Looking under the hood

Since the implementation of SFDR, Fuell says corporates are beginning to make use of these standards, “versus an investment manager’s own ESG criteria.”

“Clients want to see what’s under the hood,” he adds. “The number of deep dive sessions we have provided to investors has increased with clients keen to understand more about our differentiators and how we are actually making a difference.”

One significant development is the addition of sustainability or ESG considerations to treasury investment policies. Parry-Wingfield observes that treasurers are formally incorporating ESG into their investment policies and engaging with product providers to evaluate what solutions are available.

“There has been a dramatic increase in ESG and sustainability-focused products, from deposit solutions to money market funds, providing treasury teams with easy access to products they are already familiar with,” he says. “As regulation and industry standards in this area are still evolving, assessing these products to ensure they are aligned with their companies’ sustainability objectives is likely to remain a key focus for treasurers.”

Sewell says that while the addition of sustainability or ESG considerations to treasury investment policies is “clearly not universal yet”, treasurers seem to be taking steps towards the more formal integration of ESG considerations into the asset side of their books. “Given the widespread usage of green, social or sustainable instruments on the liability side of the balance sheet already, we see it as a very natural progression to add an ESG or sustainability focus to the asset side of treasury,” he notes.

Addressing investor appetite

So how are funds addressing investor appetite for sustainable investing? “We have invested significantly in our responsible investment capability,” says Sewell. “By building responsibility into all our investment processes, we aim to improve our risk management and investment performance, while at the same time helping to create more sustainable investment solutions fit for the future.”

He adds that Aviva Investors engages actively with the issuers it holds, promoting positive change. “This can be on cross-asset thematic activities – such as biodiversity – and at a more micro level in relation to an issuer-specific development,” he says.

“In our money market funds, our approach goes beyond ESG integration in the credit process and sector screening, which we believe has limited impact due to the high concentration of financial issuers in MMFs,” comments Parry-Wingfield. “Our ESG MMFs follow a best-in-class investment strategy that eliminates the worst ESG performers, resulting in a significant proportion of issuers being eliminated as a demonstrable sustainable investment outcome.”

According to Parry-Wingfield, these solutions have resonated with investors: “we have reached over US$7bn (USD equivalent) in our ESG liquidity strategy since first launched less than two years ago, with solutions available in GBP, EUR and USD.”

Supporting sustainable investing

Within the short-term investment market, Fuell says J.P. Morgan Asset Management is addressing investor appetite for sustainable investing through a number of mechanisms, and is working to align its commitments as a liquidity provider with key EU ESG-related regulations. These mechanisms include:

• Alignment with SFDR. Where SFDR is concerned, says Fuell, “we have recently uplifted the majority of products within our international platform to Article 8 under SFDR. We have done this by focusing on the social factor, which we believe is highly applicable to the underlying issuer base in the liquidity space (traditionally banks), more so than the environmental factor which is less applicable to financial names.” In addition, says Fuell, “we do not see sufficient issuance of front-end green bonds/green commercial paper to make a meaningful contribution to our funds at this point in time.”He notes that the cornerstone of the process involves high level issuer exclusions, “which are then followed by a commitment for a majority of the issues we purchase to promote good E/S factors, aligned to the SFDR regulations.”

• Proprietary social screen. In addition, J.P. Morgan Asset Management has added a proprietary social screen to this process. “This is an eight-factor, quantitative model called Employee Engagement & Diversity (EE&D) that has been developed in partnership with the Sustainable Investing Research & Data team within J.P. Morgan Asset Management,” says Fuell. “We have implemented a requirement for a majority of rated assets to exhibit ‘good’ EE&D credentials, and view this as a way we can create meaningful value through ESG for short term investors.”

• Driving positive change. J.P. Morgan Asset Management also seeks to engage with the weakest EE&D issuers in its universe, Fuell adds. “These engagements are conducted in partnership with J.P. Morgan Asset Management’s Investment Stewardship team, leveraging a dedicated Diversity Engagement Framework that has been built specifically for EE&D. Through this mechanism, when combined with the size of our business, we aim to drive meaningful positive change in the social credentials of the underlying issuers with whom we invest our clients’ liquidity.”

Future developments

Various developments are likely to continue shaping this area. For one thing, Parry-Wingfield says that improvements in the availability and quality of ESG data should better support sustainable investment objectives in the future. As such, HSBC Asset Management is “seeking to drive change by engaging issuers to publish high quality, consistent Scope 3 data or, where required, improve the quality of any Scope 3 published data, which should become increasingly important to consider as regulations and reporting requirements develop.”

Where regulation is concerned, Fuell notes that the Markets in Financial Instruments Directive (MiFID II) is likely to become an increasingly important focus area “as this becomes a requirement through distribution models, as regulators will likely provide greater clarity on requirements for Principal Adverse Impact (PAI) considerations and retail clients, alongside corporate investors, also assess their minimum commitments to sustainable investments.”

Looking forward, Sewell says interest in sustainable investing in treasury is expected to grow overall – “Although we do also think there will be variations across regions and industries in terms of both appetite for and approach to adopting sustainable investment techniques in treasury.” Where green, social and sustainable instruments are concerned, Sewell notes that the market is “nascent”, but more issuers are coming to market. “Over time we could begin to see these instruments, such as green commercial paper, featuring more prominently in MMF portfolios,” he says.

But while the coming years are likely to bring plenty of developments, from regulatory developments to a new supply of instruments, at this point many treasurers are at an early stage of exploring sustainable investments. As Parry-Wingfield observes, “Whilst there are treasury teams today who have already set clear sustainability objectives, many are only now starting on that journey.”