Here also, we implement our policy on responsible business conduct2. This follows UN guidelines as well as our own guiding principles around investable sectors and those excluded from our portfolios.
Admittedly, stringent rules can curb the range of eligible investment opportunities and affect portfolio yield, but we believe making a positive impact avoiding controversial practices is an important priority.
Responsible business conduct
Under our responsible business conduct policy, we exclude issuers such as tobacco or coal companies, even if that would limit – and it actually does – the returns that can be earned on the portfolio.
Per our coal policy, we exclude companies generating 10% or more of their revenues from thermal coal – even if they have interesting yields. We should note that across the broad money market investment universe, there are still about 3,000 issuers that qualify for the ESG category.
Excluding issuers with controversies, such as health problems in the case of tobacco or stranded assets in the case of oil and gas, represents sound risk avoidance. We should point out that issuers in these sectors might have reduced credit ratings affecting portfolio eligibility. Their issuance might be less liquid, and thus less attractive to us, given an investor reluctance to invest in such sectors.
ESG and SRI-labelled money market investing
Before we quantify the effect, we should clarify that our money market funds universe follows two approaches:
All our money market funds are classified as Article 8 under SFDR4, requiring a minimum extra-financial coverage at the portfolio level of 90% of issuers or the assets under management. They also target a better ESG score5 than that of their investment universe on a daily basis. Best-in-class funds have an added selection criterion: they exclude the 20% worst performers in terms of their ESG score.
What does that mean for the investment universe? For ESG money market funds, we have identified more than 550 issuers that are covered by in-house credit analysts. Some two-thirds – more than 380 – can be considered ‘high credit quality’ and are eligible for investment by all BNP Paribas Asset Management money market funds.
For SRI-labelled money market funds, the process chosen at BNP Paribas Asset Management involves the exclusion of issuers with a poor ESG score in each sector. That leaves 280 eligible issuers for SRI-labelled funds after excluding the ESG laggards (ie a reduction of about 100 issuers, or 25% on our internal buy-list). We have calculated the opportunity cost of this selectivity as being a negligible one basis point.
On top of this exclusion criterion, SRI-labelled funds aim to better the CO2 footprint and the gender diversity of their investment universe.
Exhibit 1: Money market investing – a two-pronged approach
Source: BNP Paribas Asset Management Money Market, Risk & Sustainability Centre as at 28 June 2022. For illustrative purposes only. *BNP Paribas Mois ISR taken as reference **BNP Paribas Money 3M taken as reference
Do no harm with ESG integration
This underscores our belief, as part of our sustainable investment approach, that ESG integration improves risk-adjusted returns, even if – as is the case for money market funds – there is a trade-off between the ESG score and the yield. A high ESG score means a lower yield, in most cases.
However, that stands to reason since a higher score reflects a lower risk, which means a higher credit rating on average. That in turn allows an issuer to borrow more cheaply in the market.
We have found that even with this inverse relationship, we have been able to earn yields that exceed those of the funds’ benchmarks, bringing home the point that ESG integration does not have to come at the expense of performance.
Transparency is key
We believe ESG integration6 creates value for clients, also when it comes to money market funds. Here too, we apply our stewardship philosophy7 through which we engage with issuers and seek to use our influence to advocate for a low-carbon, inclusive economy and encourage them to improve their practices. Out of the eligible corporate universe for money market funds we engaged with 80 issuers in 2021.
A key element is this approach to money market investing, and one that sets us apart, is being fully transparent on the exclusion policy and the thresholds set in our reporting to clients, on the quality and availability of data for our ESG analysis and scoring, on issuers’ ESG scores and how we act as stewards and engage with issuers.