Making money a renewable resource

How Peter Liu, a former oil industry engineer, stopped designing petrochemical plants and started the first green bank in U.S. David Bank.

David Bank | December 2008 issue

Several years ago, when the drips through our ceiling could no longer be ignored, we decided to install solar panels along with a new roof on our Berkeley, California, home. Then, when we needed a new car after our son arrived, we opted for a Toyota Prius.

We paid a premium for our little bit of green chic. That is, the money saved on our monthly electricity bill and at the gas pump didnt immediately justify the price of the not-yet-mainstream products. We figured the photovoltaic system wouldnt save us money for at least a dozen years, and it may be at least half that long for the gas-electric hybrid to pay for itself with better gas mileage. Were counting on global instability and corporate malfeasance to make our investments pay off, we joked to friends. And we havent been wrong yet!

At about the same time, across the San Francisco Bay, Peter Liu was making a much bigger bet on the same trends, literally banking on the green economy. Liu, a chemical engineer by training, assembled a Whos Who of Silicon Valley investors and others to put up just less than $25 million to open the first explicitly green bank in the U.S.

Since then, with a single branch and nearly no marketing, the New Resource Bank has attracted $166 million in deposits, including $10 million from the state of California. For individuals and institutions that have to bank somewhere, having ordinary savings and checking accounts in a bank that puts the money to work with loans to organic food producers, green developers and sustainable businesses has powerful appeal. As of June 30, deposits had more than doubled from a year earlier, while loans had nearly tripled, to $98 million.

Green may be the best kind of bank to be in these economic conditions, says Julius Genachowski, co-founder of the investment firm Rock Creek Ventures. He was one of New Resource Banks original organizers and came up with its name. I think we were early in recognizing that a bank that focused on this market could also be a successful business.

The promise of the green economy enabled Liu to raise an additional $14 million from investors this summer, despite the meltdown on Wall Street. New investors included Generation Investment Management LLP, the fund established by former U.S. Vice-President Al Gore and his partner, David Blood (their moniker, Blood and Gore, is a good description of the financial markets). Triodos Bank in the Netherlands, one of the worlds first banks established specifically to finance sustainable businesses, increased its stake in New Resource Bank. The amount of new financing fell short of New Resource Banks targets, but nonetheless gave the bank room for growth in both deposits and loans.

These days, making loans to businesses like organic cheese-maker Cowgirl Creamery, and offering no money down financing to homeowners interested in putting solar systems on their roofs no longer seems risky compared to investments in, say, subprime mortgage backed securities. (New Resource Bank did recently announce its first bad investment, a $1.9 million residential construction loan.)

Still, in the financial ecosystem, banks like New Resource represent an evolutionary growth spurt. Socially responsible investments, now 10 percent of the market, primarily seek to avoid harmful practices. Green venture capitalists made a record $2 billion in equity investments during the second quarter of 2008, according to Cleantech Group, a San Francisco research consulting firm. That has created a boom (dare we say bubble ?) in green technology startups. But scaling up the green economy also requires the kind of bread-and-butter credit traditionally provided by banks as business and construction loans or, say, financing for residential solar power systems that allow homeowners to pay a monthly installment. New Resource Bank is committed, as it says in its financial statements, to financing efficient and sustainable resources in its community.

Liu, now vice chairman at the bank he founded, insists the new market dynamics have reversed the historic trade-off between social benefits and financial returns. Now, sustainability is good business. When New Leaf Paper in San Francisco started to deliver 100 percent post-consumer recycled paper in 1998, for example, few paper mills had made sustainability a cornerstone of their business practices. With New Leaf growing 30 percent a year, competitors are starting to change their ways, says founder and chief executive Jeff Mendelsohn. New Resource Bank offered a slightly better interest rate than New Leafs previous bank on a $3.9 million line of credit, he says, which New Leaf uses to fund accounts receivable, inventory and other business needs. Theyve been a good partner as we navigate this fast growth, Mendelsohn says. They invest their time and their financial skills. Its more than an arms length financial relationship.

Paul Herman, founder of HIP Investor, a researcher and consultant for investors looking for socially responsible and sustainable business opportunities, says New Resource and a handful of other banks around the U.S. Green Bank in Texas, Home Savings Bank in Wisconsin and Charter Oak Bank in California, to name a few, fill a market niche for small green enterprises. Access to capital allows the opportunity for those businesses to prove they can be profitable, Herman says.

