Despite growing investor appetite, green money market funds will be dead in the water until more issuers start offering climate-friendly commercial paper, according to a new report from Fitch Ratings. Two new programmes launched last week, plus conversions of existing CP and a potential first sovereign issuer, have begun to improve the picture, though.
Nearly €150bn was invested in ESG MMFs globally in the first half of this year, after growing by 50% in 2020 – way ahead of the market’s overall 20% expansion. Most of these flows have been in Europe, where Fitch estimates they already make up as much as 30% of short-term MMF assets, and a fifth of all MMFs in the region.
Moreover, more than €200bn of European MMFs have been reclassified recently. Under the EU Sustainable Finance Disclosure Regulation, they are now Article 8 funds that promote environmental or social characteristics.
But a pure green product remains far off. Indeed, no MMF even holds the majority of its assets in ESG instruments yet.
“It’s very long term. We’re talking years, if not decades,” said Marc Fleury, co-head of liquidity solutions at BNP Paribas Asset Management
Fitch expects green MMFs to emerge “in the medium term”, said Alastair Sewell, senior director.
The current paucity of supply means funds would struggle to diversify enough to achieve an AAAmmf rating. This requires no more than 10% of their holdings to be concentrated in a single issuer.
With only 15 programmes established across the market’s three categories of ESG ratings, sustainability-linked and use of proceeds CP and not all of these active yet, this would be very difficult. Even throwing in another 15 issuers of green bonds in maturities of a year or under and allowing green funds’ holdings to be less than 100% in green securities (Fitch suggests a minimum of 75%), the nearer-term outlook is challenging.
“Until a viable green short-term market exists, MMFs focused on this segment will face supply constraints, compounded by potential differences in liquidity between green securities and the materially larger and more established conventional short-term security market,” said Sewell.
Green shoots
Even so, investor demand for the product is clearly growing. A recent Institutional Cash Distributors survey of corporate treasurers – one of the important categories of MMF investor – found that only 10% believe ESG is not important to their cash investment at all. Some 45% already judge it highly important or important and the same proportion see it as becoming more relevant.
Against this background, the arrival of Alliander of the Netherlands and Italy’s TERNA last week signalled positive momentum. They follow recent programmes from Endesa and Iberdrola, as well as a separate US dollar programme for Enel alongside the euro facility it established a year earlier.
Five new programmes in three months is the most rapid period of growth the nascent market has yet seen. Its first five emerged over more than a year and were then followed by eight fallow months.
In addition, issuers may be able to convert existing programmes. “Many, many issuers come to us and ask around the process of adding ESG to the framework,” said Steve Collins, head of ECP and UK T-bill trading at Barclays.
He said conversions would not impair liquidity as programmes’ credit ratings should be unchanged.
Moreover, the Republic of Austria said this year it would consider green CP among options for the green issuance it plans to begin soon. The highly rated name would mark the first sovereign entrant.
“That'd be absolutely significant,” said Fitch’s Sewell. “Any issuance in the SSA space would clearly be of interest to money market funds, and particularly from such a high quality sovereign.”