Green Lending: What Is Your ‘Why?’

Green lending has become an important part of credit union strategic conversations. There are several reasons for this focus on credit that serves solar, electric vehicles, and other forms of sustainable energy consumption needs. Each credit union board of directors and management team should explore for themselves the opportunities that are presented with green lending.

To continue this conversation, we should define what green lending means. From an environmentalist’s point of view, green lending fuels projects that reduce or avoid greenhouse gases. Greenhouse gases contribute to the cause of climate warming.

From a consumer’s perspective, green loans help lower energy costs. We see this in products like energy-efficient appliances and home improvements to lower energy usage.

Credit unions have different motivations for delving into green lending. Here are some reasons that might apply to your strategic focus.

Relief For Energy Burdens

Credit unions are cooperatives that have historically focused on helping consumers improve their financial lives. Credit unions understand there can be several social and economic determinants to financial challenges. One of the causes is the high cost of utility bills.

Reportedly, the average household spends approximately 3% of their household budget on energy consumption. This is called the “energy burden” — the percentage of gross household income spent on energy costs. For low-income households, the energy burden can be three times higher. This can be harmful to communities where the residents are often cash constrained.

Credit unions whose aim is to help members increase savings, lessen harmful debt, and live with less stress will see green lending as a viable strategy.

Lower Operating Expenses

Most credit unions spend time searching for ways to reduce expenses. A prominent expense is the provisions for loan losses. This is an expense of funds put aside for future loan charge-offs. Green lending might protect a loan portfolio with less risky assets, thus reducing write-offs.

Green loans appeal to members who recognize the need for lower energy consumption. These members are sensitized to the need for financial budgeting and efficiency. Secondly, members who see a reduction in the cost of energy are more financially resilient. Members with stronger balance sheets pose a lower credit risk to the credit union.

Meeting Member Demands

Credit unions, like other institutions, want to remain relevant to the needs of members. This ambition calls on boards and managements to continually survey consumer behavior, monitor their product mix, and stay aware of market movements.

Members are already exploring green lending products for themselves. Increasingly, we see more electric vehicles on the highways around us. Our neighbors are installing solar panels at a growing rate. Members are opting for appliances and windows that are highly rated for energy efficiency.

Members will be challenged if credit unions move away from this market. Without a relevant credit union presence, providers who do not operate with member-owned, not-for-profit principles will fill the gap to meet green lending needs. Credit unions have an opportunity to be a consumer protector for members in this space.

Mitigate Global Warming

Credit unions might not ordinarily think about global warming as an immediate or proximate risk. The problem can seem too big and complex for one credit union to tackle. Nevertheless, there are important roles a credit union can perform.

Credit unions can demonstrate leadership by educating members on ways to protect their properties. Loans for protection against weather-related events can save lives and possessions. A credit union can use its connections with local agencies to inform members on the facts.

Depending on a credit union’s geography, the membership faces different threats from global warming. Regardless of the causes, a credit union can use its power of collaboration to help the community build resilient systems. We have seen these examples play out with credit unions that help their members weather and recover from natural disasters.

Asset Diversification

Diversification can improve a credit union’s risk profile. Adding different kinds of loans whose properties present fewer economic perils help credit unions perform better.

Green lending represents an opportunity for credit unions to develop a new asset category. Green vehicle loans are not just another vehicle loan. A home equity loan for energy improvements is not just another home equity loan. Credit unions should see these loans as having potentially safer behaviors.

Finally, every credit union might begin its green lending journey by asking the all-important “why” question. The answer to this question will identify the strategic importance of this specialized lending.

Maurice R. Smith is the former CEO of Local Government FCU. Before his retirement in 2023, he had served in leadership roles at credit unions for more than 40 years.