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.
Related: Why We Think ESG Is a Bedrock Investment Issue
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.
The idea of socially responsible investments is not relatively new, but the concept is still struggling to break into the mainstream, particularly at time when the markets are at fever pitch and the major indexes like the S&P 500 are hitting record highs. The focus on ESG investing has made headway in the form of equities, but investors are also looking at opportunities within the fixed-income space where funds can make innovations to meet this demand.
ESG Bond Portfolio Ratings
In addition to Deutsche’s foray into ESG selection criteria with DWS, investment firms like Pimco and Fidelity Investments are in the forefront of building their sustainable fixed-income funds through the selection of debt issues of companies with excellent ESG ratings. In addition to selecting fixed income investments based on credit quality, investors can now filter debt issues via their contributions towards social responsibility.
“Environmental, social, and governance (ESG) analysis is becoming increasingly important to fixed income asset managers, catching up to U.S. and global equity research where these factors are more firmly entrenched,” according to asset manager Legg Mason Inc. “Although favorable ESG scores may correlate with attractive investment opportunities, the reason has more to do with improving the ability of fixed income investors to correctly price the risk of bonds over longer time periods.”
The challenge to bring ESG investing into wider investor adoption faces various obstacles, but more education and marketing towards these products, equities or fixed-income, can help increase awareness of these products.
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