Partners (Number 3, 2008)

Forging a Green Partnership:

An Introduction to the Atlanta Fed's Green Development Primer

Anyone who's been paying close attention to the media lately might come to the conclusion that green is the new black.
Photo of First federal Savings Bank in Mishawaka, Indiana
First Federal Savings Bank in Mishawaka, Indiana, uses wind turbines, geothermal heating and cooling systems, and solar panels to help meet its own energy needs. Natural lighting not only reduces energy consumption; it also provides a positive environment for employees and customers. The bank opens its doors to schools and others to show how, according to First Federal President Richard E. Belcher, "One bank can make a difference. One person can make a difference."

Newspapers, magazines and blogs are swarming with articles about green. But "green" is not just a marketing buzz word or a fashion trend—it's a basic principle that will increasingly inform the future of energy policy, car purchasing, building construction, urban development and lifestyles in general.

Banks, which have always been interested in one particular shade of green, are expanding their palette and experimenting with new shades. Indeed, environmental altruism, shareholder requests and customer preferences are all factors that contribute to financial institutions' embrace of green principles. For example, Bank of America, Wells Fargo, PNC and JP Morgan Chase have committed to investment in environmentally sustainable practices, including their lending, building and operations practices.

Although banks are acknowledging the importance of environmental sustainability—some have even developed innovative, "green" financial products—many opportunities remain for banks, savings and loans, and credit unions to help propel green lending into the mainstream. While many real estate developers and non-profits have embraced green principles, few financial products exist to support this development and financial institutions, in general, have lagged in their knowledge in this area.

Priming the pump for green
To help financial institutions, community developers and nonprofits understand the myths and realities of green building, the Federal Reserve Bank of Atlanta is publishing a Green Development Primer to inform these key players about green development practices. It includes an overview of green building, a review of the different standards used in the industry, analysis of the benefits and costs associated with green development, discussions about the greening of affordable housing, and a roster of opportunities and challenges for financial institutions interested in supporting green development.

"Green development" is any development, whether residential, commercial, industrial or institutional, whether single building or entire neighborhood, that is designed, constructed, maintained and operated so that it reduces energy and resource consumption, enhances the well-being of the community and minimizes the negative impact on the natural environment. The need for green development arises from the realization that an assumption fundamental to traditional building practices is in fact erroneous—namely that energy and materials will always be plentiful and cheap. Green building also seeks to halt the steady degradation of natural environmental systems.

Green development bestows a variety of benefits on individuals and communities. Green buildings that use energy and water more efficiently reward owners and tenants through lower operating costs. The reduced use of toxic chemicals decreases pollution and enhances health by providing better air quality (both indoor and out), while more compact development creates greater opportunities for physical activities like walking and bicycling. According to research from the U.S. Green Building Council, Capital E, David + Langdon, Romm & Browning, and others, buildings that are both more efficient and healthier yield other bonuses as well, including:

  • higher rental rates
  • discounted insurance rates
  • increased property values
  • increased occupancy rates
  • increased employee production
  • reduced absenteeism
  • and tax rebates.

While the advantages of green development are multifold, real and perceived challenges discourage some financial institutions from going green. The most cited obstacle is the lack of data supporting the potential costs savings of green building. Because green building practices are relatively new, time-tested examples of success are relatively few. But as green building practices develop and become standardized, the evidence in its favor is mounting. Studies by Capital E and David + Langdon already demonstrate that the costs of green construction are rapidly falling and nearly equivalent with the cost of traditional development.

But to account fully for the advantages of green building, banks may need to review their current underwriting practices and take more of a life-cycle approach to determining a project's economic viability. While a green building may have higher up-front capital costs, the diminished operating and maintenance costs over the life of a green building often more than offset the initial costs.

Even though green development practices have only recently begun to attract attention, pushed to the forefront by mounting energy prices and the threat of global climate change, several green standards are already well-established in the industry. LEED (Leadership in Energy and Environmental Design) provides the most well-known national standard. Other national standards include the U.S. Environmental Protection Agency's Energy Star, Enterprise Foundation's Green Communities Criteria and the National Association of Home Builders' National Green Building Standard. At the state and regional levels, standards are popping up every few months.

"The founders of One Earth Bank believe their mission will give them a competitive advantage in an increasingly socially and environmentally minded marketplace."

Greening banks
The Green Development Primer also features banks that have already played a role in spearheading green development. Banks are tackling the sustainability movement in a variety of ways—by investing in green buildings and businesses, offering more favorable loans for green projects, reducing the paper consumption and transportation costs associated with mailing statements and other documents by bolstering their electronic communication capabilities, and by building environmentally friendly retail branches and offices.

First Federal Savings Bank is among those banks leading the way in green building. In April of this year, First Federal opened the doors on a LEED Certified branch in Mishawaka, Indiana. The 5,800 square foot facility features a roof system that incorporates a drainage system and grasses to reduce storm water runoff, wind turbines and a geothermal heating and cooling system to reduce the building's energy consumption, and interior finishes of recycled or renewable materials that improve indoor air quality. According to Richard E. Belcher, First Federal Savings Bank's president, the Mishawaka branch is a model for other businesses. "[Green building] becomes more advantageous as the price of energy goes up," said Belcher.

PNC Financial Services Group has experience with greening banks. They built their first Green Branch® in 2002, and as of 2007 they had 40 environmentally friendly bank branches. According to PNC, the high-efficiency systems of Green Branch locations reduce energy use by 50 percent or more and reduce water usage by 6,200 gallons a year compared to traditional branches.

A community bank that is truly in the vanguard of green financing is the proposed One Earth Bank, in Austin, Texas. Scheduled to open in late spring 2009, One Earth Bank announced a mission of integrating social and environmental values into the business and lending practices of a traditional community bank model. They intend to work with homeowners, businesses and developers to explore ways to maximize profit by greening their projects. In addition to providing traditional loan and deposit services, One Earth Bank is developing expertise in segments they believe have high growth potential and are also consistent with building sustainable communities:

  • locally owned businesses
  • real estate projects that integrate green building, smart growth, and environmentally sensitive development
  • clean technology and energy companies
  • businesses engaged in fair trade and living wage initiatives
  • organic food and sustainable agriculture companies.

The founders of One Earth Bank believe their mission will give them a competitive advantage in an increasingly socially and environmentally minded marketplace. Founder, CEO and President, Chip Bray, states that the decision to invest in sustainable products "draws on one of the cardinal rules of banking, a focus on safety and soundness. Working with households and businesses to further the goal of sustainability, whether it's improving energy efficiency or responsible management of waste streams, is completely consistent with the safety and soundness of our business."

For a more detailed account of the possibilities and challenges associated with green development and green financing, order a copy of the Federal Reserve Bank of Atlanta's Green Development Primer today! To order contact Karen Leone de Nie.

This article was written by Jared Yarsevich, research assistant in the Atlanta Fed's community affairs division.