Money market funds that incorporate environmental, social and governance metrics are growing rapidly, with a spurt of activity by big asset managers such as State Street Global Advisors, BlackRock and DWS.
Assets in the sector rose 15 per cent to $52bn during the first half of 2019, after growing 1 per cent through all of 2018, according to research from Fitch Ratings.
This pool of assets is still very small compared with the total $6tn money market sector. However, the expansion is striking and financiers predict further rapid growth given that investors from both the public and private sectors seem keen to explore more ESG options.
Investor interest started picking up late last year, after DWS, a key participant in the sector, converted an existing US money market fund to be an ESG fund, said Alastair Sewell, senior director of funds and asset management at Fitch.
Amundi is the largest provider of ESG money funds and the majority of the market is based in Europe, but Fitch expects that to start to change. BlackRock and SSGA launched US funds in January and July, respectively.
“In Europe, there are certain public sector bodies where they are strongly encouraged by regulators to choose an ESG variant where there is one available,” Mr Sewell said.
On the private side, more companies are looking for ESG funds since they are coming under pressure to show shareholders, employees — and sometimes their own board — that they are trying to align their investments with their corporate values. The range of companies doing this has widened, Mr Sewell said, citing Starbucks as one company that is seen to be eager to purchase ESG funds.
Some observers doubt whether the growth is durable: Peter Crane of Crane Data, who tracks money market funds, said that the topic might be a “fad” and it was telling that the largest money fund providers such as Fidelity were still waiting on the sidelines.
Still, the trend for ESG money funds mirrors the increasing flows to ESG products overall. Sustainable funds attracted an estimated $8.9bn in net flows in the first six months of 2019, surpassing the $5.5bn in flows for all of 2018, Morningstar, a data provider, said in a report last week. Flows into these sustainable funds have set calendar-year records for each of the past three years and appear to be heading for a fourth, Morningstar said.
The money market funds using ESG criteria are prime funds, which invest in commercial paper and other private instruments rather than treasuries or other government securities. This means their primary exposure is to the financial sector. As such, governance — one of the three pillars of ESG — has always been an implicit consideration in the fund managers’ investment decisions, Mr Crane notes, questioning the need for ESG labels in the first place. “If everyone’s doing ESG, then why do you need ESG funds?” he asks.
However, the labels are not just window-dressing, Mr Sewell said. Fitch analysed numerous ESG money market funds and found their holdings to be substantially different from their non-ESG counterparts. “I came to this research with a heavy amount of skepticism. We took some ESG money market funds with a comparable regular money market fund and said: ‘This is all great but can we see any difference?’” Mr Sewell said. “The answer is, yes, we can.”
