would be positioned to offer a more sophisticated,

affordable and streamlined product tailored to today’s green home market. Strategically, the

banks leading the charge could establish brand presence in this expanding new segment

of the housing market, and capture a larger share of a market estimated at ~$90 billion

originating in 2016 alone. By offering green mortgages, banks can also open up a whole new

investment opportunity: Green Mortgage Backed Securities.

GREEN BONDS ON THE RISE

According to the World Bank, “green bonds” are fixed income instruments that raise funds

for projects with environmental benefits.25 Green bonds are used to fund a wide range of

environmental projects and have been gaining popularity over the past few years. Issuance

of green bonds increased from only $1 billion in 201226 to $36 billion in 201427 – still a small

fraction of total bond issuances, but an impressive increase from 2012. Demand for green

bonds is expected to continue to increase significantly, especially as the world tackles

pressing environmental issues such as climate change.

The increased presence of major investment banks is an indicator of the significant potential

in this niche market. For example, in June 2015, Morgan Stanley issued its first green bond

to provide $500 million in funding for various renewable energy projects such as a 150 MW

wind farm under construction in Texas.28


In November 2015, Barclays reached its target of investing more than £1 billion in green

bonds and committed to investing a further £1 billion, representing the largest green

bond investment commitment by any institution in the world.29 An increasing number of

institutional investors such as insurance companies are also committing to green bonds. For

example, in 2013, Zurich Insurance committed to invest $1 billion in green bonds.30 These

trends indicate that satisfying the demand for these investments will require an increasing

supply of attractive green bonds. This is where green homes can help.

FROM GREEN HOME TO GREEN BOND

Securitizing green mortgages under a Green Mortgage Backed Security (GMBS) would

create an investment vehicle perfectly consistent with the definition of a green bond – that

is, a fixed income instrument with environmental benefits. Since it would be based on an

underlying asset class that investors are already very familiar with (i.e., mortgages) GMBS

could be highly attractive to investors seeking green bonds, but want to avoid more exotic

investments such as large scale renewable energy projects.

In addition to being a familiar asset class, GBMS would also offer attractive risk adjusted

returns, especially as green mortgages are shown to carry measurably lower default and

prepayment risk compared to traditional mortgages. These features could make GMBS

a highly attractive green bond investment for those seeking long duration, low risk and

relatively attractive yield.

NEED FOR FANNIE AND FREDDIE TO TAKE THE LEAD

Liquidity in the US mortgage market fundamentally depends on the secondary market for

agency mortgage backed securities facilitated by Fannie Mae and Freddie Mac. A lender

selling its loans to these GSEs frontloads the profit stream and frees up space on its balance

sheet, allowing it to originate yet more loans. It’s clear that a key factor that will determine a

lender’s willingness to offer green mortgages will be their ability to sell these mortgages in

the secondary market. To help establish the secondary market for green mortgages, Fannie

and Freddie would need to develop guidelines for “conforming green mortgages” and

establish a program to routinely purchase these mortgages.

With its Green Rewards program that was launched in 2015, Fannie Mae has started down

this path, rewarding green-certified multifamily buildings with a 10 bps reduction in rate,

among other benefits. This encouraging program is a significant step and demonstrates

Fannie Mae’s acknowledgement of the positive impact of green features on mortgage

performance. In this spirit, a program for single family homes would not only encourage

banks to originate more green mortgages, but it would allow the GSEs to better differentiate

and so manage the credit risk associated with the mortgages they buy.


CHANGE FOR CHANGE: POOL YOUR CHANGE FOR IMPACT

A NEW WAY TO SAVE FOR A CAUSE

Change for Change would allow participants to “round up” their

debit or credit card transactions to the nearest dollar and put their

virtual “change” in an account (“piggy bank”) reserved for raising

funds towards a social or environmental cause.

THE MORE THE MERRIER

Change for Change would be a social and collaborative

crowdfunding effort. For example, if a participant wants to raise

$500 for a Kiva loan or a donation for breast cancer research, he/

she could start a campaign and invite friends and family to join.

The more people join, the more quickly the campaign succeeds

and the smaller amount of money each person would need

to contribute.

Although the person launching a campaign would need to have

an account with a bank offering Change for Change, people with

accounts at other banks could also be invited to participate.

Herein lies a challenge as this kind of collective response will

require coordination across banks to facilitate the transfer of

“change” from many transactions into a common campaign

piggy bank.

