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Filling the hole Silicon Valley Bank left in the climate tech ecosystem

(AP Photo/Mary Altaffer, File)
Framed by the Manhattan skyline electricians with IBEW Local 3 install solar panels on top of the Terminal B garage at LaGuardia Airport, Tuesday, Nov. 9, 2021, in the Queens borough of New York.

The Silicon Valley Bank (SVB) played a critical role in the climate tech industry, particularly for early-stage companies. The bank’s recent collapse will be felt even though its depositors will get their money back, as announced by Treasury Secretary Janet Yellen. Still, one can expect some project investments to be delayed and the financial costs to startups to rise as a new risk appetite emerges. An important silver lining should be that more banks may eventually get more comfortable with supporting climate tech, which can help grow this funding “ecosystem” considerably and eventually lead to more investment.

SVB was a significant climate tech sponsor

As has been reported widely, the bank embraced its Silicon Valley roots and built its 40-year business around supporting startups that struggled to get the attention of larger, traditional banks. That also included many technology-related firms in general, but climate tech was a key segment. SVB claimed more than 1,500 customers, with collectively many billions in loans for businesses focused on clean energy generation and storage. It had a dominant position in certain segments, such as 62 percent of community solar projects.

That support for startups at the cutting-edge of the energy transition translated to several products and services, including some that were more specialized. For example, SVB was a large provider of so-called “back leverage debt financing,” which is a loan product used to take advantage of tax breaks afforded to solar and wind energy generation.

More fundamentally, however, SVB’s role in nurturing emerging technologies appears to have been unique. SVB played an important liquidity role, supporting venture capital (VC)equity as startups sought to commercialize and scale their products and meet working capital needs. And by being part of the VC ecosystem, SVB was also able to connect companies with capital.

Filling the gap

SVB was willing to take risks on these emerging companies by developing an understanding of their technologies, industry conditions and the companies’ early funders. This raises questions about how to get other lenders to fill its shoes, and quickly. One, partial answer may lie in the VC community — which some will find ironic given that venture capitalists are being assigned a good portion of the blame for SVB’s demise. Members of over a dozen VC firms are reported to have already met to discuss scenarios to keep parts of SVB operations active, including participating in a consortium that could bid for parts of the failed bank.

Presumably, the biggest part of the answer is that other banks and non-bank lenders must increase their activity in this space. Although that will take time, one can imagine SVB staff helping to spread and deepen these institutions’ knowledge and relationships in clean and climate tech.

Fortunately, financing of established renewable technologies like solar and wind is now well established, and many other companies engage in it. To wit, companies such as solar provider Sunrun says, in the immediate aftermath of the collapse, it has already been approached by several other lenders to replace its SVB loans.

The incentives for banks to get more active in climate tech, even in less well-developed segments, are clear enough. It will not escape the banking industry’s attention that industry cash availability has never been higher, with U.S. climate tech venture capital funding in 2022 of $28 billion, more than double 2020 and quadruple 2018 levels. It is also clear that there are huge new investment incentives through the Inflation Reduction Act (IRA). And it can only help that servicing climate tech helps advance banks’ climate-related commitments, made through associations like the Glasgow Financial Alliance for Net Zero (GFANZ) and others.

Finally, it seems plausible that the government, and specifically a government-sponsored green bank, could be part of the answer as well. This may be anathema to some purists, yet if a promising technology area lacks a broad enough understanding by the financial community, or is too nascent to receive private capital support, then a government-sponsored green bank may be very helpful in providing initial support and incubational resources to get private capital comfortable.

The SVB saga underscores the risk to an industry that is overly reliant on one source of financial support. If the bank’s demise eventually leads to a much more diverse set of financing sources, then climate tech will be the better off for it. Getting to that point quickly should be the goal for the financial industry and government alike.

Brad Handler is Payne Institute program manager and sustainable finance lab researcher at the Colorado School of Mines, as well as a former Wall Street equity research analyst in the oil and gas sector.

Morgan Bazilian is director of the Payne Institute and a professor of public policy at the Colorado School of Mines, as well as a former lead energy specialist at the World Bank.

Tags bank failure banking system climate climate investment Finance Janet Yellen lenders Silicon Valley Bank Silicon Valley Bank failure solar wind

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