Banking regulators confront the green resilience paradox

That is the thorny question confronting regulators at the Federal Reserve Board, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) as they consider sweeping changes to the regulations that implement the Community Reinvestment Act of 1977. The agencies’ proposed rules, released last summer, would for the first time reward banks for investing in climate resilience, driving much-needed dollars to qualifying projects. Ensuring that those investments benefit the low- and moderate-income communities that are the Act’s intended beneficiaries will require creative and proactive interventions by regulators and banks alike.

A meaner, greener Community Reinvestment Act

Congress enacted the Community Reinvestment Act to improve access to credit within underserved communities and combat racist lending practices such as redlining. The Act requires regulators to assess each bank’s record of “meeting the credit needs of the entire community”  within their service areas, including low- and moderate-income neighborhoods. Banks that fail to achieve a satisfactory score on their assessment may face adverse consequences, including denial of federal approval for new branch openings or mergers.

Last May, the three agencies responsible for implementing the Act—the Federal Reserve Board, OCC, and FDIC—jointly issued new proposed rules that, if adopted, would mark the most significant changes to the Act’s implementing regulations in decades. Among other changes, the proposed rules would modernize the rating system used to assess banks’ compliance with the Act, to keep pace with industry changes and address long-standing criticism that the standards regulators use are too lax.

From an environmental perspective, the most significant change is the addition of “climate resiliency activities” to the list of so-called community development activities for which banks can receive credit on their assessment. If adopted, this change would reward banks for investments and loans that promote climate resilience within their service areas, driving investment to qualifying projects. But the proposal also tees up a challenge: how can banks ensure their climate-related activities benefit the low- and moderate-income residents the Act is meant to benefit?

Unpacking the green resilience paradox

A growing body of research documents the phenomenon of “green gentrification” caused by investments in climate and environmental infrastructure. Most straightforwardly, climate-related investment can cause displacement if it directly reduces local affordable housing options—for example, if affordable housing is demolished to make space for climate resilience infrastructure. Displacement may also occur indirectly, such as when climate investments contribute to rising local property values, driving up property taxes and rents for housing insecure residents. The possibility that measures meant to reduce climate vulnerability might perversely increase the climate vulnerability of some residents by contributing to gentrification-driven displacement has been described by one scholar as the “green resilience paradox.”

The example of energy efficiency illustrates the challenge of inclusive climate investment. Energy efficiency and weatherization can provide substantial benefits, including reduced energy use, more affordable energy bills, improved indoor air quality, and increased comfort and safety during extreme weather events. However, many energy efficiency programs struggle to reach lower-income residents, particularly those living in multifamily buildings. And even financing for multifamily energy efficiency and weatherization upgrades may provide little benefit to residents if building owners capture the energy bill savings or raise the rent after installing the upgrades. In the worst case, multifamily energy efficiency investments could drive displacement if they encourage the owner to seek higher-income tenants or to sell the property.

How can banks invest in climate resilience without displacement?

Avoiding displacement of vulnerable residents is especially important in the context of the Community Reinvestment Act given the law’s overarching goal of benefiting low- and moderate-income communities.

To address this issue, the agencies’ proposed rule includes a requirement that, to qualify for credit, banks’ climate resilience activities must “not displace or exclude low- or moderate-income residents.” But that raises the question: how, in practice, can banks ensure their climate resilience activities don’t contribute to displacement?

Potential strategies include:

• Engage with community-based groups early in the compliance planning process, especially those that can authentically represent the interests of vulnerable residents. Where appropriate, consider entering into a formal community benefits agreement that incorporates community priorities into your compliance plan.
• Coordinate with local government to ensure climate resilience activities align with long-term development goals for the area, including affordable housing goals.
• Use sector-specific best practices to mitigate the risk of displacement. For example, banks financing energy efficiency and weatherization upgrades should ensure that their portfolio includes affordable multifamily buildings and should consider incorporating affordability restrictions into lending agreements with building owners.
• Prioritize innovative resilience projects that specifically and directly benefit vulnerable or underserved populations.

For their part, regulators can help by issuing clear guidance on how banks can meet the anti-displacement requirement.

The green resilience paradox is by no means unresolvable. The proposed anti-displacement rule is a step in the right direction, but putting it into action will require commitment and creative thinking from both banks and regulators.