TECHNOLOGY IS A KEY FACTOR

Change for Change will require technological capabilities in order

to pull transaction-level data, as well as solid security measures to

protect user privacy. Luckily, there is precedent for this. Personal

financial management apps such as “Mint” have already paved

the way for accessing transaction data with the permission of

the user.


Other precedents also have paved the way. For example, Bank of America’s Keep the Change

program allows participants to round up transactions to the nearest dollar and transfer the

change to a personal savings account. Change for Change would add a social/environmental

twist to this program and make it a collaborative effort.

BENEFITS FOR BANKS

While empowering their customers and encouraging them to collectively save for the causes

they care about, banks offering Change for Change would be building their brand while

also increasing their deposits base. A quick calculation assuming three transactions per day

and $0.5 per transaction, the program could potentially generate ~$50 million in additional

deposits annually per 100,000 users captured.

Exhibit 6: How change for change works

Assemble a group of friends/family with a shared savings mission.

FIND FRIENDS ANDA CAUSE1 2 3

Keep track of how much you are contributing to the piggy bank by seeing your recent transactions rounded up.

ROUND UP FORSAVINGS

Watch savings accumulate for 6–24 months and once goal is met, cash is deployed towards the cause.

POOL YOURCHANGE

CHANGE FOR CHANGE CHANGE FOR CHANGECHANGE FOR CHANGE

We’re looking for: Sarah, you’re saving for:

$4.82

$3.26

$10.54

$9.01

$22.91

$5.37

$0.18

$0.74

$0.46

$0.99

$0.09

$0.63

SUSTAINABILITY THE FORT GREENCOMMUNITY GARDEN

We’re saving for:

We have $1023 in our piggy bank.

THE FORT GREENCOMMUNITY GARDEN

0months

5.5months

12months

TODAY

YESTERDAY

TUESDAY

FOOD

COMMUNITY-LED

Propose our own project

Total savings this week:

The Fort Green Community GardenGuerilla gardening with a focus on community education about food.

Ideal piggy bank size6-12 months

x x

x

Location:

NEAR ME US

INTERNATIONAL

x x

x

$12.00

$423.00Total savings to date:

Ari Sarah Meegs Julie Tom



INTRODUCTION: RUNNING ON SUNSHINE

The concept of driving an Electric Vehicle (EV), using solar energy to charge it at home

and enjoying “free” transportation is enticing to many. The combined investment would

eliminate trips to the gas pump, generate cost savings and immunize one from fuel price

fluctuations while supporting the broader efforts to reduce dependency on fossil fuels,

strengthen national energy security and decrease carbon emissions. An EV-solar bundle

represents a natural endpoint for those environmentally-minded consumers inclined to

“think globally and act locally”.

While this high-tech bundle has historically been considered out-of-reach for the average

consumer, the substantial and continued reduction in the cost of EVs and solar is starting

to make it an attractive and accessible option. In their 2014 report31 entitled “Will solar,

batteries and electric cars re-shape the electricity system?”, UBS Global Research

concluded that the EV-solar bundle is already an economically viable investment, with

SOLAR-PLUG


returns expected to rise and payback times to shorten dramatically given further expected

cost reductions. The prospects for this new, cost-effective and environmentally-friendly

consumer opportunity are also reverberating through mainstream media with major

outlets broadcasting spirited assertions as “the solar-EV combo may just be too good for

suburbanites to pass up.”32

However, here again challenges exist. Facilitating the mainstream adoption of EV-solar

bundles will require addressing overall process inefficiencies and administrative obstacles

associated with the purchase of these technologies, and creating a streamlined end-to-end

experience to help consumers switch to EV-solar. EV manufacturers, solar manufacturers,

financial institutions and utilities will need to collaborate to achieve these goals. The

synergies between EVs and solar can create economic value for everyone involved in this

collaboration: manufacturers can sell more EVs and solar panels; banks can finance more

EV-solar bundles; utility companies can earn credits towards renewable energy standards

and reduce the need for new and costly power generation plants; and customers can make

the switch to clean energy and save money. Indeed, government agencies also have a stake

to address regulation-related inefficiencies.

