In other news, online money fund portal ICD recently hosted a webinar, “ESG for Short Term Investing: ESG Data & Decision-Making,” which featured `ICD Portal’s Sebastian Ramos, SSGA’s Will Goldthwait and Fitch Ratings’ Alastair Sewell. Ramos explains, “We’ve observed with much interest the evolution of ESG investing in the cash space over the last few years. What began as a limited number of offerings has grown into a larger movement and we’re excited to see it continue to mature and become a larger component of day to day product consideration for our clients.”
He continues, “Taking a look at some of the data behind the trends…. While global AUM is still predominantly non-ESG … 34 percent ESG, 66 percent non-ESG, there is now a significant proportion of AUM that is ESG based. This is likely to continue increasing…. The proportion of asset owners who now require an ESG policy to be in place in order for a bidder to pre-qualify for selection of an asset manager has exceeded 85 percent. Similarly, when assessing the performance of their asset managers, nearly 80 percent of asset owners, in addition to financial metrics, now also use ESG criteria to measure performance of portfolios. It’s particularly worth noting as well, the rapid acceleration in this trend between 2017 and 2018.” (Note: We believe these statistics are for overall investments, not for money markets.)
Ramos comments, “In our 2020 [global client] survey, launched in mid-January, we have some early feedback on ESG. Of the over 100 respondents, 32 percent indicate that they are or will be investing in ESG products in 2020, so we know the interest from our client base is there.” A poll conducted during the webinar asked listeners, “Would you be interest in incorporating any sustainability or ESG analysis into your short-term investment?” Sixty-four percent of listeners answered yes, 20 percent answered no, while 16% answered ‘no, but reviewing now.’
Sewell tells us, “We have seen increased investor interest in ESG. If we look over a long period of time, we can see that there have been certain investors who have invested through an ESG framework for a very significant period of time. It really depends how you define ESG. For example, someone who invested in say, an ethical fund which might have excluded certain sectors which they didn’t like for whatever reason, you could actually say that was an ESG fund or an ESG investment. Although, it probably wouldn’t have acquired the ESG nomenclature until more recently.”
He continues, “Investors and other market participants have been asking us about how we look at ESG as a credit rating agency since at least 2015. We’ve noticed that the level of interest, and the frequency that we’re getting questions…. We’re getting it from the investor side, the regulator side, and we conclude that this is a major trend…. ESG is definitely a growing and dynamic area and we absolutely see rating agencies playing an important role here. We are now defining, or demonstrating, in our ratings which environmental, social and governance risks effect an entity and we’re showing whether that effect is significant in the actual end credit rating that we’ve assigned.”
Sewell adds, “There is a strong increase in the assets under management in ESG funds. Now, the majority of those assets are in equity funds, but fixed income funds are starting to catch up…. Whilst this trend is clearly strongly positive in terms of growth, the share of these assets remains relatively low compared with the total assets in mutual funds globally. So, this started as an equity theme, it’s moved into fixed income more recently, and the most recent development has been in the money market fund space, where we’ve seen multiple new launches or conversions of money market funds to an ‘E’, ‘S’ or ‘G’ framework. This started with DWS in September 2018 coming out with an ESG fund, that was a conversion, and since then, multiple other providers of money market funds have launched or converted funds.”
Finally, Goldthwait states, “We spent a considerable amount of time thinking about this, as far as, converting a pre-existing fund or starting something from scratch. Ultimately, what we decided was that we would start something from scratch. We decided to do that because we felt as though it was important to start fresh, so to speak. We also realized that we wanted to be able to score every asset that went into the fund. So, the objective of the fund remains the same as our non-ESG prime money market fund, which is principal preservation, liquidity and a market rate of return as the top priorities, and then an ESG tilt as that fourth priority. One thing that’s been interesting as we’ve tilted the portfolio is that we’ve noticed there is a strong correlation between stronger credits in the market, or companies that have higher ESG scores, and longer and larger term limits … from our credit team. So, there is this idea that if you build a portfolio around an ESG tilt, you’re going to ultimately have stronger underlying credit in that portfolio.”
Source: Crane Data
