Both fund ratings firm Fitch Ratings and online money fund trading portal Institutional Cash Distributors (ICD) hosted webinars on ESG, or environmental, social, governance, money funds and cash investing. The former's event, "ESG in Money Market Funds," featured Fitch's Alastair Sewell and SSGA's Will Goldthwait, while the latter's, "ESG for Short Term Investing: What Matters Counts," featured Justin Brimfield of ICD and Bob Smith of SAGE. The Fitch event discussed ESG Money Market Funds in detail, while the latter talked about ESG more broadly and separately managed accounts.
Sewell commented, "Certain high profile investors, both in Europe and ... in the US, have indicated an interest in having ESG exposure in the cash element of their portfolio. So, what does that mean for money market funds? We can see that the number of ESG money market funds has increased sharply.... We now count a total of 34 explicit, dedicated ESG money market funds globally. The question presumably on everyone's minds then is, 'What exactly is an ESG money market fund?'"
He continues, "To set our definition, what we look for to define an ESG money market fund, is a money market fund which explicitly references an ESG element in its investment objective. So, did the fund explicitly tie its process and its strategy, or the fund in particular, to ESG factors? To be clear, what that would exclude is a fund which is managed by an investment manager, which has a broad ESG integration process and as a money market fund we would exclude that. But if there was a manager with a money market fund with a specific ESG element to that fund in particular, then we would include that fund in our sample."
Sewell explains, "In terms of assets under management ... the growth has been reasonably strong in money market funds. We got to somewhere in the order of, 18-19% growth in assets in ESG money market funds over the course of 2019 in total. Just to put that into context, global money market fund assets have also expanded quite extensively in 2019. In the US, we see 20 percent growth in money market fund assets in 2019. So broadly speaking, ESG money market fund growth has been in line with total global growth."
SSGA's Goldthwait tells Fitch, "We spent a lot of time on the development of our money market fund product and considerable effort went into it. I think at the same time, State Street Global Advisors was also developing their R-Factor ... scoring methodology. One of the things that we thought [was] important in a money market fund is to have all of the assets within the fund receive some ESG score, or in our case R-factor, score. When we went about the design, we recognized that we didn't want an exclusionary fund, but we wanted a fund that would tilt, to try to enhance the ESG score. We thought that was important because we saw with a money market fund that principal preservation, liquidity market rate of return, were still top of mind.... We've noticed across the industry that ESG scoring methodology is moving more towards the sustainability and more towards the tilt, as opposed to, pure screening and pure exclusionary methodology."
He states, "Ultimately, we did come up with a product where we are able to buy all of the asset types. But we do have to eliminate certain underlying asset types within that example. So, for example, ... we can certainly buy asset backed commercial paper in the fund. We just can't buy all of the names that are otherwise on our approved list due to the underlying ratings of the collateral, the receivables. And then as an example around alternative repo, we looked through to the underlying assets and then determined what is viable as far as being able to rate that underlying collateral and then included that we could rate, and excluded that we couldn't."
When asked if ESG funds differ from non-ESG MMFs, Goldthwait answers, "We don't really see too many differences. When we compare our fund to our other prime fund that is not ESG, we know that approximately 20 to 30 percent of the non-ESG fund does not have an R-Factor score. Like I noted before, with regard to repo and regard to certain ABCP, that's easy to see, and you can also see it just observing our holdings, where the differences are. I would say from an overall risk standpoint, we really don't see any differences. It's just this idea of tilting the portfolio towards those credits that have slightly higher ESG scores or R-Factor scores."
He asks, "Will ESG funds become the norm? I think yes.... But I think ultimately the norm is going to change. I think this whole idea of 'green-washing' is certainly top of mind for anyone that is developing an ESG product. Ultimately, the investor in that product ... has to make a decision based on detailed analysis and examination of what the ESG process is within that product offering. I think it's very much up to the investor to make the decisions on what they consider valuable and important."
Fitch's slides contained a list of ESG funds, which includes US MMFs: Morgan Stanley Inst Liq ESG MMP, BlackRock Liquid Environmentally Aware Fund, State Street ESG Institutional Liquid Reserves, DWS ESG Liquidity Fund and UBS Select ESG Prime Institutional Fund. European MMFs domiciled in Ireland or Luxembourg include: BlackRock ICS Euro, Sterling and USD LEAF, DWS Inst ESG Euro and USD MMF and Candriam SRI Money Market Euro. Standard (longer-term) MMFs domiciled in France include: `Amundi Cash Institutions SRI, Ostrum Sustainable Tresorerie, BNP Paribas Mois ISR, CPR Monetaire SR Aviva Monetaire ISR CT, Allianz Securicash SRI, Federal Support Monetaire ESG, Aviva Monetaire ISR, HGA Monetaire ISR, OFI RS Liquidites, Federal Support Court Terme ESG, Carmignac Court Terme, SG Monetaire ISR, ABN AMRO Euro Sustainable Money Market and Ecofi Premiere Monetaire.
On the ICD call, Smith says, "Let me talk a little bit about cash management at SAGE.... First and foremost the objective of our separately managed ESG cash management strategy is to provide investors with portfolios that offer current income that is greater than money market instruments, while limiting their principle volatility and offering operating liquidity throughout all market environments. The four top priorities for our strategy are: capital preservation, daily liquidity, competitive yields and most importantly, a thorough ESG risk assessment. Our security selection process takes into consideration each company's environmental, social and governance rated performance in conjunction with its relative credit strength, to assess its ability to demonstrate a strong alignment with responsible and sustainable business practices and policies over the near and the long term."
He continues, "We believe our ESG research, our factor assessment and integration process are truly core value added dimensions of our overall active management activities. And, we believe that they can positively influence corporate behaviors and create long term sustainable value for our clients. We also believe that the active evaluation of ESG factors is best conducted in the context of fundamental credit and investment analysis. This is important, because they are important drivers of investment returns, from both an opportunity, and even more importantly, a risk mitigation perspective."
On the origin of ESG, Smith says, "The term ESG was actually first coined in 2004, in the United Nations' landmark study that was titled, 'Who Cares, Wins,' which was issued as part of a joint initiative with the UN and major financial institutions around the world. That report assumed, very importantly, that ESG principles have economic significance ... and that they should be integrated into the capital market.... ESG investment has grown exponentially in the year since the UN study was published."
Finally, he adds, "Many companies are feeling pressure from large institutional investors ... and shareholders alike, to recognize and better manage their ESG risks and disclose those efforts in their 10-Ks and 10-Q financial reports. These risks come from a wide range of concerns from climate change to board gender composition, to workplace culture, to human rights, anti-bribery, anti-corruption efforts, date privacy, gun violence, and sadly for some the opioid crisis. And, these companies and their investors perceive these issues as reputational threats."
For more on ESG and Social Money Market Funds, see these Crane Data News articles: Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20), Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/5/19), BNP Insticash Adds ESG Overlay (11/29/19), Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19), Goldman Adds ESG Screen (11/14/19), Aviva Investors Discusses ESG MMFs; Fitch Rates MS ESG (11/6/19), UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19) and SSGA Goes Live with ESG Money Market Fund (7/3/19).
