- A heightened focus on the carbon emissions of corporate cash prompted Capital Monitor to look at the availability of ESG short-term investment products.
- Assets under management in money market funds classified under Article 8 of the EU’s SFDR reached €600bn in the final quarter of 2021.
- Banks are also innovating in cash management offerings, with Citi and DBS launching new ranges of sustainable deposit solutions.
What corporates do with their excess cash rarely fits into a debate about ESG investment. This is despite some of the wealthiest and most influential household names sitting on stockpiles of money and investing in financial instruments that squeeze out a few extra basis points of return.
The lack of focus is linked to the short-term nature of liquidity investment, argued analysts at Pictet Asset Management in October last year. They claimed: “Risks and opportunities associated with… climate change are, by nature, long term… [making it] difficult to see their relevance for investments with maturities of 13 months or less.”
Just 13% of global corporate treasurers believe ESG and climate-related issues are embedded in their cash and liquidity management strategies, while the rest admit more must be done, according to an April 2022 report from Aviva Investors and The Global Treasurer.
That does not mean that treasurers are not keen to green their cash. Nearly 70% of respondents in the report said that achieving sustainable outcomes was an influential factor for them when managing cash liquidity.
Capital Monitor’s analysis of a recent report called the ‘Carbon Bankroll’ highlights the link that both bank deposits and short-duration fund management products have to carbon footprints. It also flags the relative power a cash-rich company has to influence change at its main banking service providers.
ESG money market funds are growing
Take the money market fund (MMF) space. Designed for safe, cash or cash-equivalent investments, MMFs seek to provide returns of around 2–3% by investing in highly rated and liquid debt securities.
The good news for investors looking for short-term liquidity products with an ethical bent is that there are a growing number of funds with environmental, social or sustainable credentials.
MMFs classified under Article 8 of the EU’s Sustainable Finance Disclosure Regulation rules – those promoting environmental or social characteristics and referred to as ‘light green’ – grew to €600bn in assets under management (AUM) during the final quarter of 2021, while the share of total European MMF AUM rose to 39% from 36% the previous quarter, according to analysis of the European MMF market by rating agency Fitch published in March. Much of that expansion is down to Article 6 MMF funds – which do not integrate any kind of sustainability – reclassifying as Article 8.
For context, the AUM of Article 9 assets in MMFs – those promoting a sustainable investment objective and referred to as ‘dark green’ – is negligible by comparison, at just €1.5bn. All investments promoted as ESG are required to classify as either Article 8 or 9, the more stringent classification.
Fitch’s analysis also finds that a much lower proportion of short-term MMFs (29%) than standard MMFs (58%) are categorised as Article 8 (see first chart below). All MMFs domiciled in Europe must be classified as either short term (with a maximum weighted average maturity – WAM – of 60 days) or standard (with a maximum WAM of six months).
Spot the ESG difference
Of course, an important caveat for investors seeking to green their cash is that the ‘environment’ is just one of three ESG pillars, meaning funds may focus on good governance, for example, rather than on reducing emissions.
For example, Fitch published an analysis in April of six US-domiciled MMFs with explicit ESG objectives and branding and six 'comparable' non-ESG MMFs (managed by the same asset manager), and revealed differences in weightings between the two types of fund. The ESG MMFs, for example, had a higher proportion of financial corporate notes than the regular MMFs (see chart below).
While asset managers interpret ESG or Article 8 classifications of their MMFs differently, many focus on corporate governance risk as a non-financial indicator in the credit risk analysis.
Pictet Asset Management, for example, says it has over time excluded a number of financial companies from its ESG universe based on governance concerns, and that subsequently several have been downgraded by rating agencies.
Similarly, US fund house State Street Global Advisors (SSGA) attaches an ‘R-Factor’ (its own ESG scoring system that aligns multiple data sources to financial materiality frameworks to generate an ESG score for all listed companies) to bank issuers based on their management strategies. SSGA says European, Australian and Canadian banks consistently receive higher R-Factor scores than their peers elsewhere, while Asia-headquartered banks tend to score lower.
On the other hand, many ESG MMFs incorporate exclusion screens for debt to ‘sin stocks’, including fossil fuels; the environmental impact is clearer in these cases.
Who dominates in ESG MMFs?
Capital Monitor’s analysis of Morningstar data on European MMFs from the end of April 2021 finds that the biggest asset manager, BlackRock, dominates the short-term Article 8 MMF league tables (see chart below).
BlackRock has built a proprietary scoring model for money market instruments, and also applies common exclusionary screens against them.
For example, the largest Article 8 MMF is BlackRock’s ICS Sterling Liquidity fund (AUM €41bn), according to Morningstar data. It invests in typical MMF holdings including certificates of deposit, commercial paper, floating-rate notes, non-UK government sovereign bonds, repurchase agreements and reverse purchase agreements. Its top two holdings are Japan's Sumitomo Mitsui Trust Bank (2.85%) and Nationwide Building Society (2.37%).
Specific to its ESG strategy, the ICS Sterling Liquidity fund excludes any issuers that derive 5% or more of their revenues from fossil fuel mining, exploration or refinement (in addition to the firm’s ‘baseline screens’ for the Europe, Middle East and Africa region).
The role of banks
All this being said, MMFs are just a small component of cash and short-term investment, especially for corporate treasury teams. Yet there is some level of innovation in the prosaic world of bank deposits, too. For example Citi launched a range of sustainable deposit solutions last month after DBS’s India business unveiled a similar offering in March.
In addition, companies can leverage their influence with banks to force them to decarbonise, says Ivan Frishberg, senior chief sustainability officer at US-headquartered Amalgamated Bank. "There are ways to reduce the carbon impact of those (short-term cash) investments, particularly on the bond side.
“On short-duration bonds or cash instruments, you can first of all push your banks to acknowledge there is a problem," Frishberg adds. "At [Amalgamated Bank] we measure our supply chain emissions, and we've talked to energy-intensive businesses in our supply chains that are doing a lot of work to decarbonise that space.”
He is confident there are plenty of options for companies wanting to green their cash: “As we start to see banks reporting on emissions and their emissions intensity, you will start to find better alternatives within the banks, and certainly a lot of the products they're selling,” Frishberg says.
Such services are likely to prove welcome amid rising scrutiny of the carbon emissions of corporate cash.
