Capital Advisors Group published a paper entitled, "Demystifying ESG Investing: Considerations for Institutional Cash Investors," which reviews a number of issues involved in "green" money market investing. Their overview says, "The popularity of responsible investing has extended to the fixed income and liquidity management fields in recent years. Incorporating environmental, social and governance (ESG) issues in cash investment decisions makes sense as part of overall credit risk management. In addition to challenges related to disclosure, criteria, measure and verification, liquidity portfolios face unique challenges in the areas of relevance, concentration, short-termism, and transparency. Rather than buying into a strategy with an ESG label, investors should engage their managers to include ESG issues in general credit evaluation and monitoring to improve risk management."
Author Lance Pan writes, "Responsible investing gained popularity with equity investors decades ago and has slowly made its way into the fixed income world, becoming a source of interest among institutional liquidity investors in the past several years. At least two institutional money market funds (MMFs) of this genre launched in the last year, and more may be coming. Separate account managers also receive more inquiries on incorporating responsible investing into a cash portfolio."
He explains, "Given the vast scope of the subject, this research commentary will provide a primer on the discipline of ESG investing, what it represents, selection criteria and applications. We will end with a brief discussion on the challenges and considerations of ESG issues for institutional cash portfolios."
Capital Advisors Group tells us, "ESG investing has emerged from the peripheral field of ethical screening to become a core component of long-term risk assessment and stock valuation. With its popularity came ESG ratings services, ESG indexes, and ESG exchange traded funds (ETFs) to help investors measure risks and make decisions. Several challenges have emerged. On the investments' side, disclosure is lacking and inconsistent due to a lack of regulatory reporting, standardization, verification and audit requirements. On the investors' side, the lack of uniform best practices has led to different selection criteria, competing ESG methodologies and the marketing of ESG products with no recognized industry standards."
The piece continues, "In the last three to five years, we have started to receive inquires on ESG investing from institutional cash accounts. This interest makes sense, as many of the same organizations may have adopted ESG emphasis in their retirement or endowment programs. Many treasury practitioners are of the millennial generation who may be more cognizant of the social and environmental impact from financial decisions than previous generations. The long shadow that the 2008 financial crisis cast on our profession also serves as a reminder of grave market consequences from failure in corporate governance."
It comments, "Service providers have taken notice of the trend. The launch of the DWS ESG Liquidity Fund (ESGXX), an institutional money market fund, in October 2018 kickstarted the race to bring ESG investing to the institutional liquidity world. In April 2019, the BlackRock Liquid Environmentally Aware Fund (LEAF), became the first 'green' (environmental) MMF in the US. One other fund, the State Street ESG Liquid Reserve Fund, has been filed with the Securities and Exchange Commission in April and other fund managers may follow this trend. There are also ESG-flavored ultra-short duration bond funds catered to liquidity investors."
Pan adds, "Incorporating ESG issues in cash investment decisions is a valid approach. The underlying philosophy has changed from penalizing bad actors and rewarding good corporate behaviors to including ESG issues as relevant credit risk factors with material financial impact. Daunting tasks remain in disclosures, selection criteria, measurement and varication by debt issuers, although initiatives are in place to improve them."
Finally, he concludes, "Fixed income portfolios may benefit more than stocks from ESG research. Liquidity portfolios have their own challenges with ESG, mostly due to concentration risk and the short-term nature of cash investments. Rather than buying into a strategy with an ESG label, we encourage investors to engage their managers to include ESG issues in general credit evaluation and monitoring to improve risk management. Unlike comingled funds, the customized nature of separate accounts may allow liquidity accounts to achieve their active ESG objectives without the constraint of issuer concentration and manager selection bias." (For more, see our April 25 News, "State Street Files to Launch ESG Liquid Reserves Fund; LEAF Now Live.")
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of June 14) includes Holdings information from 76 money funds (the same number as on 5/31), representing $1.567 trillion (down from $1.571 trillion) of the $3.305 (34.7%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our June 12 News, "June Money Fund Portfolio Holdings: Repo, CP Up, T-Bills Down, Again.")
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $620.0 billion (down from $629.2 billion two weeks ago), or 39.6%, Treasury debt totaling $460.5 billion (up from $460.3 billion) or 29.4%, and Government Agency securities totaling $275.0 billion (down from $281.9 billion), or 17.5%. Commercial Paper (CP) totaled $75.0 billion (up from $73.7 billion), or 4.8%, and Certificates of Deposit (CDs) totaled $74.4 billion (down from $72.8 billion), or 4.7%. A total of $30.7 billion or 2.0%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $31.5 billion, or 2.0%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $460.5 billion (29.4% of total holdings), Federal Home Loan Bank with $192.0B (12.3%), Fixed Income Clearing Co with $90.6B (5.8%), BNP Paribas with $72.3 billion (4.6%), RBC with $53.7B (3.4%), Federal Farm Credit Bank with $50.9B (3.2%), JP Morgan with $34.5B (2.2%), Societe Generale with $33.5B (2.1%), Wells Fargo with $30.4B (1.9%) and Mitsubishi UFJ Financial Group with $27.7B (1.8%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt ($135.4B), Fidelity Inv MM: Govt Port ($115.9B), Goldman Sachs FS Govt ($103.8B), BlackRock Lq FedFund ($92.8B), Wells Fargo Govt MMkt ($83.0B), BlackRock Lq T-Fund ($66.8B), Fidelity Inv MM: MMkt Port ($60.3B), Morgan Stanley Inst Liq Govt ($60.2B), JPMorgan 100% US Treas MM ($58.4B) and Goldman Sachs FS Trs Instr ($56.3B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