In this economy, a green bank provides a rare opportunity for depositors to leverage money to support their values with little risk, since the Federal Deposit Insurance Corporation now insures deposits up to $250,000. As a rule of thumb, New Resource, like other banks, is able to lend 10 times the amount of money it has on deposit, meaning a $100 deposit can enable a $1,000 loan to a green business. And since New Resource covers the ATM fees charged by other banks, depositors can get their money any time from any ATM.

Without a real marketing push, New Resource already has more than 1,000 depositors, including Ode. We believe that we are evolving from what was yesterday a social movement into a market opportunity, Liu told me in the banks only branch, a LEED certified green office in San Franciscos South of Market neighborhood. Thats what we are engaged in a market expansion exercise.

Peter Lius green education began at an oil company. He emigrated to the U.S. with his family from Taiwan when he was 12, settling in South Los Angeles. His father opened an electronics-supply store, where his son worked after school. Liu attended the University of California at Berkeley, majoring in chemical engineering, and went to work for Chevron oil company. I was very practical minded and put personal economics first, he says. I took the biggest offer at the biggest company.

As a process engineer at Chevrons petrochemical plants, Liu helped design sites that met Californias stricter environmental regulations, as well as lower-cost facilities that satisfied looser rules in Louisiana, Texas and other countries. There are a lot of good people, great people, at Chevron, but external forces are really needed for advances to be made, Liu says.

So Liu switched sides, joining Californias Air Resources Board and helped put into practice the states Clean Air Act. One object lesson: Executives at Chevron and other companies, who complained about proposed rules for clean gasoline, changed their tunes once the regulation was implemented. Ads trumpeted their products abilities to keep fuel lines clean and help cars run better. It became a marketing advantage, not a requirement, Liu says.

That experience led to a masters degree in public policy at Princeton University, and eventually into the banking world at Chase Manhattan Bank and Credit Suisse First Boston. The direct impetus for New Resource Bank came in 2004, when Liu, along with software entrepreneur Bob Epstein and several others, was asked by Californias treasurer at the time, Phil Angelides, to help develop a green strategy for the states two huge public pension funds, an initiative dubbed The Green Wave. Eventually, the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) agreed to invest $1 billion in established companies that met environmental standards, and another $500 million in venture capital and private equity investments in clean technologies.

Liu says many of the entrepreneurs he met told him, Thats all great, but the capital chain isnt just about private equity. The real need for money is on the credit side. In other words, in banking.

Liu and Epstein began shopping the concept for what they were calling The Sustainable Bank. One of their first meetings was with Peter Blom, CEO of Triodos Bank, established in the Netherlands in 1980, now with operations in the U.K., Spain, Belgium and Germany. Triodos had considered entering the U.S. market, but worried its model wouldnt translate well. Europeans were willing to accept slightly lower interest rates to realize social returns, Blom says; Americans, at least until recently, werent. Likewise, Triodos was able to start in Europe with basic banking adding more services later. The U.S. market required a full menu from the start.

Blom was impressed by Lius research and analysis, and by his questions about Triodos operations. He asked a couple of extra questions that were not so easy to get from the Internet, Blom recalls. We thought, Why do it ourselves if there was such a good partner? New Resource Bank didnt accept all the money Triodos principals wanted to put in; the initial round of financing exceeded the plan approved by bank regulators by 60 percent. Now, Triodos has a 10 percent stake.

Such interest from investors underscores what may be New Resource Banks greatest challenge, by now, everybody is going green. Some 60 banks worldwide have adopted the Equator Principles, setting out social and environmental guidelines for project financing. Citigroup vowed to provide $50 billion to environmental projects over the next decade, while Bank of America announced a $20 billion initiative to support sustainable businesses and turned its new 55-story, $1.2 billion Manhattan office into the worlds most eco friendly skyscraper.

Last year, when former U.S. President Bill Clinton launched a global energy efficiency building retrofit program, he quickly signed up five of the worlds largest banks, ABN AMRO, Citigroup, Deutsche Bank, JPMorgan Chase and UBS, each committed to arranging $1 billion in financing for cities and building owners to reduce energy consumption in existing buildings. If the money comes through, that will double the worldwide retrofit market.

Such global-scale investments are necessary if the world is to reduce emissions 30Ã? gigatons by 2030, about half the projected output, if current trends continue, the radical step experts say is necessary to stabilize carbon dioxide levels and avoid catastrophic climate change. A few more solar rooftops and Prius drivers wont be nearly enough.

