ShoreBank Pacific, Ilwaco, Washington, USA

A Natural Step Network Case Study

Overview
ShoreBank Pacific is a chartered commercial bank based in Ilwaco, Washington with its largest loan office in Portland, Oregon. It employs seventeen people and has assets of $80 million. It is the first commercial bank in the United States with a commitment to environmentally sustainable community development: "ShoreBank Pacific profitably assists businesses, and through them, their communities, to be sustainable in economic, social and environmental practices.”

The bank used the Natural Step framework as a basis for a scoring system that determines how closely potential loans align with the bank's mission. Aggregate mission scores, which are published in the bank's quarterly reports, allow the bank to determine whether it is helping its customers improve their sustainability practices. ShoreBank Pacific's work has attracted national attention and been a magnet for socially conscious depositors throughout the United States.

Background
The idea for ShoreBank Pacific began with Spencer Beebe. A fourth generation Oregonian and founder of EcoTrust, Beebe wanted to bring the triple-bottom-line concept of sustainability to rural communities in the Northwest. He felt that loggers, fishermen, landowners, and other locals are the only people who have a vested self-interest in both the environmental integrity and economic development of their local community. To support this effort, Beebe felt it was important to have access to capital from people who shared that same perspective. He envisioned a regional commercial bank that could provide rural communities and their businesses financial capital with a triple-bottom-line perspective.

In searching for capital and partners who shared his view, Spencer was introduced to Shorebank, Chicago, the nation's first and leading community development bank. In 1997 EcoTrust and Shorebank Corporation joined to launch ShoreBank Pacific as the first commercial bank in the U.S. with a commitment to environmentally sustainable community development.

Introduction to The Natural Step
In 1998 ShoreBank Pacific hired Kathleen Sayce, a scientist with a background in botany and community ecology. Her responsibility was to bring rigor to the environmental and social components of the triplebottom-line approach the bank was using.

As the bank's science officer, she was looking for a solid framework that her colleagues could use to quickly and objectively measure the sustainability qualities of loan applications. She was introduced to the Natural Step framework by a Shorebank consultant. The staff at Shorebank Corporation had seen a presentation on the Natural Step, and one of Sayce's contacts passed on a copy of the material used in the presentation. When Dave WIlliams came on as the new CEO, he was enthusiastic about this approach as well.

Aligning the Bank with The Natural Step Framework
Prior to Sayce's arrival the bank had been considering a loan scoring system devised by its sister organization, Shorebank Enterprise Pacific (SEP). Sayce found this scoring system cumbersome to use, and it required hours to complete for each client. She was looking for something simpler.

As Sayce began delving into the science and concepts that underlie the Natural Step, she liked what she saw. Unlike other ecological frameworks that depend primarily on environmental science, the Natural Step framework uses basic laws of physics and thermodynamics. In addition the Natural Step has a social component, a quality that is often missing from environmental approaches. Sayce concluded that the Natural Step gave her a resilient, scientifically solid framework for assessing the bank's loan portfolio.

The challenge was to translate the four principles into concepts the bank's lending officers could easily use in their loan assessment process.

Using the Natural Step principles, she devised a system that scored each prospective loan in five different categories on a scale of zero to three, where a higher number meant the organization was making a stronger commitment to move toward sustainability.

The five categories are as follows:

• Natural productivity
  • Issues: environmental impact, resource conservation, third party certification
• Green chemistry and engineering
  
  • Issues: material toxicity, process redesign, global warming impact
• Resource efficiency
  
  • Issues: material and energy conservation
• Landscape conservation
  • Issues: impact on urban sprawl
• Community diversity and stability
  
  • Issues: business diversity, rural access to capital, social equity, community improvement

Sayce developed an Excel spreadsheet with each of the five areas listed and examples of how to score each area from zero to three, and subsequently wrote a relational database for the portfolio. Although in theory an organization could be active in all five areas, few would be. Consequently, any loan with a score of three or higher was designated as supportive of the bank's mission. The overall target for ShoreBank Pacific is that 80 percent of its loan portfolio will be mission related.

Once developed, Sayce trained each of the loan officers and other key bank staff to use the scoring system. She reviewed the Natural Step principles behind the scoring system and provided examples of how various loans might be scored. The scores are now part of the loan review process, and Sayce sits as an ex-officio member of the loan committee. At monthly meetings, the loan officers review their portfolios by sector, including what might be done to improve those scores.

Some of the bank's customers, such as recycled paper suppliers, New Leaf and Living Tree Paper Companies, have asked what their scores are and how they can increase them. Sayce says that these companies are examples of how the scoring system has motivated many of their most innovative customers to examine all aspects of how their business can be run more effectively.

Although having a high score is not a requirement for getting a loan from ShoreBank Pacific, the lending officers realize that the scoring system is an objective and useful tool that can assess how well their loan portfolios align with the bank's sustainability mission.

The scoring system is also used as a marketing tool with depositors, and each quarterly report to stakeholders provides not only financial information on how the bank is doing but also the scoring mix of its loans. This gives a measurement tool on how effectively deposits are being used to support the bank's sustainability mission. (See Figure 1.)
 