Exhibit 7: Two sides of the coin – Solar-plug

POTENTIALBENEFITS

RISKS ANDCHALLENGES

• Enable customers to save on gas and home utility bills by switching to EV-solar

• Support e�orts to reduce reliance on fossil fuels and strengthen energy security

• Establish a new source of revenue through a specialized lending product

• Pave the way towards a new type of “green bond” based on pooled EV-solar loans

• High-cost of EV-solar relative to fossil-fuel based alternatives might continue to inhibit uptake

• Lack of established and ubiquitous infrastructure for EVs continues to be key deterrent

• Potential reduction or discontinuation of government incentives may slow down transition

• Certain interest groups might work against the mainstream adoption of EV-solar


Despite these challenges, momentum is building. Progress is being made through

meaningful government efforts and collaboration across manufacturers and utilities to

promote the adoption of EV-solar. What is not seen yet are customized financing options

for EV-solar bundles that would take into account the financial benefits of the bundled

investment. Here is yet another triple-win opportunity for banks.


EVs AND SOLAR ENERGY: A COSTLY PAST, BUT AN AFFORDABLE FUTURE

EVs are powered by lithium-ion batteries, and the high cost of producing these batteries is

seen as one of the factors slowing EVs’ mainstream adoption. However, advances in battery

production are making EVs increasingly affordable. The average cost of producing a lithium-

ion battery was $1,000 per kilowatt hour (kWh) in 2007.33 By 2014, it was down to the

$300-$400 range.34 In 2015, General Motors announced that the batteries used in the 2016

Chevrolet Bolt costs only $145 per kWh.35 This represents tremendous progress, as these

costs are cheaper even than earlier estimates for 2020-2025. $145 per kWh is also below

the crucial $150 mark, which is widely considered to be the point at which EVs become cost

competitive with gasoline vehicles.36

A similar cost reduction has been observed for solar energy. In 2010, the cost of installing

a residential solar energy system was around $7 per watt.37 This meant that a typical

residential five kilowatt (kW) system cost roughly $35,000. Just five years later, this cost

decreased by almost 50%.38 By 2025, the cost per watt is expected to be closer to $2.39

According to Bloomberg New Energy Finance, the price of solar energy will continue to fall

and “by 2040, rooftop solar will be cheaper than electricity from the grid.”40

In just a few years, the cost argument against EVs and solar may well become obsolete. This

is not to say that there are no further technological challenges to overcome, especially with

EVs due to their infancy. For example, “range anxiety”, the fear of running out of electricity

before getting to a charging station, remains a concern among those who otherwise might

be disposed to switch to an EV. However, with major auto manufacturers such as Ford and

General Motors, not to forget the innovative start-up Tesla, making significant investments

in EV development, it is likely these types of concerns will diminish as EV production reaches

scale, and the supporting technologies mature.

CONSUMER MOTIVATION TO BUNDLE EV AND SOLAR ENERGY SYSTEMS

Electric vehicles and residential solar energy systems represent complementary

technologies that together amplify the environmental and financial benefits generated

from the investment. If an EV is purchased without solar, consumers (in most places) would

be switching effectively from petroleum to coal as the base energy source to fuel their

vehicles. This would reduce the environmental benefits of the EV as coal is known to be more

carbon-intensive than petrol. On the other hand, if solar is bought without an EV – say to

cover the home’s electricity use alone – any future purchase of an EV would require resizing

the solar energy system since the EV could add some 30% to an average household’s

electricity consumption.41


Purchasing an EV and EV-dedicated solar system (ignoring the

home’s electricity consumption) is also an option. However,

considering the energy needs of both the new car and the home

has advantages. In essence, by making a bundled purchase,

customers could choose a solar energy system that meets the

combined energy needs of the home and EV, thereby optimizing

against aggregate cost savings as well as environmental benefits.

Despite these potential benefits, however, administrative and

process-related obstacles associated with solar energy continue

to cast a shadow that may discourage customers from making

the switch.

THE ROCKY PATH TO SOLAR

The physical and legal processes required to “go solar” includes

permitting, installation, inspection, grid-interconnection and

testing. This is an arduous and often lengthy process that can take

up to six months.42 In fact, the US Department of Energy’s “Race to

7-day solar” competition was launched in 2015 to spur innovation

and to cut the permit-to-plug-in time to seven days for residential

solar energy systems.

Bringing in the financial dimension adds another layer of

complexity. For most homeowners, the tradeoffs over time between

lower energy costs and payments on a new loan can make or break

the decision to go solar. However, evaluating these tradeoffs is

challenging. Both gasoline and electricity costs fluctuate over

time and are difficult to predict. Even with solar energy, costs are

dependent on the local utility’s offered incentives and rate plans,

which in turn are dependent on state-level requirements. These

requirements may change through time. Thus, going solar requires

homeowners to make complex financial decisions in addition to

enduring lengthy physical and legal processes.

