A business deposit account that sweeps cash into green projects

MUFG Union Bank in New York is offering a new deposit product to business clients who want to see their cash reserves used to finance socially and environmentally sustainable projects.

The U.S. arm of the Japanese conglomerate Mitsubishi UFJ Financial Group said recently that it will offer its commercial and corporate clients a new green deposit product. The product is unusual among large and regional U.S. banks, many of which offer sustainable investing options, but not deposits tied explicitly to sustainable lending activities.

While the rates and terms depend on the particular client relationship, the basic idea is the same: money parked in a green deposit account will only be loaned out for projects with a sustainable bent, such as water conservation or clean transportation.

Some investors focused on environmental, social and governance issues say they’d like to see other banks follow suit. Such accounts can provide a steady funding stream for green project financing, which is expected to grow in the years ahead. It also demonstrates to customers, investors, and employees that the bank is thinking seriously about the risks and opportunities associated with climate change.

A handful of smaller banks have tried similar concepts over the years. Among the first was the old Vermont National Bank, which in 1989 rolled out its Socially Responsible Banking Fund, a suite of consumer deposit accounts that ultimately loaned the funds out for affordable housing, small businesses, nonprofits, agricultural, education and environmental loans.

“It’s very nice to see an old idea get very new traction,” said Lauren Compere, director of shareholder engagement for Boston Common Asset Management, an investment manager that uses its shareholder status to advance companies’ progress on environmental issues. “I do commend MUFG for launching the green deposit. It’s an area I think there’s unmet demand for.”

The sustainable investment space is well-established by now, and many large and regional U.S. banks are already comfortable with issuing bonds to support environmental, social and governance-related goals. According to the Climate Bonds Initiative, green bond issuance since 2007 cumulatively totals over $1 trillion.

Just this week, Truist Financial in Charlotte, N.C., issued its first social bond of $1.25 billion for ESG goals, including financing of affordable housing. The $509 billion-asset Truist said on Tuesday that the issuance was oversubscribed. Goldman Sachs also recently issued an $800 million sustainability bond to finance activities in key areas like clean energy and sustainable food and agriculture.

In a research note discussing those recent bond issuances, Fitch Ratings said it expects growing public awareness of ESG issues to drive demand for such products.

“Environmental and social considerations are expected to become increasingly relevant for banks, which could increase reputation risk over the long term,” the ratings agency wrote.

Basic deposit products tied to a sustainable purpose are considerably rarer in the U.S. banking market. Self Help Federal Credit Union in Durham, N.C., which has $1.5 billion of assets, is one financial institution that offers a green certificate of deposit, for example. Funds deposited in that product, which is aimed at consumers, are loaned back out specifically to green businesses, such as recycling companies, solar farms, and ecotourism firms.

In 2019, the London-headquartered Standard Chartered also launched a sustainable deposit product for its corporate and institutional clients in the U.S., U.K. and Hong Kong.

Other examples are few and far between and often found at smaller credit unions and community development financial institutions, Compere said.

MUFG Union Bank’s green deposit product complements an existing project finance business it already has lending to sustainable deals, said Olu Adebiyi, managing director and liquidity product head for transaction banking in the Americas.

“We have a large number of clients already interested and I think having something like this would be attractive to prospective clients,” Adebiyi said. “Of course, it’s something that will continue to evolve and expand as we do more in the sustainable lending space.”

“All deposits generally look and feel the same, but in this particular case there were a number of things we had to think about,” Adebiyi said of developing the green deposit product.

The $132.5 billion-asset MUFG Union Bank first had to identify the asset base and loan portfolios that would be associated with the deposit product. It also hired the ESG ratings and research firm Sustainalytics, which is owned by Morningstar, to advise it on the product. Adebiyi also pulled in the company’s environmental and sustainability teams for guidance, as well.

The company will offer the green deposit product to its corporate clients in the U.S., and while pricing will be dependent on market rates and the client relationship, Adebiyi said it will carry “competitive” interest rates and the product will initially be a term deposit. Funds deposited into green accounts will then be used to finance a broad scope of eligible activities, which could include renewable energy, wastewater management, aquatic biodiversity conservation or clean transportation.

Sustainable deposits may serve other business purposes besides attracting new depositors, said Blaine Townsend, director of sustainable, responsible and impact investing with the investment management firm Bailard. They establish a complementary source of funding for sustainable project finance, for which demand is expected to grow in the coming years.

It may help a bank to raise its reputation with increasingly climate-conscious customers and shareholders. Such products could also show regulators that the bank is taking climate change seriously as a business issue.

“Goodwill is important and by making these very public commitments, they can generate some goodwill,” Townsend said. “It’s also demonstrating an acknowledgement that climate change poses real risks and opportunities.”

Compere said she would like to see more banks develop similar products, but stressed the need for clear disclosures to customers as to what qualifies as a green or sustainable deposit product.

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