Portfolio 21 Investments, Portland, Oregon, USA

A Natural Step Network Case Study

Overview
Portfolio 21 Investments (formerly Progressive Investment Management) is an investment management firm specializing in socially and environmentally responsible investing. Formed in Eugene, Oregon, in 1982, it offers investment management services for individuals and institutions, helping people invest in companies that align with their personal values. In 1999 Progressive created the Portfolio 21 mutual fund of companies focusing on sustainability. With three offices in Portland, Seattle, and Eugene, the company currently has 12 employees and $165 million under management.

Background
Founder Carsten Henningsen became fascinated with investing at the age of 10 when his father gave him two shares of Mattel stock. Later, in college, his extensive travels made him aware of the social and environmental impacts of multinational corporations. When he graduated from college, he set out to offer socially responsible investments. At the time he opened his office in Eugene in 1982, not many clients knew about socially responsible investing. That changed with the disinvestment movement over South African apartheid. Henningsen testified for an Oregon law that directs the state treasurer to disinvest in companies operating in South Africa.

In 1986 Henningsen opened the headquarters office in Portland; in 1991 he opened a third office in Seattle. As a result of the Exxon Valdez oil spill and Earth Day 1990, the environment had become a significant public issue, increasing the interest in environmentally responsible investing. Portfolio 21 has always been known as a company that lives its values. It is an active participant in shareholder resolutions to improve the social and environmental practices of its clients’ companies. For example, the bulk of these resolutions asked companies to adhere to the CERES principles, which show a commitment to environmental stewardship. Portfolion 21 was one of the first companies in Portland to begin using recycled paper and soy-based ink.

Introduction to The Natural Step
Henningsen learned of The Natural Step (TNS) through Dick and Jeanne Roy of the Northwest Earth Institute. He attended the June 1997 TNS workshop and then arranged for other members of the firm to attend subsequent workshops. President Leslie Christian came back from a workshop in September 1997 with the idea of a mutual fund focused on sustainability--what is now called Portfolio 21.

Henningsen and Christian also discussed in staff meetings how they might implement The Natural Step framework in the office.

Application of TNS Principles
Being a small firm, Portfolio 21 did not need to develop an environmental policy, plan, or internal training. Instead, it used staff meetings to do an exercise: identify every aspect of doing business, determine where system condition violations occur, and envision what the business will be like when meeting the system conditions. As a service company, the most intense environmental impacts are related to employee activities, office management, and vendor selection. Staff looked specifically at paper, energy, office space, and transportation. It considered customers and suppliers as well as its own practices. As far as the service itself, its greatest impact is in the choice of companies in its portfolios.

Results
Sustainability mutual fund. Portfolio 21, launched in September 1999, is a no-load mutual fund designed to secure a sustainable future. Companies selected for the fund have made a commitment to environmental sustainability through their business strategies, practices, and investments. Portfolio 21 believes that using sustainability as a core business strategy will position these businesses to be more efficient today and prosper in the future. Portfolio 21 initially screened 2000 companies worldwide, selecting 30 to put into the fund. It continues to scan the horizon for more qualifying organizations. The company intends to run the fund like an index fund with a long-term perspective, not trading the stocks but instead holding worthy issues over the long term.

Paper. At the same time that it was developing a new mutual fund, Portfolio 21 was making changes internally. It chose 100 percent recycled, chlorine-free New Leaf paper for copying and for Portfolio 21 promotional materials. For letterhead it chose 60 percent recycled, 30 percent postconsumer content paper. Another first step was to eliminate paper towels from the washroom; an employee agreed to wash terry cloth towels weekly. Ceramic cups and dishes were also provided.

Portfolio 21 also worked with Charles Schwab, the brokerage firm it most often uses, to cut down on unnecessary paper. In the past, a UPS driver would show up with a hand truck stacked with boxes of statements from Schwab that had to be duplicated and filed. Schwab now sends account statements on compact disks instead of paper. Schwab also lets Portfolio 21 ’s clients choose not to get a annual report from each company in its portfolio and to have their investment advisor vote their proxies rather than getting mailings. New SEC rules allowed Portfolio 21 to put its prospectus for Portfolio 21 on-line, which has reduced by at least a factor of ten the number of prospectuses mailed.

When it purchased a new copier, it got one that prints on both sides of the paper, further reducing paper consumption.

Energy. After having Portland General Electric do an energy audit of its turn-of-the-century building in southwest Portland, Portfolio 21 installed a new heating/cooling system but decided not to invest further in retrofits. Instead it choose to move into the new Ecotrust Vollum Natural Capital Center in northwest Portland in 2001. It mitigates its electricity and natural gas consumption through a carbon offset program (see below).

Office space. In remodeling the original Portland office, Portfolio 21 chose carpeting with 30-50 percent recycled content. By selecting low-VOC paint, employees were able to work in the space while it was being painted. “You couldn’t smell a thing,” Henningsen said. For landscaping it chose Garth Rhoades Organic Gardening and Landscape Service. But even that company needed some nudging: Portfolio 21 employees enticed it away from the leaf blower (the fumes of which blew in the windows) by agreeing to pay a little extra to have leaves raked by hand.

The new office space, where all tenants have an interest in sustainability, has some intangible psychological benefits. Being in such a community creates energy. Henningsen says, “Sustainability is on our minds more. We have conversations in the hallway.” For example, Portfolio 21 Investment is putting clients’ money in Shorebank Pacific next door, and the bank is letting its customers know about Portfolio 21.