A cap on carbon output, along with a market for carbon trading, will drive a booming market for clean technology, generating billions of dollars for investments that, in theory, could meet much of that challenge. In practice, however, it will take more than money and technology to realize the potential of the green economy. Equally crucial is leadership to coordinate multiple players and diffuse new practises to homes and businesses. Thats where institutions like New Resource Bank come in.

The city of Berkeley, California, for example, said last year it would become the first urban center in the country to finance the upfront cost of solar installations for homeowners who agree to pay back loans over 20 years through assessments on their property tax bills. The key to this entire program is to find a bank willing to provide the financing anticipated by the program, city staff members wrote in a report.

Likewise, Milwaukee and the Center on Wisconsin Strategy (COWS) are developing a plan to retrofit the citys building stock, an ambitious effort called Milwaukee Energy Efficiency, or Me2. Under the plan, $500 million in private financing would be repaid by building owners through monthly bills for the retrofit work, guaranteed to be below the cost of current energy bills.

I have not found finance to be a problem, per se, says Joel Rogers, the director of COWS and a law professor at the University of Wisconsin-Madison, who hopes to launch a pilot program in January of 2009. What the banks want to see is a demonstration of this working. They dont want to fund an experiment. What they have all said is, If you can guarantee payments, by getting this on a utility bill, with a penalty for non-payment, then Ill get you a very low cost of capital, below market rate. And I believe them.

Liu says New Resource is committed to breaking down barriers and taking on such leadership. The banks solar-financing program packages government rebates, tax incentives and low-cost capital into 25-year loans. Real estate developers who come in for financing can choose between two loans, one for conventional buildings and one for green construction, with a one-eighth percent discount and lower fees. For a $5 million loan, that could mean a savings of more than $60,000 over 10 years.

With the financial crisis exposing the perils of business as usual, Liu is looking for unconventional opportunities. The hurt for just doing the conventional things is getting greater and greater, he says. As the markets revive, Green should be associated with better performance.

Thats in line with the advice Peter Blom of Triodos offered Liu in their meetings. You really need to be the crazy guy when others say, This is green enough, he told Liu. You have to go the extra mile. Liu has already taken New Resource Bank that extra mile, and now hes going further.

Solution News Source

Making money a renewable resource

How Peter Liu, a former oil industry engineer, stopped designing petrochemical plants and started the first green bank in U.S. David Bank.

David Bank | December 2008 issue

Several years ago, when the drips through our ceiling could no longer be ignored, we decided to install solar panels along with a new roof on our Berkeley, California, home. Then, when we needed a new car after our son arrived, we opted for a Toyota Prius.

We paid a premium for our little bit of green chic. That is, the money saved on our monthly electricity bill and at the gas pump didnt immediately justify the price of the not-yet-mainstream products. We figured the photovoltaic system wouldnt save us money for at least a dozen years, and it may be at least half that long for the gas-electric hybrid to pay for itself with better gas mileage. Were counting on global instability and corporate malfeasance to make our investments pay off, we joked to friends. And we havent been wrong yet!

At about the same time, across the San Francisco Bay, Peter Liu was making a much bigger bet on the same trends, literally banking on the green economy. Liu, a chemical engineer by training, assembled a Whos Who of Silicon Valley investors and others to put up just less than $25 million to open the first explicitly green bank in the U.S.

Since then, with a single branch and nearly no marketing, the New Resource Bank has attracted $166 million in deposits, including $10 million from the state of California. For individuals and institutions that have to bank somewhere, having ordinary savings and checking accounts in a bank that puts the money to work with loans to organic food producers, green developers and sustainable businesses has powerful appeal. As of June 30, deposits had more than doubled from a year earlier, while loans had nearly tripled, to $98 million.

Green may be the best kind of bank to be in these economic conditions, says Julius Genachowski, co-founder of the investment firm Rock Creek Ventures. He was one of New Resource Banks original organizers and came up with its name. I think we were early in recognizing that a bank that focused on this market could also be a successful business.

The promise of the green economy enabled Liu to raise an additional $14 million from investors this summer, despite the meltdown on Wall Street. New investors included Generation Investment Management LLP, the fund established by former U.S. Vice-President Al Gore and his partner, David Blood (their moniker, Blood and Gore, is a good description of the financial markets). Triodos Bank in the Netherlands, one of the worlds first banks established specifically to finance sustainable businesses, increased its stake in New Resource Bank. The amount of new financing fell short of New Resource Banks targets, but nonetheless gave the bank room for growth in both deposits and loans.