The implication here is that the viability of the EV-solar option is

fundamentally part of the larger challenge to encourage a switch

to renewables that will require close collaboration between

government and utilities, manufacturers and ultimately financial

institutions. Manufacturers and financial institutions should

already be motivated to collaborate on this effort as the benefits

of increased adoption of EV-solar are relatively clear for them:

increased sales and financing opportunities. However, the story is

different for utilities for which the downside may be more obvious

than the upside.

EV AND SOLAR OPTIONS

Electric vehicle only;No solar

Solar only;No electric vehicle

Solar for electric vehicle only

BEST OPTION:Solar for electric vehicle and home



THE UTILITY’S COMPLEX PREDICAMENT

Increased adoption of rooftop solar presents a difficult set of conflicting issues to the utility

industry. The potential reduction in utilities’ retail electricity sales and revenue due to

increased customer electricity generation is the obvious issue. However, the more nuanced

and complex problem is around how solar energy can impact the costs of utilities.

The sun doesn’t always shine; nighttime and cloudy days are a problem for solar panels. So

even if they can offset 100% of their electricity usage, households with solar energy systems

would generally still need to connect to the utility grid for provision of continuous power

during “dark” times. This is where the issue lies – the large scale integration of residential

solar energy systems into the electricity grid complicates the grid’s management and

increases the utility’s grid management costs. The flow of power in and out of the grid based

on time and weather makes maintaining stable voltage very difficult. This is fundamentally

different than the historical one-way operation of the grid, where centralized power

plants can be managed to provide just the right amount of power to meet demand. With

decentralized generation, utilities now have uncertainty on both the supply and demand

sides of the equation. As solar take-up grows further, these uncertainties will also grow,

requiring ever more sophisticated and flexible power generation and distribution.

RENEWABLE INCENTIVES

Today, 29 states43 in the US have Renewable Energy Standards (RES) which require utilities to

produce a specified portion of their electricity from renewable energy sources in the next few

years. For example, New York must produce 50% of its electricity from renewable resources

by 2030. A 2016 study by the US Department of Energy shows that state RES programs

have led to public health benefits equivalent to $7.4 billion, supported 200,000 jobs, saved

consumers $1.2 billion in lower electricity prices and led to many other benefits in 2013

alone.44 These findings will likely be a powerful incentive as states consider launching new or

extending and strengthening existing RES programs over the next decade.

Increased adoption of residential solar energy may help utilities meet these standards as

power generated through distributed residential solar contributes to their quota.45 This

could also reduce the need for new and costly centralized power plants, which can offset

the increased grid costs. In addition, utilities have recognized the opportunity to establish

new sources of revenue by offering solar energy systems and providing related installation

and maintenance services. For example, ConEdison of New York (ConEd) has partnered

with a manufacturer of solar panels to offer their customers the option to lease solar energy

systems owned by ConEd. Similarly, Georgia Power launched a residential solar energy

system sales and installation business. By adapting early to this imminent shift in electricity

generation, these utilities will likely maximize the upside of this transition while mitigating

the downside.


Exhibit 8: States with Renewable Energy Standards (RES)

HI

AK

VT

NHWA

OR

CA

NV

MT

ID

AZ

CO

NM

TX

MN

IA

MO

IL

WIMI

OHPA

NY

NC

ME

CT

RI

MA

NJ

DE

MD

DC

WY

UTNE

AR

LAMS AL GA

FL

TN

KYWV

SD

ND

KS

OK

IN

SC

VA

States and territories with RenewablePortfolio Standards.

States and territories with no standardor target.

States and territories with a voluntary renewable energy standard or target.

Source: NCSL

CHARGING FORWARD WITH EV-SOLAR

Signs of the movement towards EV-solar can be seen across recent efforts of manufacturers

as well. Audi’s launch of its first plug-in hybrid electric vehicle in 2015 was accompanied by

the “Audi energy program”, which allows customers to purchase a residential solar energy

system with their new car. Tesla has launched a home battery solution, Powerwall, which

allows for the collection and storage of solar energy during the day so it can be used to

power the home or charge an EV at any time. eMotorWerks, a manufacturer of EV charging

stations, partnered with a manufacturer of solar energy systems to offer solar-powered EV

charging stations at a reduced bundled price.

Government authorities are also leading efforts to educate consumers in EV-solar bundles.

