Francois Masquelier (ATEL): ESG in Money Market Funds, why not?

Francois Masquelier, Chairman of the Luxembourg Association of Corporate Treasurers (ATEL) and CEO of SimplyTreasury shares his views on how MMF can motivate companies and issuers to become more socially responsible and to search for sustainability.

 

ESG and MMF

Money Market Funds (MMF) can also adapt in response to Environment, Societal and Governance factors (ESG). Only recently market has put attention to explicit ESG strategies within MMF’s. Sign of the time? Certainly. The example of MMF’s having reduced their exposure to Danske Bank in response to governance risk factors is interesting to illustrate the governance concern. Launches of new MMF’s ESG compliant and conversions of existing ones to better reflect concerns on ESG demonstrate the changes and new expectations on the “buy-side”.

“The tidal wave cannot be stopped. We need to surf on it and to gradually adapt our investments and requirements.”

Fund calibration & metrics

Funds must adjust to market demands for more corporate social responsibility. From implicit, it becomes more explicit concept in MMF’s, and strategies change to better respond to investors wishes. They try to apply filters to select “E”, “S” or “G” compliant assets. The difficulty is to fix limit of in what they can invest or not. Some assets are more obvious than others. We can imagine that sooner or later rating agencies or ESG specialists will allocate ESG ratings or score and qualify ESG compliance. The ESG metrics will be a key issue to solve prior to claim offering “ESG compliant funds”. The inconvenient is the potential additional costs. If we reduce the potential assets to invest in, the risk is to impact returns. When we will have more ESG funds, the compliant assets will become rare(r) and the scope of eligible assets will be targeted by more MMF’s, creating unnecessary competition.

 

Driver of change

If generalized, such behaviors and trends may lead to difficulties to find short term cash equivalent investments in the long run. Being more virtuous and looking for ESG compliant assets may lead to unbalanced situations. If gradual, it may force non-ESG compliant companies and issuers to become more socially responsible and to search for sustainability. The world is changing so do MMF’s managers.

Today, we know that major players like AMUNDI, AVIVA, BNPP, CANDRIAM, SG, Blackrock or State Street - roughly 20 funds - offer ESG MMF’s. You can be sure that this number will increase over time.

The tidal wave cannot be stopped. We need to surf on it and to gradually adapt our investments and requirements, as well as become more socially responsible.