These days, making loans to businesses like organic cheese-maker Cowgirl Creamery, and offering no money down financing to homeowners interested in putting solar systems on their roofs no longer seems risky compared to investments in, say, subprime mortgage backed securities. (New Resource Bank did recently announce its first bad investment, a $1.9 million residential construction loan.)

Still, in the financial ecosystem, banks like New Resource represent an evolutionary growth spurt. Socially responsible investments, now 10 percent of the market, primarily seek to avoid harmful practices. Green venture capitalists made a record $2 billion in equity investments during the second quarter of 2008, according to Cleantech Group, a San Francisco research consulting firm. That has created a boom (dare we say bubble ?) in green technology startups. But scaling up the green economy also requires the kind of bread-and-butter credit traditionally provided by banks as business and construction loans or, say, financing for residential solar power systems that allow homeowners to pay a monthly installment. New Resource Bank is committed, as it says in its financial statements, to financing efficient and sustainable resources in its community.

Liu, now vice chairman at the bank he founded, insists the new market dynamics have reversed the historic trade-off between social benefits and financial returns. Now, sustainability is good business. When New Leaf Paper in San Francisco started to deliver 100 percent post-consumer recycled paper in 1998, for example, few paper mills had made sustainability a cornerstone of their business practices. With New Leaf growing 30 percent a year, competitors are starting to change their ways, says founder and chief executive Jeff Mendelsohn. New Resource Bank offered a slightly better interest rate than New Leafs previous bank on a $3.9 million line of credit, he says, which New Leaf uses to fund accounts receivable, inventory and other business needs. Theyve been a good partner as we navigate this fast growth, Mendelsohn says. They invest their time and their financial skills. Its more than an arms length financial relationship.

Paul Herman, founder of HIP Investor, a researcher and consultant for investors looking for socially responsible and sustainable business opportunities, says New Resource and a handful of other banks around the U.S. Green Bank in Texas, Home Savings Bank in Wisconsin and Charter Oak Bank in California, to name a few, fill a market niche for small green enterprises. Access to capital allows the opportunity for those businesses to prove they can be profitable, Herman says.

In this economy, a green bank provides a rare opportunity for depositors to leverage money to support their values with little risk, since the Federal Deposit Insurance Corporation now insures deposits up to $250,000. As a rule of thumb, New Resource, like other banks, is able to lend 10 times the amount of money it has on deposit, meaning a $100 deposit can enable a $1,000 loan to a green business. And since New Resource covers the ATM fees charged by other banks, depositors can get their money any time from any ATM.

Without a real marketing push, New Resource already has more than 1,000 depositors, including Ode. We believe that we are evolving from what was yesterday a social movement into a market opportunity, Liu told me in the banks only branch, a LEED certified green office in San Franciscos South of Market neighborhood. Thats what we are engaged in a market expansion exercise.

Peter Lius green education began at an oil company. He emigrated to the U.S. with his family from Taiwan when he was 12, settling in South Los Angeles. His father opened an electronics-supply store, where his son worked after school. Liu attended the University of California at Berkeley, majoring in chemical engineering, and went to work for Chevron oil company. I was very practical minded and put personal economics first, he says. I took the biggest offer at the biggest company.

As a process engineer at Chevrons petrochemical plants, Liu helped design sites that met Californias stricter environmental regulations, as well as lower-cost facilities that satisfied looser rules in Louisiana, Texas and other countries. There are a lot of good people, great people, at Chevron, but external forces are really needed for advances to be made, Liu says.

So Liu switched sides, joining Californias Air Resources Board and helped put into practice the states Clean Air Act. One object lesson: Executives at Chevron and other companies, who complained about proposed rules for clean gasoline, changed their tunes once the regulation was implemented. Ads trumpeted their products abilities to keep fuel lines clean and help cars run better. It became a marketing advantage, not a requirement, Liu says.

That experience led to a masters degree in public policy at Princeton University, and eventually into the banking world at Chase Manhattan Bank and Credit Suisse First Boston. The direct impetus for New Resource Bank came in 2004, when Liu, along with software entrepreneur Bob Epstein and several others, was asked by Californias treasurer at the time, Phil Angelides, to help develop a green strategy for the states two huge public pension funds, an initiative dubbed The Green Wave. Eventually, the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) agreed to invest $1 billion in established companies that met environmental standards, and another $500 million in venture capital and private equity investments in clean technologies.

