Business Growth Strategies
Green Deposits: An Opportunity for Socially Responsible Short-term Investing
Addressing environmental, social and governance (ESG) issues has become a major focus for corporations. In a recent development, corporate treasury departments can now contribute to enterprise wide ESG efforts by adopting a basic liquidity management product that a handful of banks are beginning to offer: green deposits.
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.
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:
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.
There are many reasons why companies might want to allocate a portion of their short-term cash to green deposits. Among them:
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.”
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.