Funding & Investing

The rise of sustainable investing

Published: Sep 2023

Treasurers increasingly have a role to play in supporting their organisations’ sustainability and ESG objectives – and many are now turning their attention to cash investments. Three experts share their views on the rise of sustainable investment and what this means for investors and asset managers.

Hand shake graphic over forest of trees

It’s no secret that the importance of sustainability and ESG for corporations has risen significantly in recent years. In 2021, 70% of respondents to Treasury Today’s Global Sustainability Study said that sustainability was reflected in their core values, while 76% reported that sustainability was a board-level issue.

More recently, PwC’s 2023 Global Treasury Survey, which polled the views of 375 treasury department respondents, found that 83% of respondents consider sustainability in their treasury decision making, although only 16% have a defined policy with formal measurements in place. “For the respondents who indicated that they did have sustainability policies or considered it as part of decision making, the focus primarily centred on their investment of excess cash,” notes the report. Asset managers, likewise, emphasise the growing focus that treasurers are placing on ESG and sustainable investing. Hugo Parry-Wingfield, EMEA Head of Liquidity Investment Specialists at HSBC Global Asset Management, notes a “significant increase” in the importance being placed on ESG and sustainable investing, in line with the wider focus on sustainability globally. “Many corporations have implemented sustainability objectives at a company level which has also driven key goals and metrics for treasury teams,” he says.

While this dynamic is reflected by the “proliferation of products” available to investors, Parry-Wingfield says this can also create challenges for treasury teams when it comes to assessing potential investments to ensure they align with their companies’ specific sustainable goals.

Differences in appetite

“ESG and sustainable activities are an important consideration for many corporations,” says Alastair Sewell, Investment Strategist at Aviva Investors. “That being said, there are differences in appetite and approach across regions.”

Among the firm’s core set of investors, says Sewell, “we see an increasing appetite for integrating sustainable investing and ESG considerations into their cash investment activities.” He adds that a good indication of this interest is the share of money market funds aligning themselves with Article 8 under the European Sustainable Finance Disclosure Regulation (SFDR). “Well over half of all LVNAVs, or low volatility net asset value money market funds (MMFs), were Article 8, by assets as of end June 2023,” he says.

Jim Fuell, Managing Director, Head of Global Liquidity Sales, International at J.P. Morgan Asset Management, says that while the firm is seeing broader ESG objectives trickle down into group treasury, “this has generally been more qualitativein nature. Engagement on the topic has increased and most corporate investors are keen to understand more about SFDR and the specific approach J.P. Morgan Asset Management is taking.”

Sustainable Financial Disclosures Regulation

The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021, aims to improve sustainability-related disclosures – and help investors make informed choices – by placing disclosure requirements on financial market participants and financial advisers. As such, the regulation is intended to limit possible greenwashing, “where financial products marketed as sustainable or climate-friendly, or claims about financial business’ involvement, do not in practice satisfy those standards.”

The SFDR addresses both ‘outside-in’ sustainability risks – in other words, events or conditions that could affect the value of and return on investments – and ‘inside-out’ risks relating to the adverse impacts such investments could have on the environment and on society.

Under the rules, financial products may be classified as Article 6 (funds with no ESG focus), Article 8 (funds that have environmental and/or social characteristics) or Article 9 (funds that have sustainable investment objectives).

An Article 8 fund is defined as “a fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”

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.”

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