Morgan Stanley will soon join DWS, BlackRock and SSGA in the "ESG" (environmental, social, governance) money market fund space. A recent Prospectus Supplement filing for the "Morgan Stanley Institutional Liquidity Funds" explains, "At a meeting held on September 24-25, 2019, the Board of Trustees of Morgan Stanley Institutional Liquidity Funds approved various changes to the Fund, including revising its name and modifying its principal investment strategies, each change effective October 31, 2019.... All references to 'Money Market Portfolio' in each Prospectus are hereby deleted and replaced with 'ESG Money Market Portfolio'." We review this latest filing, as well as some other news in the ESG MMF space, below.

The Morgan Stanley ILF change says, "The Adviser believes that environmental, social and governance ('ESG') factors have the ability to impact the fundamental credit risk of an entity. The Fund's investment process incorporates information about ESG issues via an integrated approach within the Adviser's fundamental investment analysis framework. The Adviser may engage with management of certain issuers regarding corporate governance practices as well as what the Adviser deems to be materially important environmental and/or social issues facing a company. The Adviser has proprietary ESG-scoring methodologies that explicitly consider the risks and opportunities ESG factors pose to money market instruments. By combining third-party ESG data with proprietary views, the Adviser creates unique scoring methodologies that it applies to issuers."

It continues, "During the security selection process, the Adviser employs a rules-based process to construct the portfolio. Initially, the Adviser determines from the universe of money market fund-eligible issuers those which, in its opinion, have the lowest credit risk and/or best credit profile, excluding the following: Corporations that generate revenue from the manufacturing or production of tobacco; Corporations that generate revenue from the manufacturing or production of landmines and cluster munitions (i.e., an explosive weapon that randomly scatters submunitions); Corporations that generate revenue from the manufacturing or production of firearms; Corporations that generate revenue from the mining of thermal coal or coal fired power generation; and Corporations that primarily generate revenue from the fossil fuel industries, which the Adviser has determined produce a certain level of carbon emissions."

The supplement also comments, "The Fund's adherence to its ESG criteria and application of related analyses when selecting investments may affect the Fund's performance depending on whether such investments are in or out of favor and relative to similar funds that do not adhere to such criteria or apply such analyses. Socially responsible norms differ by country and region, and a company's ESG practices or the Adviser's assessment of such may change over time. The Fund may invest in companies that do not reflect the beliefs and values of any particular investor.... The exclusionary criteria related to the Fund's ESG criteria may result in the Fund forgoing opportunities to buy certain securities when it might otherwise be advantageous to do so, or selling securities for ESG reasons when it might be otherwise disadvantageous for it to do so."

It tells us, "During the security selection process, the Adviser employs a rules-based process to construct the portfolio. Initially, the Adviser determines from the universe of money market fund-eligible issuers those which, in its opinion, have the lowest credit risk and/or best credit profile.... The Fund may invest in green commercial paper (a security that is typically issued to raise capital specifically to support climate-related or environmental projects) issued by companies that would otherwise be subject to fossil fuel exclusions so long as the Adviser has determined that the proceeds will not be used to finance fossil fuel generation capabilities."

The filing adds, "After applying the above exclusion screens, the Adviser calculates proprietary ESG scores for the remaining issuers based on a number of variables, such as environmental, social, government, controversy and ESG momentum factors. The Adviser then sets minimum ESG score thresholds.... From the final list of ESG-approved issuers, the Adviser determines the securities and issuers in which the Fund will invest, taking into account a variety of relevant considerations (including, without limitation, yield, interest rate changes, credit quality and duration). Under normal circumstances, the Fund will invest 100% of its net assets (excluding cash) in securities whose issuer or guarantor, in the Adviser's opinion at the time of purchase, meets the Fund's ESG criteria."

Finally, it says, "The Fund's adherence to its ESG criteria and application of related analyses when selecting investments may affect the Fund's performance depending on whether such investments are in or out of favor and relative to similar funds that do not adhere to such criteria or apply such analyses. Socially responsible norms differ by country and region, and a company's ESG practices or the Adviser's assessment of such may change over time. The Fund may invest in companies that do not reflect the beliefs and values of any particular investor.... The exclusionary criteria related to the Fund's ESG criteria may result in the Fund forgoing opportunities to buy certain securities when it might otherwise be advantageous to do so, or selling." Note: Morgan Stanley Inst Liq MMP Inst, the Prime Inst fund to be converted, currently holds $3.1 billion, while Morgan Stanley Inst Liq Prime Inst (MPFXX) holds $11.5B (presumably the latter will remain non-ESG).

In related news, Funds Europe writes, "DWS applies ESG to money market funds." Their article tells us, "DWS is to apply environmental, social and governance (ESG) criteria across its money market funds managed in Europe, Middle East, and Africa. A euro institutional fund and a US dollar institutional fund have already integrated ESG criteria, while and additional euro fund will do at a later date. The firm said ESG integration in the money market funds was at an early stage but client demand already existed. The German fund manager's ESG standards include sector exclusions, best-in-class rankings, and screening -- but according to the firm, no portfolio allocation changes were necessary due to an 'already high' standard of ESG."

The update quotes, DWS's Harm Carstens, "These adjustments mean that non-financial aspects relating to ESG will play a stronger role in the fundamental analysis and portfolio allocation by investors, alongside the traditional financial considerations." The piece also tells us, "The Deutsche Institutional Money plus fund has become the DWS Institutional ESG Euro Money Market Fund. Deutsche Institutional USD Money plus is rebranded as DWS Institutional ESG USD Money Market Fund. And the DWS Rendite Optima Four Seasons - which will adopt ESG next spring and add the term to its new name - is for now called the DWS Euro Money Market fund."

Note that DWS also recently extended fee waivers on its U.S. domestic DWS ESG Liquidity Funds. The Capital Shares, Institutional Shares and Institutional Reserved Shares filing says, "Effective December 1, 2019, the Advisor has contractually agreed to waive its fees and/or reimburse fund expenses through November 30, 2020 to the extent necessary to maintain the fund's total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expenses) ... at a ratio no higher" than 0.10%, 0.12% and 0.17% for Capital Shares, Institutional Shares and Institutional Reserved Shares, respectively.

Finally, we also wrote recently about J.P. Morgan Money Market Funds' filing and alternate strategy of incorporating ESG into their overall fund processes (instead of launching a specialized fund). They amended their prospectuses to "`provide information on how the adviser integrates environmental, social and governance factors into each Fund's investment process." It says, "As part of its security selection strategy, the adviser also evaluates whether environmental, social and governance factors could have material negative or positive impact on the cash flows or risk profiles of many companies in the universe in which the Fund may invest. These determinations may not be conclusive and securities of issuers that may be negatively impacted by such factors may be purchased and retained by the Fund while the Fund may divest or not invest in securities of issuers that may be positively impacted by such factors."

For more on ESG money funds, see our Crane Data News: `MFI Intl: European Money Fund Assets Surge Too; BlackRock LEAF; EMFS (8/15/19), Federated Earnings Call Discusses Big MMF Inflows, Rate Cuts and ESG (7/29/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19), SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Flows (7/3/19) and Cap Advisors Group Demystifies ESG Investing; Weekly Portfolio Holdings (6/19/19).

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