Lush With Cash

Can e3 put the green back in banking?

by Andrew Thompson

Jessica Kourkounis e3bank's Frank Baldassarre (left) and Sandy Wiggins hope to change banking's ground rules.

In 2007, Frank Baldassarre realized he had been destroying the Pennsylvania countryside.

Baldassarre is giving me a tour of the headquarters of e3bank, which, when it opens this summer, will be the first sustainability-focused bank in the region. It's not your typical financial hub: Instead of a monolithic glass skyscraper, e3's Malvern headquarters (a Philly location is planned for 2010) is a quaint, renovated late-19th-century house painted light green and certified with the highest environmental standards. As we walk, he explains how every aspect of the house has been modified to minimize environmental impact.

In his prior life, Baldassarre specialized in real estate development at Fox Chase Bank in Exton. A vague interest in the burgeoning green-building movement led him to an information session at the Delaware Valley Green Building Council (DVBGC).

"It was like, Oh my God, what have I done?" he says. "I financed shopping centers, single-family homes, knocked down all that farmland. I just couldn't go back to business as usual. I didn't see anything wrong with that at the time because I didn't know any better."

He learned that buildings account for 48 percent of global greenhouse gas emissions, according to the American Institute of Architects, and that the way we build is a key factor in Earth's quickening degradation.

Ultimately, he realized that changing how we bank could change the world.

Baldassarre, 47, is about 5-foot-5 and wears the uniform of the urbane professional, complemented by brown, slicked-back hair. He looks like a banker. And it's tempting to wonder if this isn't a marketing gimmick. But when he talks about e3 — an acronym of sorts for "enterprise, environment and equity," what environmentalists call the triple bottom line — he does so with a gesticulative excitement that can leave him nearly breathless. For years, he says, he followed "grossly inadequate" environmental regulations that gave him a false sense of security, allowing him to work without truly understanding the ramifications of his actions. "I don't want to say ignorance was bliss," he says. "What I didn't understand was the total impact, from a systems standpoint, that I was having."

Baldassarre says he found himself the only person at Fox Chase meetings to consider the bank's environmental impacts beyond EPA regulations. "I had an option," he says. "I could try to develop these ideas and retrain the existing banking world by creating a new division in the bank. But sustainability is not a division. Sustainability is a belief system. Unless that organization believes in sustainability across all its systems, it's hard to be sustainable in the long haul."

Some wonder if being sustainable in the long haul is even possible, and say real sustainability is anathema to profitability.

"There's no such thing as a truly sustainable business right now, there are only degrees of sustainability," says Janet Ranganathan, vice president for science and research at the World Resources Institute in Washington, D.C. Such a sentiment is typical of many environmentalists who feel that our system has to be entirely upended before it can be fixed, and that the only truly sustainable enterprise is the one that exists outside of an economic structure born in the Industrial Age.

"She should have said, 'The way we live today is unsustainable. The way we live tomorrow can be,'" Baldassarre says with a smile, emphatically slamming his hand down on the conference table. "I guess at the end of the day, I'm optimistic. Will it be hard? Hell yeah. Will it be a challenge to get to where we really need to be? Yes. But I'm optimistic on our capacity to really change. I know of no other way to answer it because we are upstream.

"And in the worst case," he continues, "you start over and go to a different stream."

Baldassarre's decision to start from scratch brought him to become more involved with the DVGBC, which led him to Sandy Wiggins, one of the council's founding members. At 54, Wiggins is grayed and calm with a soft smile. A former real estate developer, he has since traded his BMW for PhillyCarShare, moved from the suburbs to Chestnut Hill, started walking to his hardware store. Though only seven years separate them, Wiggins and Baldassarre interact like seasoned mentor and eager apprentice: Baldassarre remains jubilant over his new enterprise; Wiggins is more reserved. Baldassarre is brightly optimistic, asking why I'm so skeptical when I bring up potential hurdles in fulfilling their mission. Wiggins is optimistic, too, but he asks no such questions.

"My first reaction was, 'You've got to be kidding me. I'm not a banker,'" says Wiggins of Baldassarre's proposal in 2008 to start e3. "I couldn't think of an industry that interested me less." But it wasn't long before he was convinced that changing methods of lending and borrowing is the surest way to change behavior.

We're sitting in an office on 17th and Locust where Wiggins and Baldassarre are showing me the simple PowerPoint presentation they use when making their case to potential investors. It doesn't start with pie charts and market potential. It starts with graphics of environmental and urban carnage: a miles-wide Chilean copper mine so toxic that three nearby towns had to be relocated; a crippled man on a street in China; an Earth laid waste.

And then they show The First Bank of the United States,>just across town from the office we're sitting in. "This edifice was really designed to inspire security and safety," says Wiggins, looking at the picture of the traditional Greek structure. "But ultimately it became all about the bank, where the bank set all the ground rules and controlled people's lives very much."

