Leading with the ‘S’ in ESG

As ESG performance rises up the corporate agenda, the social dimension (the ‘S’) is rapidly emerging from the environment’s shadow – giving treasurers and CFOs an opportunity to lead by directly contributing to their company’s positive social impact. Catherine Berman, CEO and Co-Founder, CNote explains.

Evidence is mounting that ESG is not a fad. That’s true despite recent critiques of ESG ratings systems (see a good distillation of them here). In fact, some analysts see the increased scrutiny as a sign that ESG is having a significant impact. Board and investor surveys bear that out: In PwC’s 2021 Annual Corporate Directors’ Survey, 64% of directors said ESG is linked to their company’s strategy – a 15-point rise over 2020. PwC investor research from 2021 found that about 50% are willing to divest from companies that don’t take sufficient action on ESG issues, and almost 70% think ESG factors should figure in executive compensation targets.

In this context, the social dimension of ESG presents a puzzle urgently in need of solutions. The ‘S’ has always been the blurriest aspect of ESG. “Commentators and investors have described the ‘S’ in many different ways: as social issues, labour standards, human rights, social dialogue, pay equity, workplace diversity, access to health care, racial justice, customer or product quality issues, data security, industrial relations, and supply chain issues,” noted Jason Saul, Executive Director, Center for Impact Sciences at the University of Chicago, in a recent article for Stanford Social Innovation Review.

The lack of clarity meant corporations paid less attention to the ‘S’, but that started to change with the onset of the pandemic, which sharpened the focus on social disparities and fuelled calls for corporations to do more. Some social impacts, Saul wrote, are emerging as universally material to companies, including racial equality, financial inclusion, workforce development, and health equity.

So, what does all this mean for treasurers?

Community investment opportunity

Treasurers who manage cash allocations are in a unique new position to enhance their company’s social performance because they have an incredibly powerful tool at hand: the corporate balance sheet. By allocating cash to loan funds or deposits at community financial institutions, they could drive real progress toward addressing racial and economic inequities – while minimising risk in their portfolio.

To illustrate the potential, if every S&P 500 company allocated 1% of its treasury cash to US community development financial institutions (CDFIs), that would pump about $50bn into underserved communities, according to HIP Investor’s analysis of 2020 FactSet data. These kinds of investments also provide trackable impact – a crucial benefit given the growing scrutiny of ESG impact claims. And with the advent of new technology platforms, investments and deposits in CDFIs and minority depository institutions (MDIs) are far more accessible than they used to be.

Data from CNote’s community investment platform is illustrative. We deploy corporate dollars into CDFI loan funds and into depository products, such as money market accounts and CDs, from vetted and insured CDFIs, low-income designation (LID) credit unions and MDIs. We report quarterly to each of our corporate partners on what their funds have financed. Aggregate data across the platform for 2021 shows that our community finance partners lent 75% of cash deposits and 82% of fixed-income investments to people or communities of colour. During that same period, partners lent 68% of cash deposits and 61% of fixed-income investments to low- and moderate-income people or communities.

The opportunity is compelling enough that PayPal positions its community investments as the centerpiece of its social innovation ESG strategy. Its 2021 report highlights the complete deployment of its $535m commitment to address racial and economic inequality through investments in mission-driven financial institutions, as well as grants and partnerships.

Risk profile

In addition to offering a massive and measurable opportunity to advance the ‘S’ in ESG, I believe that depositing and investing funds in community financial institutions generally poses less risk than ESG investments in private equity funds or direct venture deals.

The US Treasury Department’s CDFI Fund commissioned analyses of CDFI loan funds, banks and credit unions compared with conventional financial institutions and found that CDFIs pose no more risk of financial failure than their conventional counterparts. Cash allocations are especially secure when treasury teams use an insured programme that spreads deposits out nationally. They also provide diversification that reduces risk compared with keeping all cash holdings in one or two major banks.

At the same time, community investments yield broad ESG value. For example, community investments can complement internal diversity efforts by enabling finance teams to diversify their vendor network through work with smaller MDIs or CDFIs led by people of colour. They can also advance climate justice by funding adaptation and emission reduction projects in the most affected communities. In some cases, treasurers can work with a platform partner to create deposit and investment programmes that are tailored to corporate goals, such as supporting communities where the company has a significant presence, adding MDIs to the treasury supply chain or supporting women entrepreneurs.

Rise of ‘S’ and treasurers’ superpower

“Societal leadership is now a core function of business,” Edelman concluded in its 2022 Trust Barometer report, based on international survey data. Expectations of business are growing, the report found, with about half of survey respondents saying companies aren’t doing enough to address climate change and economic inequality. There are many ways to act on the ‘S’ in ESG – including via the supply chain or workforce practices – but treasurers and CFOs are ideally positioned to drive positive impact throughout entire communities, simply by unleashing the power of the balance sheet.