DWS, a subsidiary of Deutsche Bank AG, launched the first money market fund in the United States, the DWS ESG Liquidity Fund, that utilizes environmental, social and governance (ESG) criteria to select its holdings. The launch of the fund is a credit positive event because DWS is the first to bring ESG selection criteria into the $531 billion prime money market fund industry.
Additionally, the launch signifies that ESG investing is starting to become more widely embraced in corporate culture and is now even extending itself to money management. Over time, it could influence more short-term issuers to improve their adherence to ESG principles.
The DWS ESG Liquidity Fund currently has assets under management of approximately $360 million, but according to the fund’s management team, significant interest in the fund exists among the firm’s corporate treasury clients, which increasingly want the management of their corporate cash to reflect their respective values. Management believes the fund has the ability to grow by $2 billion in the next couple of years.
To select its holdings, the fund uses proprietary software to extrapolate and analyze data from multiple sources. The software assigns an ESG rating of A,B,C,D or F to each company whose short-term debt it might consider for investment–only the highest grades are accepted for inclusion into the fund’s debt holdings.
According to DWS, the overlay of ESG criteria has had a minimal effect on performance results in its initial testing, with returns trailing similar to non-ESG funds by only two to five basis points, which is beginning to narrow. DWS can take active steps, such as lengthening maturities in certain investments in order to bring the fund’s performance in line with its peers.