Cash Deposits Can Make a Meaningful Impact on Communities

February 2, 2020

Cash Deposits Can Make a Meaningful Impact on Communities
This article was originally published on GreenMoney Journal. You can view that article here

Because public and private equity investing garner most of the attention of impact investors, the liquid “cash” portion of the portfolio is often overlooked despite the availability of a variety of socially impactful options that may even yield better returns at a lower risk than traditional approaches. The most well-known of these are community development financial institutions (CDFI’s) which are banks (both nonprofit and for-profit) that must dedicate the majority of their lending dollars to their stated missions, typically tied to community benefits (e.g., lending to low-income families, investing in small businesses, etc.). Another option is the handful of banks that are part of the Global Alliance for Banking with Values (GABV) which are banks that dedicate their business practices and lending activities to align with specified social or environmental standards.

These may be ideal options for parties with smaller volumes of funds to deposit, but because FDIC insurance is limited to $250,000 in any given bank, many limit their exposure in GABV banks or CDFI’s accordingly. Others may find that the financial returns from CDFI’s (and the certificates of deposit or other products they offer) are substantially less than they can garner through other avenues and are unwilling to accept the tradeoff.

Social Impact Money Market Alternatives

A somewhat lesser-known option that addresses these limitations is CDC Deposits, a mission-driven organization that specializes in large cash deposit management. With over a billion dollars in its Impact Deposit Program, CDC provides FDIC insurance on all deposits, next-day liquidity, and competitive rates while also delivering a wide-spread social impact program in conjunction with their network of community banks. CDC’s program is typically utilized by parties with $1 million or more in deposits and may be ideal for socially-minded individuals and family offices. Additionally, CDC’s program supports local nonprofits, which aligns particularly well with “place-based” community foundations, local governments and pensions, corporations, and other community-focused organizations that have an interest in selecting the particular nonprofits or causes in their community to support.

Market Cash Solutions

While these strong social impact cash solutions exist, most individuals, companies, institutions, and even organizations dedicated to impact (like foundations, endowments, and nonprofits) continue to place their cash in traditional banks (with track records like Wells Fargo) or money market funds in their trading accounts that often pay significantly lower returns on those funds than could be obtained from a program like that of CDC Deposits. Some parties believe that their banks are using solutions like CDARS (a Promontory cash management solution) for funds over the $250,000 FDIC limit and that this is a socially impactful option; but while CDARS is used by some CDFI’s that benefit from the extra funds for lending on their balance sheets, the portion of CDARS depositors’ funds that actually go to CDFI’s is actually quite small, with most going to a broader network of large banks (like, for instance, the Bank of China) with practices that may run counter to the goals of impact investors.

What’s Preventing Action

So why do parties who are avid impact investors ignore the potential social benefits and continue to put their cash deposits in traditional banks and money market funds? Why do corporations making public sustainability announcements continue to do likewise with their corporate treasuries? How can local governments and pension funds chase returns through riskier corporate paper when comparable financial returns can be achieved through options that benefit their very communities? Even harder to understand, how can foundations, endowments, and nonprofits ignore options that can directly support the causes they champion in favor of less impactful solutions (that may even advocate against causes they care about or deliver worse returns)?

The answer, unfortunately, goes back to the original point and it’s a bit disheartening. While the market focuses on “sexier” equity investments, cash is ignored or seen as trivial. Boards spend precious time arguing over the merits or drawbacks of “ESG” investing in the public markets, but often cash decisions continue to be the purview of the CFO who generally cares little about the positive social or environmental stance of their organization and would rather take the familiar path (perceived to be less risky). Yes, these social impact options may not be on the investment platform they use so a quick check of the money market funds box may not be possible. And, it may require funds to be wired to a different CDFI, bank, or program custodian. But why make the effort if nobody is going to question their lack of action? Ultimately, it comes down to a lack of motivation. We have heard every excuse under the sun, but these are not complicated choices, and the minimal effort to move funds from the current structure to another clearly is not an insurmountable impediment.

Size of the Opportunity

Almost no one is looking at this topic from a system-wide perspective. According to recent banking data, total deposits at U.S. banks are at an all-time high of $14 trillion, which includes over $5 trillion in money market accounts and $3 trillion in savings accounts. Imagine the positive impact that even a small portion of these deposits could have in our communities if placed in CDFI’s or CDC’s Impact Deposit Program!

We often ask parties where their cash sleeps at night, but in reality, it never sleeps. Your funds and those of your clients are always working. The question is whether they are working to strengthen the causes, values, and organizations you support or serve in neutral or (even worse) contradictory positions. The choice is yours. Take action or don’t. But know that cash options are available that support communities and positive social and environmental causes, and your cash deposits and money market funds have the ability to make a meaningful impact.


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