ESG integration and stewardship efforts have traditionally been focused within the equity space, but investors are taking the first steps to engage right across the capital structure – even in select short duration and money market strategies.
In 2019, ESG became a pre-requisite rather than a nice to have for many investors and demand for strategies and solutions from different investor types across the globe are now being seen. The recognition that environmentally conscious, socially aware and well-governed businesses are better positioned to withstand emerging risks and harness new opportunities is shaping many a conversation with clients today, says Kathleen Hughes, Global Head of the Liquidity Solutions Client Business at Goldman Sachs Asset Management (GSAM).
Whilst the majority of pension funds, sovereign wealth funds and insurers already have ESG at the top of their agendas, an increasing number of treasurers – both institutional and corporate – are keen to understand how they can contribute to the ESG narrative within their organisation. Indeed, many recognise their role in driving a collective investment response to the risks of climate change and ESG-related risks, without compromising returns or increasing risk.
“Given that ESG and stewardship has traditionally focused on equity, entities that are more active in the debt market have often been overlooked by engagement activity,” notes Hughes. “This is particularly true within short duration and cash management strategies, where the longer-term shifts of climate change, socio-economic equality and gender parity seem far removed from the short-term time horizons of debt instruments and cash equivalents which make up money market fund (MMF) portfolios.”
Whilst MMF investors typically only hold specific credits for short periods of time, underlying issuers of shorter-dated instruments may well be names that feature in portfolios for consecutive periods stretching over many years. In this sense, says Hughes, money market investors are long-term stakeholders in issuing entities and have an important role to play in the future of these businesses. “It is crucial that our market comes to recognise the power it has to drive positive change in the practices and behaviours of investee companies – regardless of the type or maturity of the underlying security held.”
In practical terms, she believes that integrating ESG considerations into short duration credit and cash strategies should be aligned with investor values and can be structured towards a range of objectives and thematic exclusions, ranging from predatory lending to climate change disclosures. It is, she adds, also critical that any exclusions are closely aligned with asset owner values, and that any fund conversion is underpinned by a “suitably rigorous” process.
More to ESG than E
For many investors, carbon objectives come as a pre-requisite in ESG strategies. MMFs’ primary exposure is often financials, a sector which tends to already score well in terms of the “E” in ESG. As such, explains Hughes, GSAM’s recent engagement efforts have focused across select MMF strategies on themes within the third pillar of ESG – governance. To this end, its Liquidity Solutions team has partnered with the firm’s dedicated Stewardship team to develop an engagement strategy around diversity and inclusion.
“Some of the entities we are engaging with have had very little, if any, conversation on this topic, particularly in certain jurisdictions,” she notes. But by adopting a multi-faceted approach to engagement, often as both equity owners and holders of short and long-term debt, corporate and financial issuers with material under-representation of women at board level are, she says, being “prompted” to rethink their strategy.
GSAM today will engage with any issuer where there is material underrepresentation of women, and track the impact and outcome of its conversations on an annual basis. Using a combination of external data sources to assess the percentage of women on the board of individual issuers, its teams will contact the board, company management, investor relations, HR or other appropriate contacts to identify and discuss the issue.
“We believe that underperformance on this metric may be symptomatic of broader diversity issues across a business, which presents key commercial risks,” explains Hughes. Women remained significantly under-represented at the top of corporate America in 2018, comprising around 40% of all employees and 33% of managers across the S&P; 1500 – but just 5% of CEOs and 21% of directors.
In the financial sector, GSAM’s research into the gender pay gap shows that women have, on average, made up more than half of all employees over the past five years, but just 40% of managers and 4% of CEOs. “Clearly, there is a lot of headroom for improvement and investors have an important role to play in driving forward the changes required,” says Hughes.
By recognising their role as stakeholders in the long-term future of issuers and, where possible, coordinating engagement efforts across the capital structure, it is apparent that MMF investors can take their seat at the table on ESG engagement.