Does your portfolio fully integrate ESG?

The little-considered opportunity of an including impact in an ESG portfolio’s cash position

ESG integration in equity investments is becoming mainstream and the ESG bond space is rapidly developing, but “the ESG of cash” is less understood. Most portfolios keep approximately 1% of the assets liquid, so to what extent do ESG fund managers consider the impact of the cash deposit position? Herein lies an opportunity for portfolio managers to take the lead on this little-considered element of ESG investing and achieve full integration beyond only screening for equity or fixed income positions.

The aim of a cash position is to allocate funds into the least risk possible. But do fund managers understand the ESG risks associated with the banks that hold the deposits? The banking industry is somewhat infamous for a history of corporate governance controversies and there are plenty of social risks currently in the spotlight as well, especially as they relate to financial inclusion or community lending. The main reason many of us are engaged in ESG integration is because we believe in the power of this industry to finance a more sustainable future. However, very few banks have made high-level climate-related commitments or risk disclosures, and many plainly separate their sustainability strategy from their financing activities. Portfolio managers should consider these factors and improve their ESG due diligence process as it relates to the bank deposit position as well.

Of course, not all banks are associated with high ESG risks. Many of the major banks are leading on ESG integration and pose a low-risk opportunity for values-alignment within the cash deposit position. However, regional banks are becoming a more viable option given their insurance under the FDIC, option to geographically diversify beyond Wall Street headquarters, and overall growth. In the past, these smaller banks have been excluded from such deposit programs because they were unable to accommodate the volume of daily inflows and outflows of deposits. As these banks grow, they can both handle the cash and authentically promise to make an impact with the cash.

What does this impact look like for a bank deposit? Consider the including any of these 6 commitments among the ESG criteria to screen for:

1. Members of The Global Alliance for Banking on Values (GABV): This network of banks represents a diverse range of institutions that serve the real economy, share a mission of using finance to deliver on sustainable development, and focus on helping individuals fulfill their potential by building stronger communities.
2. Banks with a B Corps certification: These banks are certified to have met the highest standards of verified ESG performance, public transparency, and legal accountability to balance profit and purpose. These banks are working towards reduced inequality, healthier environments, stronger communities, and creating high quality jobs.
3. Banks that participate in programs through The Community Development Financial Institution Fund (CDFI): These mission-driven financial institutions take a market-based approach to support generating economic growth and opportunities in disadvantaged communities by injecting new sources of capital into neighborhoods that lack access to financing.
4. Signatories of the United Nations Principles of Responsible Banking (PRB): This unique framework ensures that banks’ strategies and practices align with the Sustainable Development Goals. More than one-third of the global banking industry has signed-on to report their impact, set targets, and disclose their progress.
5. Banks that have set a Science-Based Target (SBT): These banks have committed to set emissions-reduction targets in line with science for a well-below 1.5-degree future scenario. This includes banks’ financed emissions, which is the most ambitions and leading position to take towards driving an environmentally sustainable economy.
6. Banks that have joined the Partnerships for Carbon Accounting Financials (PCAF): These banks are assessing and disclosing the greenhouse gas emissions associated with their loans and investments. This is considered the best-practice method for managing a bank’s climate impact.

Many of these commitments lend themselves somewhat naturally to tracking, measuring, and reporting the impact of these deposits. However, there are likely high switching costs associated with reconfiguring the banks within an investment firm’s bank deposit program. What other challenges do you think stand in the way of achieving this level of ESG integration?