Growing Your Income

A Business Strategy for Financing the Low-Carbon Transition

Last April, battery storage systems developer and operator Jupiter Power, based in Austin, Texas, announced it had received $174.6 million in financing from KeyBank for six stand-alone battery energy storage projects. The projects, all of which are in commercial operations, provide 655 megawatt-hours of storage capacity to support the Texas grid’s reliability as it shifts to renewable energy sources.

A validation of the economic viability of stand-alone battery storage facilities, the loan—which, prior to the Inflation Reduction Act (IRA) had to be financed differently than co-located solar and storage facilities—illustrates the financial sector’s critical role in providing the trillions of dollars needed to drive the low-carbon transition and limit global warming to 1.5°C above pre-industrial levels.

For KeyBank, the Jupiter Power financing was one of the first actions tied to the Cleveland-based super-regional bank’s recently announced five-year, $38 billion green financing commitment. The loan also exemplifies a strategic vision “to build a sustainable business model that manages risk, capitalizes on opportunities, and drives the transition to a low-carbon economy,” says KeyBank CEO and chair Chris Gorman.

In this conversation, condensed and edited for clarity, Gorman and Deloitte COO Pete Shimer discuss what it means to prioritize sustainability and climate action in the business strategy, and the finance sector’s role in driving the transition to a low-carbon economy. They also consider the new opportunities and business risks of making climate action central to the operational and business model in a fast-changing marketplace.

Pete Shimer: At Deloitte over the past 24 months, we have fundamentally shifted operational and business strategy to reflect the urgency of reducing greenhouse gas (GHG) emissions, making climate action core to our enterprise goals. What are some important elements of your strategic vision to focus KeyBank on tackling climate change and thriving in a low-carbon economy?

Chris Gorman: Our strategy is twofold. First is the commitment we made earlier this year to be carbon neutral within our own operations by 2030. In 2017, we pledged to reduce our carbon footprint. Since then, we have reduced our emissions by 31%, but we recognize that we still need to do more. The second part of our strategy is to ramp up our renewables finance business and work with clients to help them mitigate their own climate impact.  

We’ve financed more than $15 billion across a broad spectrum of renewable transactions since 2010, and from 2018 to 2021 we were the top-ranked North American renewable energy project lender by number and dollar volume of deals executed. Financing and advising on transactions that advance the clean energy transition is central to our business strategy. We’ve closed 23 renewable energy battery storage financings—such as the one for Jupiter Power—and committed $2.3 billion of balance sheet to these transactions since February 2020. 

Is your sustainable lending portfolio focused on a particular market or company type?

Gorman: Our portfolio is pretty well-diversified across sectors. We have lower concentrations in some areas that have the highest climate-related risk, such as agriculture, automotive, chemicals, metals and mining, oil and gas, utilities, and transportation. But even industries with high and medium risks—those heavily dependent on carbon-based energy or contributing significantly to emissions—need financing to speed their transition. We are particularly active in the renewables sector, which we consider to be among the biggest opportunities for our business.

In terms of our overall portfolio, we’re also looking at our financed emissions. We recently joined the Partnership for Carbon Accounting Financials and have started working towards adopting the Global GHG Accounting and Reporting Standard to measure and disclose our financed emissions. We’re in the early days of that adoption, as the data is challenging to work with. We’re using a combination of outside models and working at the client level to measure and reduce our financed emissions.

The transition to low carbon is complex, and the more orderly we can make it, the more the risk can be mitigated for everyone involved. It’s going to take a lot of people coming together to work through the policy, legal, technological, and market changes to drive this transition.

Understanding and disclosing climate-related business risk has emerged as a top priority for many companies across virtually every sector, including Deloitte, and certainly for banks. What is your approach to managing climate risk?

Gorman: Banks now disclose how they identify, assess, and mitigate climate-related risks. We’ve been disclosing our carbon-related information through voluntary reporting frameworks since 2012. In 2021, we committed to emissions reduction targets by 2030 using a framework aligned to the recommendations of the Task Force on Climate-Related Financial Disclosures (and the Sustainability Accounting Standards Board).

We’re currently executing nine work streams that partner with lines of business throughout the organization to identify and manage climate-related risk. One example of their work in progress is collaborating with our technology teams to implement systems to enhance disclosure governance and efficiency.

I believe in having goals and frameworks for achieving our climate commitments. What is interesting, is what we’re doing as an organization day in and day out, and how these activities drive progress toward those goals. We always challenge our teams to demonstrate to both internal and external stakeholders that we’re making progress.

At Deloitte’s executive committee meetings, we make a conscious effort to ensure that our strategy intersects with our purpose and aligns with risk management when we make decisions about the business. But there are inevitably a lot of gray areas in that decision-making. What is your approach to aligning KeyBank’s purpose of driving the low-carbon transition to the business strategy?

Gorman: We take a long-term perspective; any major transition causes friction and progress doesn’t happen in a straight line. We believe that when our communities and neighbors thrive, we thrive. So, climate leadership, financial inclusion, and diversity, equity, and inclusion are all cornerstones of our business. While there will be discussions and friction points along the way, we think each of those is critical to our defined purpose: to help our clients and communities thrive.

Our approach has always been to create value for our clients, our community, and our company at the same time. Of course, we can’t do everything at once, so we prioritize actions we think create the greatest value for our clients, knowing ultimately that prioritization will in turn create value for our business. That’s our mindset.

How has increased attention to the renewable energy finance market from larger competitors affected KeyBank’s growth strategy?

Gorman: As the renewable energy ecosystem continues to develop, we may end up with a smaller slice of the market—but in a rapidly and vastly expanding pie. The short answer is that increased competition hasn’t affected the clean energy focus of our growth strategy at all, other than to confirm it and our innovation-driven market approach. The financing we did for Jupiter Power, for example, was novel for its revenue strategy. Typically, financings for battery storage projects have been limited to those with “take-and-pay” contracts. The Jupiter projects had the new wrinkle of being true merchant deals for stand-alone, front-of-meter energy storage that relies primarily on uncontracted revenue streams. The important point is that financing projects like these really open the battery storage project aperture for a lot more market participants.

The market possibilities for renewable energy are vast. Business opportunities will continue to grow for us and for other banks that are willing to be leaders in the clean energy transition and  able to innovate as more capital and competitors come into the market.

—by Andy Marks, Deloitte Services LP, editor, Deloitte Insights for sustainability leaders

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