Transportation. Transportation is the area in which the company has the greatest environmental impact. The first step was to purchase bus passes for each bus commuter and annual maintenance reimbursements for each bike commuter. Moving to the new site added an additional incentive for commuting by bus or bike because parking requires a monthly fee whereas before it was free. The fact that the building provides two Flexcars helps as well. Henningsen says, “Their availability is fabulous, and they’re both hybrids (gasoline-electric).”

In 1999 the company learned about carbon offsets. Employees have agreed to a program that offsets carbon emissions from their transportation choices. Each employee tracks his/her mileage on various modes of business travel including daily commutes (via public transportation, car, bike, plane, etc.). At the end of the year, carbon credits are purchased to offset this travel, deducting that amount from each individual’s profit-sharing check. This system acts as an incentive to reduce miles and change modes since some modes have greater emissions than others. (See Exhibits 1 and 2.)

Carbon Offset Program. The Carbon Offset Program was devised to measure the company’s direct impact on global warming and to mitigate this impact by purchasing carbon offsets for workrelated travel and electricity use. Later this was extended to natural gas use. Carbon offsets are an investment in a project that reduces greenhouse gases, typically by storing CO2 (reforestation) or avoiding CO2 emissions through alternative energy sources or efficiency measures. Typically purchases are made through a third party, such as The Climate Trust.

Portfolio 21 Investment first calculated its total CO2 emissions from travel and electricity, converted that to the cost of offsets ($9/ton), and multiplied that by a factor of ten to cover other environmental externalities (including dirty tailpipe and power plant emissions) that an offset program does not address. In deciding where to purchase its offsets, the company considered the limitations of the forestry option. Indigo Twiwes-Cain, who did the research, says, “Planting trees is not a long-term solution. In England, for instance, Climate Care calculated it would have to plant an area the size of Devon and Cornwall for one year. Another two counties would be needed the next year and so on. Clearly this would place tremendous pressure on land resources.” Portfolio 21 Investment also wanted to have an impact on its local community. For its 2000 mitigation, the company invested in the NW Wind Project and PGE Solar for Schools program. Whereas the travel offsets are purchased by the employees, electricity offsets are subtracted from revenues as a business expense.

In 2002 Portfolio 21 Investment partnered with its new building owner Ecotrust and the property manager Ashforth Pacific to arrange for a carbon offset program for all 16 tenants of the Natural Capital Center. By donating funds to The Climate Trust and purchasing Green Tags through the Bonneville Environmental Foundation, the tenants will reduce their fossil fuel energy footprint by 91% or the equivalent of 929,067 miles per year in auto travel. The Climate Trust will achieve offsets by investing in energy efficiency for apartments and commercial buildings. The Bonneville Environmental Foundation will invest in wind power.

Lessons Learned
When asked what lessons he could share with other organizations, Henningsen said, “Implementing sustainable practices takes serious effort, but it’s worth it. You’re never done with it. It’s a journey that’s always changing. But it’s really rewarding. Every day, we’re thinking about what we can do next.”

Henningsen also mentioned that the company’s emphasis on sustainability differentiates it from other investment managers. Portfolio 21 has been attracting an average of $500,000 per month in new assets. The Web site gets 50,000 hits per month (or 12,000 page views).

Source
Interviews with Carsten Henningsen, Chairman, and Indigo Teiwes-Cain, research analyst.

Exhibit 1
Environmental Impact: CO2 Emissions
Our research revealed:
CAR travel generates approximately 0.9 lbs. of CO2 for every mile traveled, or 18 lbs. of CO2 per gallon of gas used.
BUS travel generates “insignificant” CO2 emissions and local transit authorities do not collect this data. Additionally, we would like to encourage public transportation (PT) travel as a lower impact-commuting alternative (Portfolio 21 Investments already reimburses employees for public transportation travel passes). Therefore, zero CO2 emissions were used for bus travel.
ELECTRIC TRAIN/MAX uses electricity from PGE. As we would like to encourage PT travel as a lower impact-commuting alternative, we assigned zero emissions for this form of travel. We do recognize, however, that this form of travel does have associated CO2 emissions, as does bus travel.
AIR TRAVEL. Calculations for determining the carbon emissions of air travel are very complicated and vary based on a number of factors. These include the type of airplane, the distance of the trip (longer trips are more fuel-efficient as a considerable amount of fuel is used during takeoff and landing), the longitude and latitude, the temperature and occupancy. The “fuel only” number commonly used is 0.5 lbs CO2/passenger-mile. This is the carbon dioxide release due to fuel combustion and is commonly talked about as being an average for the overall jet fleet. According to Dr. Mark Trexler, an expert on climate change mitigation, the Intergovernmental Panel on Climate Change is considering various multipliers on this “fuel only” number, ranging from 1.5 to 3.5. We have chosen to use a multiplier of 3, which results in an emissions figure of 1.5 lbs CO2/passenger-mile of air travel. This is a conservative (high) number and is triple the number that airlines would agree to today, but there is scientific support for it. By using a conservative (high) number, we aim to ensure we do not underestimate our travel impacts.
ELECTRICITY USED IN OFFICES varies from office to office. In Portland, we can purchase some wind energy from PGE. Seattle has no such program, and, while Eugene has a green energy program, it is not possible to participate in the program due to the current building management situation (Portfolio 21 rents only a small portion of the building and utility costs are included in the rental contract). Finally, our office in Wisconsin has signed up for wind energy through Madison Gas and Electric Company to cover office energy usage. Figures are obtained from each office to calculate carbon emissions from electricity use although there are a number of estimates involved (see calculations spreadsheet).

Exhibit 2
Appendix II