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Will the banking busts hurt clean tech?

Apr 20,2023 - Last updated at Apr 20,2023

NEW YORK — The collapse of Silicon Valley Bank last month seemed to bode ill for the global clean-energy race. Just as recently enacted US investment packages and the rest of President Joe Biden’s climate dreams were about to take off, the high-tech start-up sector’s bank of choice went bust, and commentators are warning of a looming slowdown in “the transition to clean energy”.

Yet, rather than hampering the clean-energy race, this episode should be a teachable moment. Yes, the initial handwringing over the banking fallout and its implications for climate policy were justified. SVB occupied an important place in the startup sector, and it was especially tapped in to clean-tech firms (its website still boasts “over 1,550 prominent clients” among clean-tech and sustainability startups). But if we learn the right lesson here, SVB’s bust may become a godsend.

First and foremost, SVB’s fate ought to bury the silly idea, peddled by some of the tech sector’s loudest voices, that technology alone will save us from society’s ills. It helps that SVB has “Silicon Valley” in its name. Recall how the Valley’s self-styled “libertarians” snickered at the bank bailouts of 2008 and the automaker bailouts of 2008-09, regarding it as obvious that big staid Wall Street and boring old Detroit would need taxpayer cash. If only tech CEOs had been in charge, innovative and independent-minded thinking would have prevented the whole mess. We now know how fanciful such arguments were.

In fact, those earlier bank and automotive industry bailouts also offered important lessons. One is that ever-present moral hazard will make future bailouts both more likely and more costly. But while deposit insurance and more implicit state-backed guarantees against systemic risk bear some of the blame, that doesn’t mean bailouts are not sometimes justified. As Jeffrey Frankel of Harvard University famously quipped in 2008, “They say there are no atheists in foxholes. Perhaps, then, there are also no libertarians in financial crises.” Silicon Valley needs Washington as much as Washington needs the Valley.

That brings us to another, subtler lesson of the SVB episode. While the size of an institution obviously matters for financial stability, it must not be the only criterion. After 2018, SVB was not subjected to regular bank stress tests, because the Trump administration had reclassified banks with assets under $250 billion as systemically unimportant. (SVB’s CEO, Greg Becker, was a strong supporter of that regulatory rollback.)

There are, of course, good reasons why smaller institutions should not be subject to all the same rules as big ones. A solo entrepreneur cannot and need not face the same regulations as large multinationals. But a balance must be struck. Just as banks with assets under $250 billion should not have been excluded from stress tests, the world cannot afford to ignore small polluters by exempting them from rules merely requiring disclosures of greenhouse-gas emissions.

As matters stand, the US Environmental Protection Agency sets a minimum reporting threshold of 25,000 metric tonnes of carbon dioxide per year. This benchmark raises obvious problems. Suppose you are on the board of a company with emissions just above the threshold, or perhaps one that’s twice as large. What should you do? One option is simply to split into two (or more) corporate entities.

The number 25,000 shows up elsewhere, too, perhaps with more bite. New York City now requires buildings larger than roughly 2,300 square metres to meet strict decarbonization targets. With fines potentially reaching millions of dollars per building as soon as next year, building managers might now think twice about approving that penthouse expansion.

Globally, most countries that are not among the largest dozen polluters can and often do hide behind the claim that they are “too small to matter”. But, together, these economies account for around 25 per cent of annual CO2 emissions. Being small does not mean your actions are irrelevant. To keep emissions and global warming in check, we will need to maintain a nuanced understanding of individual contributions and obligations.

Fortunately, supporting clean, lean, and green ventures is no longer the narrow purview of a scrappy community bank that is going out on a limb. Every major financial institution now wants in on the action, and SVB’s failure may well mean that they can step in with more vigor (and financing) than they otherwise would have done.

HSBC, for example, gained a foothold in a growing multibillion-dollar tech sector overnight when it bought SVB’s UK arm for £1 ($1.25). Moreover, those 1,500-plus clean-tech clients mentioned on SVB’s website are now looking for new bankers. Most will opt for larger institutions with deeper pockets. Wherever they take their business, they will teach one another new tricks in the process.

Equally important, these other banks and financial institutions presumably will not follow SVB in touting as a core competency their expertise at overcoming “regulatory hurdles”. The goal now will be to take advantage of the new regulatory and investment environment at a time when the US federal government alone is spending hundreds of billions of dollars on decarbonisation. Rather than fighting the good fight against Big Government, clean-tech startups are vying for the state’s largess. These market changes all call for an unprecedented level of cooperation between risk-takers and regulators.

Will we see a congenial, well-executed public-private minuet, or will there be more faceplants for big stars? Most likely, there will be plenty of both. When it comes to an economic transformation on the scale of the transition to net-zero emissions, it could hardly be otherwise.

 

Gernot Wagner, a climate economist at Columbia Business School, is the author of “Geoengineering: The Gamble” (Polity, 2021). Copyright: Project Syndicate, 2023. www.project-syndicate.org

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