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Banking on Natural Capital

ShoreBank Pacific is perhaps the first bank dedicated to fostering a conservation-based economy. Ecosystem liquidation and degradation are banned from the business plan. The bank has begun mapping new business approaches to ensure that the economic activity it helps to support always includes social and ecological accountability. ShoreBank Pacific is a small pioneer, with eight employees, headquarters in Ilwaco, Washington near the mouth of the Columbia River, and loan offices in Seattle and Portland.

Last year, Chicago-based Shorebank Corporation, in tandem with Ecotrust (a nonprofit conservation group out of Portland), founded ShoreBank Pacific (SBP). For twenty-five years, Shorebank Corporation has been rebuilding inner city neighborhoods block by block, offering loans for small businesses and housing renovation in areas avoided by other lenders. The new bank, a wholly owned subsidiary of Shorebank, works with an affiliate nonprofit business development organization, Shorebank Enterprise Pacific. Since 1994, the enterprise group has provided marketing services and credit from a $3.5 million revolving loan fund to entrepreneurs and businesses in the Lower Columbia and neighboring watersheds—an area of degraded ecosystems, rising unemployment, slipping incomes, and declining investment in resource-based livelihoods (farming, fishing, and forestry). There is a great regional thirst for both economic and ecological revival.

Like any responsible bank, SBP is super careful and conservative. It adheres to time-tested practices: thorough and prudent lending and long-term relationships with investors, borrowers, depositors, and the communities. Unlike most other banks, SBP's sole goal is not maximum profits and expansion. Through loans and conservation recommendations, SBP hopes to initiate a wider public policy discussion on fiduciary responsibility and community reinvestment, a discussion that will include conservation principles, alternatives to government regulation, and, in rural areas, measurements of ecosystem services and biodiversity indicators. There is no model to follow in establishing ShoreBank Pacific. SBP's working partnership with Ecotrust and Shorebank Enterprise Pacific is pathbreaking; the map is new. ShoreBank Pacific's ability to meet its mission—the development of progressive loan products and environmental services—will require continual adaptive reckoning and self-appraisals.

The Responsible Banking Toolkit

LOANS: Like any other bank, ShoreBank Pacific is a financial intermediary that accepts deposits and offers commercial loans, lines of credit, mortgages, and residential home equity loans. ShoreBank hopes to distinguish itself by quantifying the cashflow benefits of improved environmental management practices and applying this information in its evaluation of loans. It's no easy proposition: cashflow and environmental benefits can occur over time scales that are not quantified adequately by tax, regulatory, or present-day accounting.

An urban borrower, for instance, might seek financing to purchase a waste-heat exchanger that generates cost savings in energy consumption, waste disposal, and insurance. When downstream cashflow benefits and environmental improvement work in harmony, a SBP loan officer might structure the price, repayment conditions, or other terms of the loan accordingly. For ShoreBank Pacific, this cashflow analysis of environmental practices is critical. It may allow loans that another bank would forgo.

To finance some conservation-based projects, SBP will form joint loan partnerships with another bank. ShoreBank may run into thorny moral/financial landscapes: How to balance the other bank's investments —which may be blind to conservation issues— with the "good works" goals of the specific partnership?

EQUITY CAPITAL: ShoreBank Pacific's loan quality, capital adequacy, and solvency are reviewed systematically by federal regulators. The bank's deposits are insured by the FDIC. Unlike most banks, however, ShoreBank Pacific's equity capital was obtained primarily from foundations making program-related investments. It has raised more than $7 million (about $6 million from philanthropic sources) toward a goal of $9 million. Shorebank President Ron Grzywinski refers to this equity as "patient capital" because both the investors and the investment are patient, giving as much weight to long-term community and environmental health as profit maximization. Based on typical equity-to-liability ratios for a bank of its size, ShoreBank Pacific's "patient equity capital" can support deposits as high as $100 million.

Once again, as a conservation-based financial institution, SBP must trailblaze: how and where should it invest its equity capital, capital closely regulated and tightly constrained by federal laws? How to non-harmfully invest its deposits? There are no simple answers to which "green screens" should be applied. Navigating with two captains—its fiduciary responsibilities and its professed green and non-harmful investment goals—SBP covers unchartered ground.

LOCAL BANK/GLOBAL DEPOSITORS: ShoreBank Pacific offers mission-based "EcoDeposits." Almost 800 depositors have deposited more than $7 million, mostly in small amounts. Most banks emphasize retail banking and compete for depositors within their local communities. ShoreBank Pacific seeks depositors nationally (at present, from forty-nine states) and worldwide (at present, from seven foreign countries). ShoreBank Pacific's smaller CDs are competitive with regional rates and national averages for comparable accounts. As ShoreBank's deposit base grows, loans will flow into a rural area that has suffered disinvestment because of liquidation of the natural resources on which residents depend.

MELDING PRIVATE/PUBLIC FINANCE: ShoreBank Pacific is, in part, a specialist small business lender that looks to work with other banks, public sector agencies, and nonprofits. Collaborations between SBP and the private/public sectors will hopefully create a new financial "toolkit" for conservation-based development. Shorebank Enterprise Pacific initiated one such project on the Astoria, Oregon waterfront, where hydrocarbon contamination from an abandoned plywood mill threatened an intertidal mill pond that empties into the Columbia River. The contamination prevented site re-development. An existing collaboration included capital from the enterprise group's revolving loan fund and matching funds from the EPA brownfield cleanup division. It also included the state, the city, and another local bank. Together, they made site remediation possible. ShoreBank Pacific has now joined Shorebank Enterprise to work with the city and developers to bring back the site's productive use.

SMARTER SELF-ANALYSIS = SUSTAINABLE PERFORMANCE: ShoreBank Pacific and its partners (Ecotrust and Interrain Pacific) are developing new forms of technical support for the bank's customers. These environmental services will help businesses measure resource inputs and outputs, evaluate products based upon resource use, and review benchmarks relative to similar sectors in industry. With this information, the bank can help customers, especially small and medium-sized customers with limited time and resources, to establish baselines, benchmarks, strategies, and options to improve efficiency and performance.

ShoreBank Pacific starts with the recognition that, in today's world, diminishing natural capital and the limited capacity of living systems to absorb human influence are major constraints. It believes that experiences in rural Oregon and Washing-ton have demonstrated that ecosystem conservation and community development can evolve into a balanced symbiosis. Forthright consideration of market, ecological, and financial systems can widen a bank's view of community and should, by extension, help to reduce the bank's credit risk. ShoreBank Pacific hopes its new niche will become every bank's niche—that other banks will eventually realize that conservation-based development is their business too.