Can money market funds really be sustainable?
Gregory Chereau, money market investment specialist, BNP Paribas Asset Management
BNP Paribas Asset Management (BNPP AM) has been an early leader in sustainable investment. We set up a dedicated ESG research team and launched our first socially
responsible investment fund in 2002, which was followed by the bank becoming a founding signatory of the Principles for Respon- sible Investment (PRI) in 2006. Since then, we have progressively strengthened our commitment, by pledging to align our portfolios with the Paris Agreement goals in 2015. In March 2019, we launched our Global Sustainability Strategy, a firm-wide blueprint to mainstream and increase BNPP AM’s sustainability ambition across our business. As part of our approach we define four pillars of sustainable invest- ment: ESG integration, stewardship, responsible business conduct expectations and sector-based exclusions, and a focus on the future. The final pillar is a forward-looking perspective to enhance invest- ment decision-making by focussing on key sustainability issues that we believe will be critical pre-conditions for a more sustaina- ble and inclusive economic system: energy transition, environ- mental sustainability and equality. At the core of all our investment processes, analysts and portfolio managers integrate relevant ESG factors into their company, asset and sovereign evaluation as well as investment decision-making processes. Our goal is that by 2020, every investment process – and, by definition, every investment strategy – will have been reviewed and approved by our in-house ESG validation committee.
SO HOW DOES THIS GOAL RELATE TO OUR MONEY MARKET CAPABILITIES? At BNPP AM, we have a wide range of money market and short- term investment strategies, and our investment process seeks to favour issuers with better than average ESG ratings. Our objective is to always respect a minimum ESG score, according to our inter- nal methodology, within each of our money market funds. Our ESG research team currently provides a score for 4,000 issu- ers. All companies included in our money market funds are cov- ered. This team is independent from investment teams and its findings are based on a variety of sources, not limited to ESG data suppliers and includes regular research carried out with issuers directly.
Companies’ ESG scores range between 0 and 100 and include a minimum of 10% of the final score on the environment pillar, 20% on the social pillar and 30% on the governance pillar. The final weighting of each pillar depends on the company sector (e.g. a util- ity issuer will have a higher environmental contribution than a financial one). In addition to the quantitative score, our ESG analysts can apply a qualitative overlay of +/- 30% to account for topics not captured by a quantitative indicator, such as specific efforts or conversely recent controversies.
The objective of the recently defined ESG integration in our mutual funds is to favour companies with good scores, and engage with rather than exclude the lower-rated ones (although the latter meth- odology is applied in our SRI-labelled funds, which apply a best-in- class approach excluding 30% of the most weakly rated companies in each sector).
In practice, we aim to achieve a minimum average ESG score for each of our money market funds. Companies with a low score will have to be underweighted compared to the current exposures (or even arbitrated versus a better-rated name). In addition, as part of our wider commitment to help improve the way companies operate, we may engage with lower-rated companies. Our objective is to raise their awareness of any perceived weaknesses identified through our ESG analysis, and to help them improve their behav- iour, and thus their score. In the case of insufficient improvement, we may decide to exclude the company from our buy-list.
IMPACT AND MEASUREMENT
In terms of performance, it is difficult to assess the direct impact that our ESG integration approach is having on our fund returns. We do believe that companies with solid ESG foundations should perform positively. Conversely, we believe that companies facing environmental, social or governance difficulties are more likely to suffer operating issues, potentially affecting their credit profile, and thus the pricing of their fixed income instruments. What we are certain of is that our clients are demanding more sus- tainable investment solutions and that we as a firm are committed to providing this to them. We believe our expertise will give us a long-term competitive advantage in sustainable short-term investing.
BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom.
www.bnpparibas-am.com This article is issued by the investment company. Investors considering subscribing for the financial instruments should read the most recent prospectus or Key Investor Information Document (KIID) available on the website. Opinions included in this article constitute the judgement of the investment company at the time specified and may be subject to change without notice. This article does not constitute or form part of an offer or invitation to subscribe for, underwrite or purchase an interest in any strategy. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. Past performance is not a guide to future performance.
As at October 2019.
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