Liu says many of the entrepreneurs he met told him, Thats all great, but the capital chain isnt just about private equity. The real need for money is on the credit side. In other words, in banking.

Liu and Epstein began shopping the concept for what they were calling The Sustainable Bank. One of their first meetings was with Peter Blom, CEO of Triodos Bank, established in the Netherlands in 1980, now with operations in the U.K., Spain, Belgium and Germany. Triodos had considered entering the U.S. market, but worried its model wouldnt translate well. Europeans were willing to accept slightly lower interest rates to realize social returns, Blom says; Americans, at least until recently, werent. Likewise, Triodos was able to start in Europe with basic banking adding more services later. The U.S. market required a full menu from the start.

Blom was impressed by Lius research and analysis, and by his questions about Triodos operations. He asked a couple of extra questions that were not so easy to get from the Internet, Blom recalls. We thought, Why do it ourselves if there was such a good partner? New Resource Bank didnt accept all the money Triodos principals wanted to put in; the initial round of financing exceeded the plan approved by bank regulators by 60 percent. Now, Triodos has a 10 percent stake.

Such interest from investors underscores what may be New Resource Banks greatest challenge, by now, everybody is going green. Some 60 banks worldwide have adopted the Equator Principles, setting out social and environmental guidelines for project financing. Citigroup vowed to provide $50 billion to environmental projects over the next decade, while Bank of America announced a $20 billion initiative to support sustainable businesses and turned its new 55-story, $1.2 billion Manhattan office into the worlds most eco friendly skyscraper.

Last year, when former U.S. President Bill Clinton launched a global energy efficiency building retrofit program, he quickly signed up five of the worlds largest banks, ABN AMRO, Citigroup, Deutsche Bank, JPMorgan Chase and UBS, each committed to arranging $1 billion in financing for cities and building owners to reduce energy consumption in existing buildings. If the money comes through, that will double the worldwide retrofit market.

Such global-scale investments are necessary if the world is to reduce emissions 30Ã? gigatons by 2030, about half the projected output, if current trends continue, the radical step experts say is necessary to stabilize carbon dioxide levels and avoid catastrophic climate change. A few more solar rooftops and Prius drivers wont be nearly enough.

A cap on carbon output, along with a market for carbon trading, will drive a booming market for clean technology, generating billions of dollars for investments that, in theory, could meet much of that challenge. In practice, however, it will take more than money and technology to realize the potential of the green economy. Equally crucial is leadership to coordinate multiple players and diffuse new practises to homes and businesses. Thats where institutions like New Resource Bank come in.

The city of Berkeley, California, for example, said last year it would become the first urban center in the country to finance the upfront cost of solar installations for homeowners who agree to pay back loans over 20 years through assessments on their property tax bills. The key to this entire program is to find a bank willing to provide the financing anticipated by the program, city staff members wrote in a report.

Likewise, Milwaukee and the Center on Wisconsin Strategy (COWS) are developing a plan to retrofit the citys building stock, an ambitious effort called Milwaukee Energy Efficiency, or Me2. Under the plan, $500 million in private financing would be repaid by building owners through monthly bills for the retrofit work, guaranteed to be below the cost of current energy bills.

I have not found finance to be a problem, per se, says Joel Rogers, the director of COWS and a law professor at the University of Wisconsin-Madison, who hopes to launch a pilot program in January of 2009. What the banks want to see is a demonstration of this working. They dont want to fund an experiment. What they have all said is, If you can guarantee payments, by getting this on a utility bill, with a penalty for non-payment, then Ill get you a very low cost of capital, below market rate. And I believe them.

Liu says New Resource is committed to breaking down barriers and taking on such leadership. The banks solar-financing program packages government rebates, tax incentives and low-cost capital into 25-year loans. Real estate developers who come in for financing can choose between two loans, one for conventional buildings and one for green construction, with a one-eighth percent discount and lower fees. For a $5 million loan, that could mean a savings of more than $60,000 over 10 years.

With the financial crisis exposing the perils of business as usual, Liu is looking for unconventional opportunities. The hurt for just doing the conventional things is getting greater and greater, he says. As the markets revive, Green should be associated with better performance.

Thats in line with the advice Peter Blom of Triodos offered Liu in their meetings. You really need to be the crazy guy when others say, This is green enough, he told Liu. You have to go the extra mile. Liu has already taken New Resource Bank that extra mile, and now hes going further.

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