Climate change legislation may be stalled for the moment on the domestic front, but some leading U.S. banks are not waiting for Congress to act to begin factoring carbon risks into future utility sector investments. This week, Ken Lewis, Chairman and CEO of Bank of America Corp. announced that the bank will factor the cost of carbon into its risk and underwriting processes when evaluating the business models of utility sector companies. In the absence of federal legislation, Bank of America will assume carbon emission costs will fall between $20-$40 per ton of carbon dioxide.

Bank of America’s announcement is the latest signal that US banks, like many foreign institutions, factor climate change issues into their strategic decision making. In early February, three major banking entities - Citi, JPMorgan Chase, and Morgan Stanley - released climate change risk management guidelines intended to assist utility advisors and lenders in managing risks associated with utility projects.

According to different report released by Ceres entitled “Corporate Governance and Climate Change: the Banking Sector” in January, thirteen out of 40 of the world’s largest banking institutions, including two major US companies (Citi and Wells Fargo) had already adopted risk management policies or lending procedures that address climate change in some form. These recent actions suggest that four of the largest banks on the Fortune 100 list of US Corporations (Citigroup, Bank of America, J. P. Morgan, and Wells Fargo) and one of the largest securities firms (Morgan Stanley) see climate change as a credible risk factor for future investments.

Of course, not all in the financial sector have embraced climate change as an appropriate investment consideration. Indeed, a review of the voting patterns among the top 100 Mutual Funds indicated that mutual fund management consistently abstained from or opposed shareholder resolutions seeking increased disclosure of climate change risks during 2006. Nevertheless, there appears to be a growing sense that climate change is “a global mega-trend” that could completely redefine the global businesses environment.

Such language may seem grandiose, but Ken Lewis’s explanation for the Bank of America’s policy changes offers a pragmatic basis for why, at minimum, banks are increasingly factoring climate change considerations into energy project and utility financing. In his comments during the North Carolina Emerging Issues Forum, Mr. Lewis asked his audience to “consider [that]:

• the utility sector is one of the largest contributors to greenhouse gas emissions;
• the carbon impacts of new plant construction will be with us for many years;
• regulation of greenhouse gas emissions is coming, but until it does we need to make assumptions about what the cost of carbon will be;
• there is a growing volume of research showing the needed actions and associated costs to slow, stop and reverse the growth of greenhouse gas emissions.”

Mr. Lewis’ emphasized the need for flexibility while cleaner technologies are under development, noting that, “[i]t will take time to make this shift happen. In the meantime, I’d like to keep the lights on.”

Mr. Lewis’s concluding statement is as an apt double entendre for the dilemma facing the commercial banking industry. To be sure, banks will need to continue playing a role in funding carbon-based energy projects for the foreseeable future if we are to meet the growing need for energy here and abroad. With the likelihood of future constraints on carbon emissions just around the corner, however, banks also need to make prudent risk management decisions if they hope to keep their own lights, and economic prospects, burning bright.

For further information about this topic, please contact Akin Gump.