Goldman offering companies higher interest in accounts if they meet ESG goals

Firm hopes the ESG component will help attract more depositors as it tries to build out its banking segment.

Goldman Sachs Group Inc., in an effort to win more deposits and build out its transaction banking segment, is offering companies slightly higher interest on their accounts if they meet environmental or other socially responsible goals. 

The bank opened its first such account last month, for Xylem Inc., a company that supplies equipment and technology to water utilities. It’s seeing interest from other clients, with five to 10 more transactions in the works, according to Mark Smith, Goldman Sachs’s head of global liquidity and transaction banking. 

Xylem’s financial incentive to meet its goals is modest: Goldman Sachs is paying a fixed amount of extra interest – between two and five basis points – to Xylem for meeting its goals, amounting to a maximum of $50,000 a year for every $100 million the company has on deposit. 

“In the long run it won’t cost them very much,” said Ryan Riordan, research director at the Institute for Sustainable Finance at Queen’s University in Kingston, Ontario, referring to Goldman Sachs. “They’re trying to find the most efficient way to have a positive impact.” 

But it’s at least a product to advertise to help draw in potential depositors and build out the lender’s transaction banking segment. The deposits are a “key part” of the bank’s strategy and helps Goldman reach clients with ESG objectives, Smith said. 

Banks with more of a background in lending, like Bank of America Corp. and JPMorgan Chase & Co., are awash in deposits, but traditional investment banks like Goldman Sachs have been looking to boost this source of funding, which can be a relatively cheap and stable form of financing. 

‘SMALL BITE’

That stability is in contrast with financing in bond markets, which can be difficult or expensive in times of stress.  

Goldman Sachs’s ESG-linked deposit account for Xylem is essentially a corporate checking account for the company’s day-to-day operations. If Xylem reaches a key performance indicator that it agreed to, Goldman Sachs will pay Xylem between 0.02 to 0.05 percentage point of extra interest on the daily average balance of its account at the end of the year, according to a person with knowledge of the matter. Xylem’s key performance indicator is related to transitioning major facilities to 100% recycled process water, according to a separate person familiar with the matter. 

Xylem had $1.9 billion of cash and cash equivalents at the end of 2020, and has said its deposit account holds hundreds of millions of dollars. Xylem has embraced other methods of green financing, including a sustainability-linked revolving credit facility and issuing a $1 billion green bond. 

In December, Goldman Sachs said it wants to boost its interest-bearing deposits by $100 billion over the medium-term. In a recent presentation it pointed out that U.S. consumer deposits alone are a $5 trillion market. The bank is also looking to boost related banking businesses like transaction processing.  

“Goldman’s aspirations don’t seem huge; it’s a matter of taking a small bite out of a very large market,” Mike Mayo, head of U.S. large cap bank research at Wells Fargo Securities, said of Goldman’s involvement in transaction banking. “This is a marker that climate and ESG considerations are more important than ever before to the banking industry and its investors.”