Wiggins and Baldassarre want to change those ground rules. They want to take an industry that has traditionally eschewed mindfulness and make it mindful, somehow working within the constraints of the same system that wrought the problems they hope to repair. To them, the financial world's narrow, profit-obsessed mentality for unending growth that undercut itself and wreaked havoc on the world economy is ultimately the same thing that financed projects that spewed billions of tons of carbon dioxide into the atmosphere and dumped toxic chemicals into water systems. From Baldassarre's perspective, banking is the force that has powered every project — nefarious or otherwise — in the past few hundred years, and the trick is to point that power in a different direction.

In the past few years, a handful of similar banks across the country — like New Resource Bank in San Francisco and ShoreBank Pacific in Ilwaco, Wash. — have either opened or been conceived with the goal of shifting consumer behavior through information, and lending and borrowing. These institutions, like e3, vow not to be simply places that use paperless account statements or put solar panels on their headquarters and call themselves "green" (although they tend to do these things). Instead, their goal is to change how projects are financed from the start.

They also share the adoption of the triple-bottom-line principle of devising metrics not only for financial performance but social and environmental performance, as well.

Wiggins and Baldassarre want e3 to be part bank, part knowledge repository. Studies have shown that a chief impediment to consumers purchasing greener products has been a simple unawareness of their options. For a business owner, that means knowing how to get in touch with fair-trade suppliers or providers of lower electricity usage. For a homebuyer, it means knowing exactly what options exist to weatherize a house.

In the built environment, they see a particularly striking dearth of information, and the area where they hope to make the biggest impact is the mortgage division. Green buildings are the fastest-growing real estate sector in the country: The number of LEED-registered buildings in the Delaware Valley is now more than doubling every year and is on track to increase at least tenfold by 2010, according to the DVGBC.

The mortgage division employs what is perhaps the bank's most innovative feature: tiered mortgage rates — something few, if any, of the new eco-banks have adopted. Homes with higher efficiency incur lower interest rates. (Those rates, Baldassarre says, are locked in once mortgages are signed.) From a risk-analysis standpoint, it makes sense. Lower operating costs mean more money to pay back a loan, and thus a lower risk of defaulting.

For the most part, banks haven't absorbed this. Most bankers haven't boned up on green building procedures and don't know how to handle a builder interested in a LEED-certified project. And that's created situations like Jackie O'Neil's.

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When taking out a mortgage, certain criteria have to be met: You have to have a heating system, a water system, waste disposal and so on. The conventional forms of these processes differ from newer, greener means of construction, but most banks know only how to appraise the old forms; they haven't yet adapted to evaluate the green methods. And that's why O'Neil, an e3 board member and IT consultant, became frustrated with M&T Bank in October 2004 when she attempted to build the first LEED-certified home in Pennsylvania.

"They didn't have a clue, honestly," says O'Neil. "It's no fault of theirs — they do tons and tons of mortgages. But they like clean, conventional construction."

O'Neil wanted to use solar power to heat her home, but says M&T's appraiser wouldn't grant her a conventional mortgage. They asked her again how she planned to heat her home; she repeated she would use solar, and after some more back-and-forth, she compromised by building an extraneous heater-grade fireplace in her home.

This is where Wiggins and Baldassarre think e3 plays an antidotal role to the current economic crisis borne from mortgage defaults. By creating incentives for borrowers to decrease energy costs in their homes, they say, you decrease both the long-term costs of the home as well as the burden of debt.

"It's win, win, win," says Baldassarre.

"I think we've designed one of the stupidest financial systems possible," says Josh Farley, an ecological economist at the University of Vermont. "One of the biggest problems with our current system is that money is loaned into existence bearing interest, and so anybody who borrows money has to pay back more than they borrowed, and on average, that means the economy has to be bigger every year so that people can pay back loans from the previous year."

Farley's criticism echoes that of many in his field: The financial world has prescribed a system of infinite, exponential growth completely out of touch with nature. Requiring borrowers to repay debt with interest demands ever-increasing extraction of resources.

The source of this problem, say Farley and his colleagues, is that banks can loan out more than they actually have. If e3 reaches its $30 million capital-raising goal, it will be able to loan $300 million. This means it, like every other bank, can generate money essentially out of nothing — and the only way to make nothing into something is to turn it into a physical good created from a natural resource. Critics' solution is to make banks loan out only what they have on hand.

In other words, the solution is less growth, not more.

"I don't have the equation to take nature to the financial services sector, yet," says Baldassarre when I ask him how e3 will try to counter an economy based on infinite growth. "But the fact that we're looking at these things are the first steps."

On Sept. 26, 2008, the day after Washington Mutual collapsed and became the largest bank failure in U.S. history, Baldassarre and Wiggins sat in the FDIC branch office in New York to pitch their idea for e3. Given the crisis of confidence rippling throughout the financial sector, they weren't sure what to expect.

But the FDIC reps received their idea well. So well, Wiggins recalls, that by the end of the presentation, he and Baldassarre were getting pats on the back for a job well done. "I think they were really tired of regulating an industry with no value system," says Wiggins.

