Treasurers’ Role in ESG and DEI

How corporate treasury teams can take a leading role in “impact” initiatives—and why they should.

Corporate finance departments haven’t historically been positioned to create social impact within their organizations. Now, however, mounting attention from shareholders, employees, and customers on environmental, social, and corporate governance (ESG) standards is leading C-suite executives to look at every aspect of the business for new opportunities to support diversity, equity, and inclusion (DEI) initiatives.

This shift is giving corporate treasurers a new role as “impact investors.” And a rising generation of treasurers is embracing the opportunity to support corporate responsibility and recruitment goals.

According to the corporate finance leaders with whom CNote works, stakeholders increasingly want to know how their companies are investing in DEI, both within the enterprise and on the ground in the communities where they operate. Employees are asking that question too—often enough to make meaningful ESG investments a retention and recruitment factor.

Some treasurers in the vanguard see moving deposits and investments into community development financial institutions as a way to demonstrate leadership in addressing demands from shareholders and the corporate talent pool. They are emerging as key players in their companies’ efforts to support underserved communities—and they’re showing it can be done with measurable impact and without increasing risk.

It is true that those who have embraced the community investment challenge are going above and beyond the usual scope of the treasury organization, and that means they’re learning as they go. Among the lessons are the following four fundamentals:

1. You can move money into underserved communities without increasing risk.

Pioneering treasurers are not creating more risk in their portfolios—in fact, they may be mitigating risk. In the United States, cash deposits across multiple FDIC- and NCUA-insured community development financial institutions (CDFIs), low-income designated (LID) credit unions, and minority depository institutions (MDIs) are both secure and meaningful. They grow the deposit base at these community institutions, allowing them to increase lending activity and deploy additional financial resources.

CDFIs fund woman- and minority-led small businesses, affordable housing, and economic development. LID credit unions serve communities where most people have household incomes well below the national median. MDIs are financial lifelines for communities of color.

Diversifying cash deposits and investments with these institutions may actually reduce risks compared with leaving large amounts of cash in a few major banks, by increasing the proportion of fully insured deposits. Treasurers sometimes worry that community finance institutions carry higher risk, given their focus on underserved populations—but they do not. The standards are the same for everyone. Community finance institutions must comply with the same regulatory standards as traditional banks in terms of capitalization, liquidity, asset ratios, and other parameters. For anyone who trusts the banking system’s rules, there’s no reason to question the reliability of MDIs, CDFIs, or LID credit unions.

This level of diversification may sound like a lot of work—and it can be, for those who do it themselves. But that’s not necessary: A new cohort of technology-powered impact platforms can help treasurers efficiently identify potential partners, perform due diligence, move money, and generate impact reports.

2. Spreading the wealth maximizes the impact.

Offering to make a multimillion-dollar deposit in the best-known community-centered institution may seem like the quickest path to building an ESG-friendly cash management portfolio, but that doesn’t necessarily ensure that corporate cash will support the communities that would benefit most. In fact, there’s a growing asset gap between white-led and minority-led CDFIs that’s partly fueled by the “who you know” approach and reliance on which organizations show up first in an internet search.

There are more than 3,000 mission-driven deposit institutions and lenders in the United States, and many of them would welcome corporate deposits or investments. Treasury teams that look beyond the institutions everyone has heard of will see a full spectrum of impact opportunities, from insured cash management to investments in community loan funds that support small businesses owned by women and people of color, affordable housing, and economic development in financially underserved areas.

Spreading corporate funds around ensures that these communities have the capital they need when they need it—an approach that enables DEI-focused institutions to leverage corporate dollars for maximum impact.

Taking a more expansive view also allows finance leaders to target deposits and investments geographically—in communities where their corporate offices are located, for example—or thematically, in a way that aligns with the company’s impact priorities. Mastercard, for example, sees its deposits in CDFIs and LID credit unions as part of its broader commitment to closing the racial wealth and opportunity gap and supporting woman- and minority-owned businesses. Other businesses choose to invest in a customized portfolio of CDFI loan funds focused on low-income female entrepreneurs, Black-led businesses, or climate adaptation in disproportionately impacted communities.

3. Partnerships can solve timing and scale mismatches.

We have heard from some treasurers that they reached out to an MDI and had their deposit turned down. That rejection likely indicated not a lack of interest but a mismatch in timing, scale, or both. A variety of issues, including negative effects on the institution’s balance sheet and regulatory issues, could be in play. But a Black-owned bank that doesn’t need your deposit today or tomorrow might be eager to have it sometime in the future.

Treasury leaders who are succeeding with impact deposits and investments are building relationships and looking at multiyear rollouts, often through impact investment platforms and CDFI intermediaries. For example, when Comcast decided to increase its commitment to MDIs, the company’s treasury leaders built a long-term partnership with Inclusiv, a CDFI that provides capital, products, and services to community development credit unions. As a result, Comcast became the first corporate investor in Inclusiv’s Racial Equity and Resilience Investment Fund.

A relationship-based approach typically yields greater impact results and reveals unexpected opportunities. Treasurers who start with cash deposits may subsequently learn of loan and equity investments that fit their finance strategy. They may also discover opportunities for nonfinancial support that they can bring to other corporate teams, demonstrating leadership in advancing the ESG aims of the company overall.

4. Regular impact reporting shows progress on social goals.

Many treasurers prefer to start small, understandably, but some have staked out ambitious impact goals and allocated funds commensurate with those goals.

PayPal, for instance, has committed $535 million to credit unions, banks, loan funds, and venture capital funds that strengthen Black businesses and underserved communities, and that help drive financial health, access to capital, and generational wealth creation.

Netflix has pledged to allocate 2 percent of its cash holdings on an ongoing basis to financial institutions and organizations that directly support Black communities in the United States. Netflix recently hit its initial $100 million goal. The commitment was the result of a joint effort by the company’s treasury director and director of talent acquisition, illustrating the relevance of community investments across departments and the opportunity for treasurers to contribute to corporate goals in new ways.

Ensuring progress on lofty goals is the final piece of the puzzle. The level of public scrutiny on what the meaning of “impact” is and how companies are measuring it has dialed up considerably over the past year. The broad metrics on investments in LID credit unions and CDFIs are solid: These institutions must meet the needs of underserved populations to earn their designations from the federal government. However, an impact platform partner should verify the “impact” institution’s operations at a deeper level, and treasurers should expect quarterly reports explaining the benefits of the corporation’s deposits and investments, broken down by demographics and region.

 

Treasury Management Practices Are the Next ESG Target

The ability to show impact is increasingly important to corporate brand strength. Treasury management practices are likely to be the next factor included in ESG ratings: Environmental ratings have long considered a company’s entire supply chain, and that’s starting to happen with social ratings too. The window on corporate DEI is expanding beyond personnel and procurement to include how and where companies allocate their treasury cash and non-R&D investment dollars.

Investors are starting to demand disclosures of how companies use their capital—is it generating climate emissions and exacerbating injustice, or is it creating positive social and environmental outcomes? And because many ESG and DEI initiatives are directly tied to the movement of money, whether it’s cash or investments, corporate treasurers are positioned to be an essential driver of social impact within their organizations.

Those who’ve stepped up to that opportunity by adding CDFIs to their portfolios are demonstrating that impact investing doesn’t have to mean adding risk. It’s smart. It’s creating real benefits for communities and companies. It’s achievable. And it’s the future.

 

See also:

Yuliya Tarasava is co-founder and COO of CNote, a fintech impact platform that helps corporations deliver on DEI goals and improve ESG performance by moving cash and investments into CDFIs, LID credit unions, and MDIs.

Recommended Stories