According to a new SEC filing, DWS, formerly Deutsche, will convert an existing fund into the first ESG money market mutual fund, one whose investments are guided by environmental, social and governance criteria. A new Prospectus Supplement for the DWS Variable NAV Money Fund says, "The following changes are effective on or about October 1, 2018: DWS Variable NAV Money Fund is renamed DWS ESG Liquidity Fund. All references in the fund's prospectus to DWS Variable NAV Money Fund are superseded with DWS ESG Liquidity Fund. The following information replaces the existing similar disclosure contained in the 'Principal Investment Strategy' section of the summary section of the fund’s prospectus.... The fund is a money market fund that is managed in accordance with federal regulations which govern the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. The fund does not seek to maintain a stable share price.... Under normal circumstances, the fund invests at least 80% of total assets, determined at the time of purchase, in securities that meet the Advisor’s sustainability criteria."

It continues, "The fund may invest without limit in US treasury securities under adverse market conditions. The fund invests in high quality, short-term, US dollar denominated money market instruments, including obligations of US and foreign banks, corporate obligations, US government securities, municipal securities, repurchase agreements and asset-backed securities, paying a fixed, variable or floating interest rate. The fund reserves freedom of action to concentrate in obligations issued by domestic banks and US branches of foreign banks provided such US branch is subject to the same regulations as a domestic bank. The fund buys US government debt obligations, money market instruments and other debt obligations that the Advisor determines present minimal credit risks."

DWS explains, "In addition to considering financial information, the security selection process also evaluates a company based on Environmental, Social and Corporate Governance (ESG) criteria. With the exception of municipal securities, a company's performance across certain ESG criteria is summarized in a proprietary ESG rating which is calculated by an affiliate of the Advisor on the basis of data obtained from various ESG data providers."

They write, "Only companies with an ESG rating above a minimum threshold determined by the Advisor are considered for investment by the fund. The proprietary ESG rating is derived from multiple factors: Level of involvement in controversial sectors and weapons; Adherence to corporate governance principles; ESG performance relative to a peer group of companies; and Efforts to meet the United Nations' Sustainable Development Goals."

DWS also says, "ESG ratings for municipal securities are calculated by the Advisor by applying a combination of positive and negative screens. From the investable universe of municipal securities, positive screens will automatically include green bonds that meet minimum standards and negative screens will exclude municipal securities with exposure to weapons, issues where more than 10% of the business is attributable to nuclear power or more than 25% of the business is derived from coal, and issues related to gambling, lottery, the production or sale of tobacco, and other sectors deemed controversial by the Advisor. The remainder of the investable universe of municipal securities are then scored on key performance indicators in each of three pillars: environmental, social and corporate governance. Only municipal securities with a cumulative score across all three pillars above a minimum threshold determined by the Advisor are considered for investment by the fund."

The filing adds, "Based on the financial and ESG information described above and working in consultation with portfolio management, a credit team screens potential securities and develops a list of those that the fund may buy. Portfolio management, looking for attractive yield and weighing considerations such as credit quality, economic outlooks and possible interest rate movements, then decides which securities on this list to buy. Portfolio management may adjust the fund's exposure to interest rate risk, typically seeking to take advantage of possible rises in interest rates and to preserve yield when interest rates appear likely to fall."

It states, "The fund is a money market fund that is managed in accordance with federal regulations which govern the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. The fund follows policies designed to preserve capital: Fund securities are denominated in US dollars and, at the time of purchase, have remaining maturities of 397 days (about 13 months) or less, or have certain maturity shortening features (such as interest rate resets and demand features) that have the effect of reducing their maturities to 397 days or less. The fund maintains a dollar-weighted average maturity of (i) 60 days or less and (ii) 120 days or less determined without regard to interest rate resets. The fund maintains certain minimum liquidity standards.... The fund does not seek to maintain a stable share price. As a result, the fund's share price will fluctuate and reflect the effects of unrealized appreciation and depreciation and realized losses and gains."

On its "Management process," DWS comments, "Based on the financial and ESG information described above and working in consultation with portfolio management, a credit team screens potential securities and develops a list of those that the fund may buy.... The ESG performance of a company is evaluated independently from financial information based on a variety of indicators. These factors may include, but are not limited to, the following fields of interest: Environment: Conservation of flora and fauna; Protection of natural resources, atmosphere and inshore waters; Limitation of land degradation and climate change; and Avoidance of encroachment on ecosystems and loss of biodiversity. Social: Human rights; Prohibition of child labor and forced labor; Non-discrimination; Workplace health and safety; and Fair workplace and appropriate remuneration. Corporate Governance: International Corporate Governance Network (ICGN) Corporate Governance Principles; and United Nations Global Compact Anti-Corruption Principles."

Finally, it says, "The following disclosure is added under the 'Other Policies' heading of the 'Fund Details' section of the fund's prospectus. The Board will provide shareholders with at least 60 days' notice prior to making any changes to the fund's 80% investment policy as described herein. The following disclosure is added under the 'Main Risks' section within the summary section and the 'Fund Details' section of the fund's prospectus. ESG investing risk. Investing primarily in investments that meet ESG criteria carries the risk that the fund may forgo otherwise attractive investment opportunities or increase or decrease its exposure to certain types of companies and, therefore, may underperform funds that do not consider ESG factors."

Note that while Crane Data believes this is the first ESG money market fund, we do recall a couple of "socially-responsible" funds that existed briefly back in the 1990's. Calvert used to have a money fund, and the "E-Fund", run by Citizen's Trust and Sophia Collier, had a moment atop the highest-yielding charts in the mid-1990's. (See this 1995 NY Times article.) For more on ESG investing, see Forbes' "The Remarkable Rise Of ESG"."

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