The New York State Energy Research and Development Authority (NYSERDA) and California

Public Utilities Commission (CPUC) partnered with Clean Power Research to offer an online

“EV-solar planning tool” that automatically determines the optimal size of a residential solar

energy system based on inputs such as the make and model of the EV and current electricity

bill. The tool also calculates the expected cost savings and environmental benefits of

switching to EV-solar.


THE OPPORTUNITY FOR BANKS

As government bodies, manufacturers and utilities continue efforts to facilitate and

promote the adoption of EV-solar bundles, banks have an opportunity to contribute to

and benefit from this transition. Currently no major bank is differentiated or established

as the leader in this market. Thus, those who take the lead in providing customized EV-

solar financing options may establish competitive advantage as the go-to financer of these

investments, enhancing their brand and capturing a larger share of the market.

Assuming EV share of new auto sales46 in the US reaches a level between 10% and 50% by

2025, we expect the cumulative interest revenue that banks can generate from financing

EV-solar bundles to be in the range of $9 billion to $26 billion over the next 10 years. By

offering a customized financing option that takes into account the financial benefits of

EV-solar bundles, banks can promote the adoption of these technologies while establishing

a new platform for revenue generation.

The financing options offered for EV-solar bundles may take various forms. One innovative

option could be financing the bundled purchase with a single loan that has a term

structure, interest rate and other features that are reflective of the combined cash flow

and risk characteristics of the bundle. A single loan to the consumer could simplify the

purchasing and financing process, which would contribute to efforts around facilitating the

switch to EV-solar.

Since EV-solar bundles are investments made with a particular environmental goal, loans

on EV-solar bundles could also be securitized to create another form of “green bond”,

similar to the Green Mortgage Backed Securities discussed in the “Green Mortgages”

section. By helping expand investments in green bonds, EV-solar loans can open yet

another avenue for banks to create value for their shareholders, customers, and the planet.


CONCLUSION

Following the 2008 crisis, most of the FS industry’s energy and attention focused on damage

control and recovery, compliance with new regulatory requirements, and the overall

enhancement of risk management practices. After almost a decade of efforts to build a more

resilient financial system, banks are now slowly entering a new and stronger steady state

where management attention can finally be turned to other proactive efforts that can create

substantial value for customers and shareholders. The creation of new products that allow

consumers and investors to make sound financial decisions that generate positive

social/environmental impact could be one of these forward-looking efforts.

The financial services industry should not see these products as an altruistic endeavor that

would require the sacrifice of profits in order to save the planet. To the contrary, just as any

new product is designed to meet a certain type of new demand, socially and environmentally

focused financial products would cater to a growing segment of conscientious consumers

and investors, leading to new growth and branding opportunities – all while helping the

world transition to a more sustainable future.

Financial institutions that move swiftly and seize this triple-win opportunity will establish

themselves as an empowering ally in the effort towards a better future and will enjoy the

trust, loyalty and business opportunities that arise from this position for years to come.


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19. Id

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34. Id

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37. On average across the 50 US states; including all equipment, engineering and soft costs such as permits and professional services, excluding subsidies. http://www.bloomberg.com/news/articles/2015-02-25/in-the-time-it-takes-to-read-this-story-another-solar-project-will-go-up

38. Id

39. Id

40. http://www.bloomberg.com/news/articles/2015-06-23/the-way-humans-get-electricity-is-about-to-change-forever

41. The average US household uses ~900 kilowatt hour (kWh) of electricity per month (https://www.eia.gov/tools/faqs/faq.cfm?id=97&t=3). An EV would consume ~300 kWh per month assuming 37 miles driven daily on average (http://www.fhwa.dot.gov/ohim/onh00/bar8.htm) and three miles driven per kWh based on industry average

42. http://energy.gov/articles/race-7-day-solar-0

43. http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx#ca

44. Wiser, R., G. Barbose et al. A Retrospective Analysis of the Benefits and Impacts of US Renewable Portfolio Standards. Lawrence Berkeley National Laboratory and National Renewable Energy Laboratory, 2016

45. The types of renewable energy that count towards the mandate may differ by state, and some states may not count electricity produced by residential rooftop solar energy towards RES goals

46. 16.5 million automobiles were sold in the US in 2014 (http://www.nytimes.com/2015/01/06/business/us-auto-sales-jump-for-2014.html). We assume 16.5 million automobiles will be sold in 2025


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Ege GurdenizEngagement Manager in the Americas Finance & Risk and Public Policy Practice

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Mark AmesPartner in the Americas Finance & Risk and Public Policy Practice

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