Green Deposits: An opportunity for socially responsible short-term investing

The emergence of ESG investing

ESG encompasses a broad range of issues — ranging from climate risk and solar and alternative energy (environmental), to pay equity and good corporate citizenship (social), to cybersecurity and diversity initiatives (governance).

The importance that corporations across the globe are placing on achieving ESG objectives continues to grow. As such, more and more companies are looking to integrate ESG into how they deploy their investment dollars. The result has been a shift toward more socially responsible investments that align with corporate values.

Growing demand for a simpler alternative

To address this shift, many ESG investment alternatives have emerged. However, until recently, most sustainable investment alternatives have been in off balance sheet asset classes, with companies investing directly in the debt or equity of individual companies with strong ESG performance records and initiatives, or in debt or equity ESG funds.

The challenge of investing in such asset classes is they expose a corporation to higher volatility, particularly when investing directly in debt or equity. Investing in ESG-strong companies and funds may require revisions to a company’s investment policy and is complicated by an increasingly confusing landscape:

• Many ESG-focused companies tend to be in newer and less understood industries.
• A growing number of ESG research firms as well as more traditional credit rating agencies are ESG-scoring companies, but no one uses the exact same standards.
• The number of indexes that now benchmark ESG investment performance has risen above 1,000.
• Standards continue to evolve for corporate ESG reporting.

As a result, companies investing in these asset classes to pursue ESG objectives can find it more challenging and expensive than traditional investing.

Often, it requires the assistance of a specialist external investment manager or internal staff dedicated to monitoring and managing the performance of those investments.

These complications have created a rising demand for simpler, more familiar ESG investment alternatives.

HOW GREEN DEPOSITS FILL THE VOID

A new short-term investment option meeting that demand is green deposits. These are interest-bearing bank deposits that enable a company to fund loans or commitments which meet established ESG criteria.

The idea behind green deposits is simple. Banks make loans that support ESG projects. Why not give companies an opportunity to fund those loans using their short-term cash?

Green deposits can help finance projects across a wide range of categories such as energy efficiency, renewable energy, clean transportation, waste management, greenhouse gas reduction, and sustainable agriculture and natural resource management. In doing so, they afford companies a simple, inexpensive opportunity to participate in the ESG movement.

How green deposits fill the void

There are many reasons why companies might want to allocate a portion of their short-term cash to green deposits. Among them:

• Green deposits are familiar. Corporate treasurers shouldn’t expect many surprises with green deposits. They are a bank deposit product, just like the ones treasurers have used for years in both their business and personal financial lives. As such, they are easy to understand and familiar both to company decision makers and the frontline financial staff executing daily transactions.
• They carry low risk. Most traditional ESG investment alternatives expose corporate investors to the volatility and potential loss of principal associated with the securities markets. In contrast, green deposits offered by banks have the same characteristics of existing bank deposit products with additional protection from the Federal Deposit Insurance Corporation for FDIC insured institutions, with coverage up to applicable limits.
• They don’t require a lot of resources to monitor. When was the last time you reviewed your savings account to see how it was performing? Bank deposit products just don’t require a lot of monitoring, and thus there’s no need to engage either internal or external investment managers to watch over them.
• There are few governance hurdles to clear. Because it’s a new product, it’s important to do a certain amount of due diligence before you begin making green deposits. You want to document how these deposits work and how they will help your company meet ESG goals. However, because it’s such a familiar, low-risk product, there’s usually no need to incorporate green deposits into formal investment policy guidelines.
• You get to tout your company’s ESG practices. Say you’re in an industry like oil exploration that’s under the microscope from an ESG perspective. Wouldn’t it be nice to report to shareholders and potential investors that a certain percentage of your short-term cash is in green deposits that support sustainable projects?
• Green deposits allow you to extend your relationship with your bank into the ESG arena. Rather than looking to a new, non-strategic relationship for support in pursuing ESG goals, you can integrate ESG into your day-to-day banking operations with a trusted partner and advisor.

Before you ‘Go Green’ on investing

So how do you approach the decision on whether to dip the company’s toes into green deposits — as well as other related matters such as who to invest with and how much to allocate?

The best advice is to follow the same “SLY” guiding principles you use for other short-term investment decisions — focusing on the “S” (security) first, then the “L” (liquidity), and finally on the “Y” (yield).

Green deposits offer a strong security profile. Most of the banks offering them today in the U.S. are large, well-capitalized global institutions, so counterparty risk shouldn’t be an issue. Similarly, there is very little market price risk associated with a bank deposit product.

From a liquidity standpoint, green deposits can make sense for investing across all categories of short-term cash, including operational, core/reserve and strategic. The key is to select a deposit maturity that will ensure your company has access to cash when it’s needed.

Under SLY, yield considerations come last, and that certainly should be the case with green deposits, where achieving ESG goals takes precedence over returns. In fact, the guiding principles for green deposit investing could be better described as “ESLY,” with the “E” standing for “ESG.”

ESG is here to stay

The way ESG has weaved its way into the fabric of corporate decision making suggests it’s not merely a trend. Being responsible stewards of corporate assets has become a fundamental part of corporate missions.

As companies continue to move forward on their ESG journeys, green deposits represent an inexpensive, low- risk way of engaging in socially responsible investing. For a corporate treasurer, it’s a simple move — substituting green deposits for non-green deposits when allocating some portion of short-term cash.