Figure 1 - Portfolio Distribution by Mission Score - September 30, 2003

Applying the Natural Step Framework Internally
After establishing the mission scoring system, the bank decided in early 2002 to apply the same sustainability concepts to its own internal practices. Using a sustainability "backcasting" process, Sayce convened bank personnel in a series of meetings that systematically identified where the bank's operations violated the four system conditions of the Natural Step.

By flowcharting how the bank delivered its products and services, the group organized the violations into categories such as transportation, electronic equipment, printed material, document storage, food, and facilities. The group then created a vision of full sustainability where all activities met the system conditions, along with steps the bank could take over an extended period of time to reach that vision.

This process will not only help the bank become more efficient in its internal operations, but it will also give the personnel a deeper understanding of the issues involved in achieving a sustainable company. The results of the planning process were published in EcoNotes, the bank's quarterly customer newsletter.

Outcomes
ShoreBank Pacific is growing rapidly because it provides a safe place for socially driven investors to put their money. As reported in The Oregonian, "Deposits are soaring as people across the nation find the bank a place to save money while helping the environment." Assets increased from $20 million at the end of 2000 to over $80 million by June 2003. Deposits have grown 299 percent in the same time period from $17.4 million to $69.5 million. During this time the loan portfolio has grown from $11.6 million to $26.3 million, a growth rate of 127 percent.

The companies that have taken loans are enthusiastic about their relationship with the bank. "They actively promoted our product, more so than any bank I have ever seen," said Marc Gaudin, owner of the Joinery, a Portland company that makes handcrafted furniture from sustainably certified wood.

Jay Graves, owner of The Bike Gallery, says that when he got a line of credit from ShoreBank Pacific, "Having that connection with the environment and sustainability was a good thing. When we were with another bank we weren't happy with the service we were getting. We felt we were just a number on a page, rather than someone they cared about."

Sayce believes the bank has benefited by the internal "backcasting" effort. One example is saving $1,000 a year by shifting to filtered water from bottled water. A second is replacing an old copier with one that scans documents, converting them to an electronic form that can be e-mailed and digitally archived. Additionally the bank installed software to convert all incoming faxes into e-mails that can be electronically distributed. Sayce has begun calculating the CO2 emissions generated by travel and other bank activities. The bank intends to participate in a CO2 offset program so that its activities are ultimately carbon neutral. Not only is the bank profitable and growing but it is also gaining an international reputation. CEO Dave Williams was invited by the World Bank in June 2001 to address its 50 top managers on ShoreBank’s approach. At the time Williams told the Portland Business Journal, "[World Bank is] finding that development for the sake of development doesn't work -- it needs to be environmentally conscious. … They knew we were doing that, so they wanted to hear how we do it.”

Costs
The most direct cost of ShoreBank's innovative approach is the cost of having a science officer on its staff Some of that cost is offset by consulting services Sayce provides customers on how to improve their sustainability effectiveness. Examples include environmental surveys with recommendations on how to mitigate any negative impacts.

The costs of implementing the sustainability changes to the bank's internal operations have been minimal and are being spread over several years so that they are matched by offsetting resource savings.

Future Focus
By banking standards, ShoreBank Pacific is a small bank with the intention to grow into a significant regional bank. To Williams, sustainability makes good business sense. The sustainability filters not only help it invest in businesses with a long-term future but also businesses with reduced risks. Williams and Sayce foresee the day when their approach to banking will be the norm rather than the exception.

Lessons Learned
What worked
The Natural Step framework gave Sayce the template she was looking for in developing the bank's sustainability scoring system. It was based on solid science, could be articulated with just a handful of aspects to measure, and resulted in a straightforward scoring system that could be used fairly quickly.
What also helped was the strong support of CEO Dave Williams. As a former physics teacher, Williams understood the basic science that underlies the Natural Step and as a former CEO and business turnaround specialist he understood how the four principles made fundamental business sense.

What did not work
What has been more challenging to Sayce is devising a way to assess the social and community component of loans. The fourth system condition of the Natural Step recognizes that there is a social aspect to sustainability. What Sayce is looking for is a social science foundation for the fourth systemcondition that is as readily understood as the physical science components that underlie the first three system conditions.

Advice for Others
Sayce knows that ShoreBank Pacific is leading a pioneering effort in the banking industry. No other banks have a sustainability scoring system like ShoreBank Pacific does. Sayce recognizes that over time she and her colleagues will get smarter about how to do this and that their processes will evolve. What she likes about the Natural Step is that it provides a strong foundation upon which they can build their efforts. She also likes the non-prescriptive approach. The four system conditions don't tell one what to do but act as a compass in guiding an organization toward a sustainable society. Lastly, she believes it is crucial to have a CEO who can make the connection between sustainability and the organization's business mission.

Sources:
1. Interview with Kathleen Sayce, Science Officer
2. "Ecotrust Stirs Up a New Shade of Green,” FastCompany, April/May 1997
3. "ShoreBank's Expertise Sought by World Bank,” Portland Business Journal, June 2001
4. "Walking the Talk - Merging Mission with Internal Operations,” ShoreBank Pacific EcoNotes, Vol.4, Issue 3, Fall 2002
5. "Banking With A Conscience,” The Oregonian, August 8, 2003

This case study was prepared by Duke Castle, The Castle Group, in November 2003 for the Oregon Natural Step Network.