US corporations have an unprecedented opportunity to help struggling communities
across the country thrive just by changing the way they manage a sliver of their
cash reserves. All it takes is a willingness to look beyond business as usual.
S&P 500 companies collectively held $5 trillion in cash as of 2020, according
to HIP Investor’s analysis of FactSet data. If these
firms allocated just 1 percent of that liquidity to loan funds or deposits at
community finance
institutions,
they could drive real progress on addressing the nation’s racial and economic
inequities — while minimizing risk in their portfolio.
This goal is entirely feasible in 2022. Already, two firms — collectively worth
$500 billion in stock market value — are investing in this way: PayPal is
moving
to deposit $135 million into mission-driven financial institutions and
management funds that help underserved communities of color break barriers to
economic equity; that’s more than 1 percent of PayPal’s estimated $10-plus
billion in cash. And 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
US; and it just hit its initial $100 million
goal.
If every S&P 500 company allocated 1 percent of its treasury cash — about $50
billion — to community development financial institutions (CDFIs) nationwide,
that would raise CDFIs’ current total
liquidity
of $222 billion by 22 percent. Ongoing percentage allocations are ideal: They
share the wealth generated by corporate growth and assure community institutions
that cash will be there when they need it. That certainty could fund and scale a
new wave of entrepreneurship and job growth in communities of color and
underserved communities. It could also provide money for affordable housing and
climate-justice
projects,
including Equitable Climate Action Plans such as the one the City of
Oakland has published.
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Companies that are serious about diversity and
inclusion
are integrating initiatives throughout their business operations, and many see
their cash management and community investments as the next frontier — with
insured deposits, limited risk from loan defaults and a multiplier effect on
social impact. Mastercard,
for example, used CNote’s Impact Cash™ platform
to deploy $20
million
to communities that need it most, and sees that investment as a key part of its
commitment to racial equity and small business advocacy. Putting cash to work
for social equity at CDFIs, minority-focused deposit institutions, and
low-income designated credit
unions
is also a step toward meeting the growing expectations of ESG (environmental,
social and governance) investors and their increasing emphasis on the social
equity dimension.
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
diversity, equity and inclusion is expanding beyond personnel and procurement to
include how and where companies allocate their treasury cash and non-R&D
investment dollars.
Corporate treasury practices are likely to be the next factor included in ESG
ratings, just as banks’ loans are. Investors are starting to demand disclosures
of how companies use their cash — is it generating climate
emissions
and exacerbating injustice, or is it creating positive social and environmental
outcomes? We know several financial firms that are seeking to rate money market
funds for social impact. Shareholders are asking corporate finance leaders how
their companies are addressing financial
inclusion,
both broadly and in the headquartered community. Institutional investors and
major asset managers such as BlackRock are pushing corporations to publicly
share EEO-1 Reports on workforce diversity, and many want the same data on
supply chain partners. Balance sheet scrutiny is next.
Balance sheet actions can go a long way toward meeting social impact goals
Concerns about racial justice, ESG and diversity, equity and inclusion are
merited and here to stay. CEOs of corporations that have signed onto
stakeholder
capitalism
are under pressure to act, and many have also committed to UN Sustainable
Development Goals, including gender equality (SDG 5). They’re looking to their
finance teams for leadership.
CFOs typically play a major role in strategic planning, which includes
addressing SDGs — and using the tremendous power of the corporate balance sheet
is a natural path forward. This can and should be a long-term strategy:
Community financial institutions, especially those serving the job creators who
are most excluded from traditional finance, need multiyear allocations and
long-term capital.
And while private equity, venture capital and private credit funds require deep
due diligence, allocation of cash deposits can be an easier entry point for
treasurers: Underwriting is typically a lighter lift if treasurers use a
federally insured program that spreads deposits out across the country to the
institutions that need them most. This is a key point: Cash deposits should be
distributed over time and geography, rather than dumped in indigestible chunks
to a few well-known institutions.
Investments in racial equity and community wellbeing can become business as
usual for the S&P 500. Deploying 1 percent of corporate cash to institutions
that are set up to serve close to 99 percent of the population — especially
those who have been historically
excluded
— is an authentic way to address the inequities these communities face and forge
a path to sustainable impact.
Catherine Berman is CEO of CNote. R. Paul Herman is CEO of HIP Investor and co-editor of the Global Handbook of Impact Investing
(Wiley 2021).
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An internationally recognized expert in impact investing, Herman invented the “HIP = Human Impact + Profit” ratings system nearly 20 years ago, in 2004 — when investors asked how to create more human impact with their for-profit portfolios.
Catherine Berman is CEO of CNote — a fintech impact platform that helps corporations, foundations and banks deliver on diversity and inclusion goals by moving cash and investments into CDFIs and minority-led deposit institutions.
Published Jan 11, 2022 7am EST / 4am PST / 12pm GMT / 1pm CET