COMMUNITY VALUE($): Big Banks are leaving LMI communities; here’s why you should not

By Omar Blayton

In recent years, low-and-moderate-income (“LMI”) residents have witnessed a significant retreat by the nation’s largest banks from their communities. According to S&P Global, U.S. banks have implemented a 10%, or 2,347, net reduction of branches in LMI communities from 2014 through 2018, with Bank of America, J.P. Morgan Chase and Wells Fargo leading the way with 240, 187 and 174 closed branches respectively.

While bank branches are closing in communities across income segments, the rate is highest among LMI neighborhoods, where the negative effects are most acute. Reduced access to bank branches has a prolonged negative impact on community residents and businesses. Hoai-Luu Q. Nguyen found in her research published, earlier this year, in American Economic Journal: Applied Economics that “Closings lead to a persistent decline in local small business lending,” and loan originations, “remain depressed for up to six years.” Furthermore, these negative effects, “are very localized, dissipating within six miles.”

Although the negative effects of branch closings may be somewhat mitigated by the CRA funding these banks provide, the important question is, “What is causing this access to capital to leave?” 

For the answer, we may need to look no further than the CEO of J.P. Morgan Chase himself, who at a February investor conference referred to wealthy customers as the bank’s “biggest opportunity.”

This statement, while not disparaging LMI communities, clearly states where J.P. Morgan Chase sees its best potential for growth. While CRA lending is federally mandated, the location of bank branches is a concrete statement of where an institution sees value, strictly from a business standpoint.

In contrast, regional and community banks can often provide examples of institutions that look deeper to find the value in and engage with underserved communities. However, these banks simply do not have the scale to completely counteract the actions of the biggest players. 

The view of big banks towards LMI neighborhoods comes as no surprise as these, and similar, institutions use traditional metrics to assess the financial potential of communities. Using the traditional rubric, underwriting affluent neighborhoods is the lowest hanging fruit, seemingly providing the most value for the effort. In this view, it is simply not worth the institutions’ time to look for more creative ways to unlock value in LMI communities, even if that value could provide better returns on a risk-adjusted basis and have additional social impact.

This bias persists beyond traditional banking.

When it comes to capital allocation, the solar industry is not much different from big banks. Year after year, institutional money goes after large utility-scale projects and distributed solar installations in affluent communities that are seemingly easy to underwrite. Meanwhile, communities that could most benefit from affordable clean power remain overlooked as few solar companies and financing firms choose to create and nurture new solar markets. This dynamic leads to “solar deserts” – communities where access to solar is scarce or absent altogether – and to an unfortunate outlook for LMI communities with respect to the benefits of clean and affordable energy.

Suppose this were not the case. Imagine if firms were willing to try new models of underwriting and investment that incorporate LMI communities into investable products. These firms would be able to provide value to, as well as obtain value from, the communities overlooked by others and, in the process, potentially become leaders in both impact and financial return.

At Sunwealth, we are building and growing this new investment model. We look to collaborate with all communities, digging deeper with our underwriting in order to assess the true fundamental value of solar for the locations in which we invest. To date, 43% of our projects are located in low-income communities and 31% are located in communities considered Opportunity Zones.

Since our start in 2014, Sunwealth has financed more than 75 solar projects across a diverse range of communities and building types, including educational facilities, nonprofits, houses of worship, first responders and individual homes.

Through our projects and investment offerings, our investors enjoy non-concessionary returns while fighting climate change and making a positive impact in underserved communities. We recognize the numerous benefits that can come with localized solar -including green job creation, local economic growth, lower power bills, increased energy independence.  We want to bring these benefits to everyone, regardless of location or demographic.

While financing large utility-scale projects might be easier, our goal is to be intentional about the kind of value we are unlocking and the kind of impact we are creating. Every day, Sunwealth works to build a more inclusive and resilient clean energy economy that benefits all of us.

Want to invest in a more inclusive clean energy economy? Email us at hello@sunwealth.com.