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Stanford Engineering scholars work with bankers to encourage investments in sustainable projects

Two scholars in the Department of Civil and Environmental Engineering are working on a model that could help banks reward borrowers for decisions that benefit the environment.

Bruce Cahan, a Stanford visiting scholar, Harry Kellogg, Silicon Valley Bank board vice chairman, and Assistant Professor Michael Lepech are working on a template for sustainable banking that would r

Bruce Cahan, a Stanford visiting scholar, Harry Kellogg, Silicon Valley Bank board vice chairman, and Assistant Professor Michael Lepech are working on a template for sustainable banking that would reward borrowers for decisions that benefit the environment. | Photo: Rod Searcey

What goals should a bank have? Safety and profitability to be sure, but what about sustainability? Two scholars from Stanford’s Department of Civil and Environmental Engineering have joined with a prominent Silicon Valley banker to create a new template for banking that factors in sustainability. Their goal is to build a bridge between what bankers fund and Stanford research aimed at creating more livable cities, smarter buildings and infrastructure, and enabling more efficient use of resources.

Although the term “sustainable banking” may seem surprising, the concept is gaining traction for a variety of reasons: earth’s resources are finite, investors and the public are demanding greater corporate social responsibility from banks, and the metrics necessary for measuring and tracking sustainability in the financial sector are maturing.

“Banks are society’s engines for ‘printing money’ through loans. Engineers redesign engines to be safer and produce less pollution,” said Bruce Cahan, a Stanford visiting scholar and former Wall Street lawyer who co-founded the sustainable banking initiative. “Where better to redesign banking than at Stanford’s School of Engineering?”

Michael Lepech, a Stanford assistant professor of Civil and Environmental Engineering who launched the initiative with Cahan, describes the work as “science-based banking” because economic valuation of assets financed by banks is rooted in the science of whole systems used by engineers.

“The question sustainable banking poses is, ‘Can Stanford engineers convince banks to reward projects that are designed for sustainability advantages?’” he said.

Lepech explained that sustainability is a growing concern in construction projects and manufacturing processes. It’s possible for architects, engineers and developers to consider 30 or more factors in weighing a project’s social, economic and environmental impacts. What is missing, he said, is a sustainable bank that rewards borrowers for decisions that benefit the environment.

The financial crisis of 2008 stimulated interest in a more holistic approach to decision-making in the banking and investment sectors, sustainable banking advocates say. This would include weighing how actions in one area of bank lending (for instance, funding mortgage derivatives) could lead to unwelcome effects in other areas (booming home prices that eventually bust). “I’ll be blunt. The banking system was broken in 2008, and I don’t think it has been completely fixed,” said Silicon Valley Bank Board Vice Chairman Harry Kellogg, who is a strategic advisor for Stanford’s sustainable banking initiative.

Silicon Valley Bank is an important player in the innovation economy, serving as a bank, networker and advisor for many venture capital firms and tech companies that call Silicon Valley home. It was, for example, Cisco’s first bank and LinkedIn’s first bank. The bank is also used by angel investors, many of them founders of successful startups, who use their personal wealth to seed new ideas and companies.

“Supporting high technology and entrepreneurs has always been part of our core business,” Kellogg said.

“But we are also a basic commercial bank. We take deposits, and we make loans. We’re not involved in complicated derivatives or other exotic investments. We want to help launch businesses, grow with them and help them be successful, and that’s a model that I believe will work for sustainable banking.” It was Kellogg’s interest in finding ways to improve on the current banking model that encouraged the Stanford researchers to move forward with their ideas.

The sustainable banking initiative had its genesis in 2010 when Cahan and Lepech met through Ray Levitt, a professor at Stanford’s Global Projects Center and the Woods Institute for the Environment. Cahan was modeling financing strategies that rewarded the sustainability of natural and human-made systems, and Lepech had researched the possibility of adding “natural capital” as assets on corporate books.

Kellogg provided the final and critical component: a seasoned Silicon Valley banker who supports rethinking banking beyond what Wall Street finances today.

“The three of us agreed that there had to be a better way of determining real value in asset classes,” Lepech said. “Currently most banks consider financial market pricing as the primary criterion in evaluating a potential loan. But social and ecological values also contribute significantly to asset worth, once we calculate those values using existing accounting principles.”

Sustainable banking would leverage metrics for emerging concepts such as “ecosystem services,” Lepech said. As a hypothetical example, he described a city that needs more wastewater treatment capacity to grow. A standard wastewater plant would be relatively easy to assess in terms of both capital outlay and conventional benefits of wastewater treated per year.

An alternative, however, would be wetland-based systems such as those developed by Stanford Civil and Environmental Engineering Professor Richard Luthy. But a process that relies on marshes and holding ponds to purify wastewater would be more difficult to quantify as a hard asset than the massive concrete and steel facilities that are the current wastewater treatment infrastructure for municipalities.

Still, the services performed by the natural system are real – clean water, lower capital outlays and reduced energy costs. Other services may include carbon sequestration, fisheries and wildlife enhancement, and recreational opportunities. All of these services have real economic value.

Admittedly, things can feel squishy when you try to translate multiple social benefits into asset valuations. But Cahan, Kellogg and Lepech are working on a tool that will allow them to do just that. “We’re developing a periodic table of quality of life,” Cahan said. “Instead of a table listing the elements according to atomic weight, ours accommodates the elements that improve life – clean water, clean air, open space, carbon storage, reduced disease incidence, social equity, infant mortality and so forth.”

“This will allow sustainable banks to look at a potential investment or loan in its true economic and regional context, and holistically evaluate all its benefits,” he said.

Ultimately, the group believes, dollar values can – more to the point, must – be fixed to such social goods. Sequestered CO2 can be evaluated on the basis of existing carbon markets, and reduced disease and infant mortality can be analyzed from the perspective of lower public health costs.

Lepech noted that sustainable banking also dovetails with public sentiment, giving it critical impetus.

“Numerous studies suggest that people – especially high-net-worth people—want their money to do more than simply earn interest,” Lepech said. “More and more, they’re demanding proof of positive impacts in their impact investments, venture philanthropy or wealth management.”

Cahan said that bank deposits and funding sources are a currency of messages, either implied or explicit, that cue bankers on what mix of transactions to fund, and what rate of return depositors and investors are willing to accept.

“Money and semantics are intertwined,” he said. “When you put money in a savings account or buy a bond or CD, you’re signaling intentionality for that money.”

The team’s goal, Cahan said, is to better communicate the intentions captured by the periodic table to the bankers, to “tag” money with that intentionality. Later, the group aims to track bank investments to see how they actually contribute to quality-of-life elements in the table – that is, to measure whether public health, education, environmental or infrastructure issues are getting better or worse, which would allow them to determine which banks and asset managers invest purposefully for the long term.

So how does sustainable banking move from brainstorm to best practice? Kellogg said part of the plan involves returning bankers to their traditional roles as stewards and fiduciaries, growing the commonwealth, much like the community banker George Bailey in Frank Capra’s film, It’s a Wonderful Life. “We need an alternative banking culture that honors the traditional precepts of ethical banking,” Kellogg said. He noted that the relationship between Stanford and the private technology sector was a prime mover for the information technology revolution. Now he is convinced that a similar symbiosis will help kick start the sustainable banking movement. “The world really needs what we’re trying to develop here,” Kellogg said, “but we need Stanford to lead this effort.”

Glen Martin is a former San Francisco Chronicle reporter based in Santa Rosa, Calif. His latest book, ““Game Changer: Animal Rights and the Fate of Africa’s Wildlife,” was published by the University of California Press in 2012.

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