Understanding Climate Risk: What We Learned from CDFIs
In late 2021 the Federal Reserve Bank of San Francisco kicked off a series of roundtable discussions on climate change-related risks with community development professionals who work in low- and moderate-income (LMI) communities and communities of color.
Our most recent roundtable focused on understanding the impact of climate risk on Community Development Financial Institutions (CDFIs) and the important work they do in LMI communities. Participants included real estate lenders and small business and consumer lenders serving urban, rural, and Tribal communities.
Here’s what we heard.
“CDFIs can take the headwinds,” but need the right kind of financing to do it.
CDFIs are widely considered to be innovators in the financial system. They can be nimble and flexible, so they are well positioned to be leaders in creating new financing products and approaches for climate adaptation in LMI communities. However, the work needs to be financially sustainable for there to be broader adoption across the CDFI industry, and CDFIs need funding to support the innovation they do best.
Attendees voiced a clear need for a pot of climate-specific, long-term, low-cost, flexible funding, such as through the Treasury Department’s CDFI Fund, that would enable CDFIs to experiment with adaptation work that is not directly subsidized. As one participant stated: “Where do I get the capital to start this, to invest…to build my capacity to do it? Do I know that funding will be there next year and the year after and the year after?”
Another attendee gave the example of fire hardening for homes in fire risk areas. “It’s expensive and it’s necessary, and has the potential to be highly valuable, but there’s not a clear source of funding for this work…The more we are able to show some of that [success],…policy-generated money will follow.”
Under consideration in Community Reinvestment Act (CRA) modernization efforts by the bank regulatory agencies (the Fed, the FDIC, and the OCC) is providing additional definitions of community development activities, including disaster preparedness and climate resiliency activities. Changes that incentivize long-term investment in CDFIs are also under consideration in the CRA modernization proposal. If adopted, these changes could help spur climate resilience investment through CDFIs.
“Programs are siloed.”
Even when there is funding to promote adaptation and resilience efforts, it comes from very specific funding streams that result in siloed strategies and products, making it difficult for CDFIs to develop a cohesive strategy.
“We end up with all these little pots of money reporting to 50 different [funders] on what they want,” said one participant. “We all have good ideas for our communities, but…strapped to these weird pots of money, it’s very hard to lead as a community development organization.”
Participants noted that ever-changing regulations at the local, state, and federal levels also pose a challenge to CDFIs engaging in financing climate adaptation and resilience.
“We need new financing tools and partnerships.”
Addressing climate risk in LMI communities means grappling with complex, often intertwined issues that require flexible funding and collaboration among non-traditional partners, as well as outside of the box approaches to address the magnitude of the challenge.
“We’re doing ancillary products to add on products,” said one participant. “Often times they don’t fit well within the current conventional financing system.”
An attendee shared an example from rural Alaska, where the financial viability of projects is a barrier to progress: “Many times there are very few users to spread the cost. It really takes an innovative financing structure with grants or loan programs with very generous terms to make this work for a lot of these projects. And to further complicate matters, in certain cases a tribal entity owns a property, but they aren’t technically a nonprofit, so they don’t have access to grants that a nonprofit would.”
Another participant described a creative financing partnership developed by a solar company working on Tribal lands. Because of the barriers to accessing collateral-secured financing for homes on a Native American reservation, the solar company partnered with a coalition of mission driven lenders to launch its own lending program through which homeowners on the reservation can access character-based loans that are not collateralized to pay for solar system installation. Attendees shared how the existing barriers to funding and limited bank investment in Tribal lands further compounds the challenges native CDFIs have in addressing climate risks. Under consideration in CRA modernization efforts is a clarification and expansion of the definition of community development activities in Native Land Areas, which, if adopted, could help reduce funding and investment barriers in these areas.
“This work is happening on the margins” – How do CDFIs transition from conversation to action?
We heard that while there is a lot of interest and talk about climate risk, there is limited action from CDFIs on the whole. And while the number of CDFIs that have a dedicated energy efficiency or climate infrastructure product is growing, it is still a small percentage of the overall industry.
Participants shared ways for CDFIs to start incorporating climate adaptation and resilience solutions into their work without creating a “full-on product.” Examples include:
- Smart-E: Smart-E is an expanding partnership being rolled out nationally that mobilizes the capacity of local lenders by providing CDFIs with an ecosystem of support to offer consumer energy efficiency loans (underwriting assistance, a vetted contractor network) without having to build a product on their own.
- CDFI Resilience Assessment Tool: A small group of CDFIs, in collaboration with the Opportunity Finance Network (a CDFI industry organization), recently developed a tool designed to assess the level of resilience in a loan under consideration as part of underwriting, as well as to surface opportunities for building greater resilience in their loans and the underlying projects or businesses they are financing.
“Education is very important.”
While we heard much about the need for changes to the financing landscape, we also heard about the need for CDFIs to build capacity and knowledge around this work. For example, lenders who are considering offering solar loans need to know how to evaluate two different solar proposals, what a reasonable level of wattage is for a given residential solar array, and how to know which installers are good to work with, among other topics.
In addition to building their own capacity, participants discussed ideas for developing an ecosystem to support this work, such as contractor networks for energy efficiency installation, and programs that assist with workforce training for energy efficiency, weatherization, and solar installation jobs.
Attendees also noted the need to educate clients, particularly on the commercial side, about the value of adaptation products in order to create demand that isn’t there currently. As one participant explained, CDFIs need to “be able to offer a client a turnkey project [and say] look, we have the people that can do the work. I can show you the math on how this is going to save you money. You’re not going to have to pay a lot of money out of pocket. We can make this work.”
Continuing the conversation
Over the next several months, the Community Development team will be meeting with the workforce development sector as we continue to explore how climate-related risks impact low- and moderate-income communities and communities of color. We will share what we learn, so check back often or join our mailing list continue learning with us.
Sarah Simms is a community development finance manager for the Federal Reserve Bank of San Francisco’s Community Development team. In this role, she seeks to further the conversation around emerging issues and best practices in the community development finance sector.
Elizabeth Mattiuzzi, PhD is a senior researcher in Community Development at the Federal Reserve Bank of San Francisco. Her research focuses on regional transportation and housing governance, equity, and economic opportunity.
More from the Understanding Climate Risk series:
- What We Learned from Twelfth District Agriculture CEOs
- What We Learned from Businesses
- What We Learned from Community Development Professionals
- What We Learned about the Impact of Climate Risk on Affordable Housing Development
The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.