We've written twice already this month on the Association for Financial Professionals' "2022 AFP Liquidity Survey. (See our June 22 News, "More AFP Liquidity Survey: Yield No. 1 Factor for Money Market Funds;" our June 17 News, "AFP's 2022 Liquidity Shows Deposits, MMFs, T-Bills Still Kings of Cash;" our June 15 Link of the Day, "AFP Releases Liquidity Survey;" and AFP's press release.) Today, we finish the job and quote from the section on Environmental Social Governance Investments. (Note: Thanks again to those who attended our Money Fund Symposium last week in Minneapolis! The recordings and Powerpoints are available in our "Money Fund Symposium 2022 Download Center." Mark your calendars for next year's MFS, which is June 21-23, 2023, in Atlanta!)
AFP's 2022 Survey says, "Twenty-five percent of respondents consider ESG (environmental, social and governance) investment parameters when managing operating cash -- an increase from 14 percent in 2019 and 17 percent in 2021. Sixty-three percent do not consider ESG and 12 percent are unsure about taking ESG parameters into account."
It tells us, "The significant increase in the percentage of companies considering ESG investment parameters compared to 2021 was driven primarily by organizations that are publicly held, have at least $1 billion in annual revenue or are investment grade net investors. The share of respondents indicating they are unsure if their companies took ESG parameters into account decreased from 18 percent to 12 percent. The increase in the percentage of organizations considering ESG investment parameters was largely offset by the percentage that shifted from being unsure."
AFP explains, "One possible reason for the shift was due to the increase in ESG-focused money market funds. These funds have been waiving their fees to encourage investment from institutional holders. ESG money funds are Prime funds in nature and hold a high percentage of financial institutions in their portfolio across different asset classes. Many funds have underlying investments with qualifications of ESG and therefore are now ESG-focused, even if their name hasn't changed to reflect the focus. The top-yielding funds at the time of this writing were predominantly ESG-focused funds."
Discussing the "Percentage of Operating Cash in ESG Investments," they comment, "Of those companies considering ESG investment parameters, nearly half (48 percent) do not have any of their operating cash in ESG investments, 31 percent have less than five percent in ESG investments, 15 percent have 5-10 percent and 6 percent have more than 10 percent of operating cash in ESG investments. While it appears that organizations are considering ESG investments, the pace at which they are investing in them appears to be slow and at smaller allocations as a way to invest into the space."
The AFP writes, "Forty-seven percent of respondents indicate their organizations impose the same investment ESG parameters globally as domestically while 23 percent do not impose them the same; 30 percent are unsure.... Compared to last year's survey results, a smaller share of companies is imposing the same investment ESG parameters globally as domestically, while a greater percentage of practitioners is unsure."
They tell us, "Of those organizations investing in ESG investments, ESG money funds are most popular, with 43 percent of organizations choosing to invest in them. Separately Managed accounts rank second, with 23 percent of practitioners reporting their organizations are investing in them. Twenty percent of organizations are investing in minority-owned broker (defined as 'minority-owned business,' 'women-owned business' or 'business owned by a person with a disability' and could include Veteran-owned as well) products -- a significant increase from the three percent that invested in these ESG vehicles in 2021."
Regarding Europe, they quote, "'The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.' The regulation primarily impacts financial services firms with more than 500 employees and requires them to report ESG metrics. It was initially set to take effect July 1, 2022, and is now pushed back to January 1, 2023. Very few respondents are aware if their organizations will require that funds be compliant with Article 8, Article 9 (regulation noted above) or both if their organizations do invest in European funds. Only two percent indicate their organizations will require they be compliant with Article 8 and 14 percent report they will require compliance with both Articles 8 and 9."
The survey adds, "Those organizations with cash and short-term investment holdings outside of the U.S. manage their cash holdings similarly as they do their domestic ones. Sixty-nine percent of non-U.S. cash holdings are maintained in bank-type investments (including certificates of deposits, time deposits, etc.). This is a decrease from the 72 percent reported in last year's survey and similar to the 70 percent in 2020. Another 12 percent are held in money market mutual funds and 8 percent in government-type securities."
The AFP report also tells us, "Banks continue to be major depositories for companies' U.S.-based cash and short-term investment holdings. Survey results reveal an increase in the percentage of cash and short-term investments being held currently at banks (55 percent). Treasurers consider several factors when deciding where to place their organizations' cash and short-term investments. A vast majority considers the overall relationship with their banks a determinant (cited by 93 percent of survey respondents) while 72 percent indicate that the credit quality of a bank is a deciding factor, 8 percentage points higher than the 64 percent in last year's survey -- indicating a shift in credit focus from previous years. `Nearly 50 percent of organizations consider compelling rates offered on deposits a determinant (confirming the same theme as Safety, Liquidity and Yield). Additionally, practitioners also consider earnings credit rate (ECR) and simplicity of working with banks when selecting their banking partners."
It explains, "Organizations rely on various bank instruments for their cash and short-term investments. The most commonly used bank products are interest-bearing deposit accounts and time deposits. Interest-bearing deposit accounts are the most-often cited bank product: 59 percent of treasury and finance professionals report their organizations use interest-bearing deposit accounts. Time deposit products are being used by 42 percent of organizations, unchanged from results last year."
AFP continues, "While structured bank deposit products were the most-often used investment vehicle in 2019 (cited by 49 percent of respondents), their use decreased in both 2020 (to 31 percent) and in 2021 (to 26 percent) before increasing slightly to 28 percent in this year's survey. Thirty percent of organizations use non-interest-bearing accounts, compared to 33 percent last year, 22 percent in 2020 and 38 percent in 2019."
Finally, they state, "Organizations continue to place most of their short-term investment holdings in instruments with very short maturities. On average, 48 percent of all short-term investment holdings are in vehicles with maturities of one day or less, while 13 percent of all short-term investment holdings are in vehicles with maturities of between 8 and 30 days. Another 7 percent of short-term investments are held in vehicles with maturities between two and seven days." (For more on ESG MMFs, see our June 3 News, "SEC Names Rule Proposal Could Impact or Ban ESG, Social Money Funds," and our May 12 News, "UBS AM Explains Sustainability in Liquidity; Federated Adds SGD Shares.")
