Insight & Analysis

Building ESG considerations into MMFs

Published: Nov 2020

Sustainability and environmental, social and governance (ESG) considerations are increasingly becoming an important focus for corporations around the world. Treasury Today’s 2020 Global Sustainability Study found that for 61% of respondents, sustainability is reflected in their organisations’ core values. In addition, 81% reported that their companies have a sustainability ‘champion’.

short term investments - sustainability

For corporate treasurers, one area where this topic is becoming a particular focus is that of short-term investments. As such, money market funds (MMFs) are increasingly taking steps to incorporate sustainability and ESG considerations into their products.

Investor expectations

Natalie Cross, Senior Client Portfolio Manager at Invesco, says that as companies make changes to their corporate ESG policies and business strategies, “these are increasingly becoming key considerations for many treasurers. Investment policies and guidelines now frequently include ESG requirements and form part of their due diligence process when considering which MMFs they utilise.” As a result, she says, the firm is increasingly being asked to demonstrate how it is addressing ESG factors within the management of its MMFs.

Jonathan Curry, Global CIO Liquidity & CIO Americas at HSBC Global Asset Management, likewise reports growing interest from treasurers on this subject – although as he points out, the level of interest does vary, depending on where a company is on the journey of defining its wider sustainability goals. “We see this played out most keenly in the disparity of investor expectations as to the extent to which ESG considerations can have an impact on portfolios and their outcomes,” he says.

For those at the start of that journey, with a less fully defined philosophy on sustainability, he says: “we see interest in ESG named products with simpler formulaic approaches such as exclusionary screens applied to specific sectors.” Meanwhile, firms with well-developed philosophies “are more focused on the impact of a strategy and how it can contribute more meaningfully to achieving their corporate sustainability goals, such as net-zero commitments or reducing their carbon output.”

Adopting an ESG approach

So how are MMF providers responding to this growing focus on sustainability and ESG considerations? Cross says that ESG integration, combined with active engagement, “are the pillars of our ESG approach.” She adds: “We have built a holistic framework that analyses qualitative inputs, quantitative impacts, investment decisions, and active ownership.”

Cross explains that Invesco’s Global Liquidity team, which is responsible for its range of MMFs, includes dedicated credit research analysts and portfolio managers. “Starting with the credit research team, all issuers are assessed and given ESG scores using our own ESG ratings,” she adds. “These scores are held in our portfolio management systems to allow the team of portfolio managers to include the ESG ratings in their investment decisions.”

For HSBC Global Asset Management, meanwhile, Curry says the firm is focusing on two key areas:

  • Sharing expertise with investors on ESG integration and the benefits it can have in terms of identifying and mitigating risks arising from ESG factors.
  • Actively developing a market-leading ESG MMF investment strategy that will support investors looking for an investment solution that goes beyond ESG integration.

He adds: “Our ESG MMF strategy will meet our proprietary policies for defining and labelling investments ‘Sustainably Invested’. In the absence of any agreed global industry standards for sustainable investment, these policies have been developed by a team of experts at HSBC to provide our clients with confidence in the sustainable investments they select.”

Next steps

Looking forward, Cross says that ESG “will continue to be a core factor in the decision-making process for treasurers, with growing emphasis placed upon this element.” She notes, “As regulations on ESG develop, and reporting becomes mainstream, it will give investors an additional way to evaluate their MMF investments through an ESG lens.”

Likewise, Curry says the focus on sustainable investing “is here to stay, and will continue to grow due to increasing levels of investor demand for sustainably invested MMFs, calls for greater transparency on investments and growing stakeholder engagement in all areas of sustainability.”

But he also notes that the specific areas of focus will vary between different MMF providers – and that simpler ESG screening methodologies, such as screening out specific sectors, “may have very little impact given the A1/P1 investible universe of MMFs and the high weighting of portfolios to financial institutions, sovereigns and government agencies.” As such, he says, the firm’s focus is on “delivering a more innovative solution” that will address these shortcomings.

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