The FDIC also likely knew the same thing as investors, who poured $1.5 million into e3 over two meetings last spring, according to Baldassarre. That is, they knew it had a market — a crucial part of getting government approval to start a bank.

Wiggins speculates that had Al Gore's environmental warning calls not invaded mass consciousness in the past few years and created a "perfect storm of awareness" in the U.S., e3 never would have gotten past lunchtime conversation.

An idea like e3 may once have appealed only to the granola-eating co-op shopper, but dread has become mainstream. Wiggins won't give the exact numbers found by Shelton Group, the company hired by e3 to map out the bank's market. But he expects four main demographics to compose the e3 customer base: the "true believer" who has "lived and breathed this for a while"; the "concerned mom" who lightly takes notice of global meltdown; the "cautious conservative" who at least acknowledges the reality of phenomena like global warming; and the "millennial generation," the group more likely than any other to switch brands to support a cause.

Wiggins and Baldassarre insist there's no compromise between fulfilling their mission and being financially successful — in fact, they say, that mind-set is what's prevented businesses from being sustainable in the first place. And after all, it's the people who don't bleed green who need convincing.

But consumers are fickle. While e3's investors can rest assured that die-hard environmentalists would be willing to take a quarter-percent cut in CD returns to fund local projects (the bank's "deep green" money market account), others won't. They'll seek the highest returns.

Illustration By: Jason Fritzsche

"We're not a niche. We're a bank, we're a bank, we're a bank," says Ken LaRoe, founder of First Green Bank in Eustis, Fla., which opened in February. He raised a staggering $19 million in start-up capital for his bank in five weeks. "In Florida, we wouldn't last a month if all we did business with were sustainable investors. It's an educational process. We have to show people these things, and if we don't do it right, we'll be out of business."

The debate over whether firms can be profitable and sustainable has raged for years, and many ecological economists still aren't convinced that it's possible. There seems to be a paradox: You can either be a niche green product, which isn't really green, or a mass green product, which isn't really profitable. I called an old professor of mine, John Sorrentino, an ecological economist at Temple University, and gave him the background on e3.

"It sounds like it could be discriminating," he immediately says. "Most people who talk about the triple bottom line effectively ignore the equity part, but when you're in a large urban area with a lot of poor people, you can't ignore that. The set of things you can do where you can help economy and ecology are relatively few."

In other words, e3, like other green businesses, may have to forgo appealing to the bulk of Philly if it wants to turn a profit, and the average Philadelphian is notably absent from e3's target markets. Most residents won't be able to afford the up-front systems upgrades and LEED-certification fees, even if it means long-term savings. A business owner in Olney might be less interested in making sure that coffee growers aren't slashing and burning the rainforest than in making sure he can sell coffee cheaply enough that people will buy it. A small niche frequents local farmers markets, but mammoth industrial farms exist for a reason: to cheaply feed a skyrocketing population. And if Whole Foods is the most sustainable adaptation of the supermarket chain model we have, it doesn't bode well that the company prices its products high enough to make the idea of a location in Strawberry Mansion a bad joke.

There's certainly economic benefit to the public if e3 helps a North Philadelphian weatherize his house and lower carbon emissions. But given our financial structure, the only way it would show up on the bank's balance sheets is if they get more business because customers think e3 is worth patronizing. The real benefit is so long-term and so diffuse that it's the kind of challenge normally taken on by governments.

"The private sector can't really make money addressing a lot of these problems," says Farley of University of Vermont. "A lot of the most serious problems we face concerning sustainability are public good problems, and public goods by their very nature are not fixed well by the private sector." For example, attaching value to something like the rain forest or carbon emissions is either done by taxes or cap-and-trade — something a single company on its own can't achieve.

Even Baldassarre admits that nailing down the social equity component of their triple-bottom-line measurements is incomplete and "a little more challenging."

I asked e3's O'Neil if she thought they would have to make any sacrifices in order to truly fulfill the bank's goals.

"We're not going to go homeless pushing our mission forward," she says. 

Back at the office on 17th and Locust, I ask Wiggins if he ever feels the despair that comes with making a life out of fixing global catastrophe, if he thinks there's still hope at this point and if his plans for e3 are enough. I ask him how the bank will deal with the fact that hybrid cars need to extract lithium from Bolivia, that solar panels are expensive, that the population continues to climb at a nearly vertical rate and our economic system is still predicated on infinite growth. I ask him how all this will be included in their triple-bottom-line measurement and if they think that green building and consumer education will be enough to stop what so many see as a high-speed train headed off a cliff.

"You mean have I ever looked into the abyss?" he asks. "Sure. That happens to me once a week. Maybe it's just the way I'm wired, but I really believe humans have the capacity to turn this all around.

"It's either that," he continues, "or go home with a bottle and a shotgun."

For more on e3bank, visit e3bank.com.

(andrew.thompson@citypaper.net)