An often overlooked part of the burgeoning environmental, social, and corporate governance (ESG) investment industry may soon encounter greater global scrutiny from regulators.
Analysts at Fitch Ratings expect rulemakers to push for more transparency from managers of money-market funds (MMFs). This comes as other ESG-related offerings that fall short on the standards front are increasingly struggling to attract and retain investors.
The integration of ESG factors into money funds has accelerated in recent years, especially in Europe, where in 2021 assets surged by about 200 percent as more and more funds took on the "ESG" label.
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Roughly 350 billion euros (US$369 billion) is invested in ESG-focused money funds, accounting for 23 percent of the total market for European money funds. By comparison, there's just $9 billion in U.S. prime money funds that have ESG in their names.
Large ESG reporting disparities exist between the two regions, creating inconsistencies in reporting standards across the market. In Europe, there's "a more prescriptive, standardized framework," while in the U.S., reporting is more of "a disclosure regime," said Greg Fayvilevich, senior director and global head of Fitch's fund and asset manager ratings group.
Money funds are considered to be among the least risky investments available because they traditionally hold only the safest government and corporate-bond securities. The average yield for money funds has risen above 0.3 percent in Europe, from -0.6 percent at the start of the year. Yields are now at the highest level since 2014.
As that yield climbs with central banks boosting interest rates around the world, the presumption is that more investors will gravitate to money funds, especially if stock markets continue to lose value.
The level of investment demand for ESG products already exceeds the availability of bonds, and that makes finding enough securities to buy more complicated, said David Gorgone, a portfolio manager for money markets and short-duration bonds at Geneva-based Pictet Asset Management.
"We have seen more and more ESG-related bonds and commercial paper programs, but the supply is still too small to be able to build a proper ESG-only portfolio," he said.
Similar to other parts of the ESG industry, money funds are likely to be more susceptible to greenwashing as more and more funds proliferate the market. Expanded ESG disclosures and third-party oversight to examine funds in a standardized way would help reduce those risks, Fayvilevich said.
Greenwashing typically occurs when companies, people, or governments overstate or misrepresent their climate credentials. The term has morphed in the past year to also include issues when organizations overhype their commitments in other areas of ESG.
The European Securities and Market Authority (ESMA) is among those organizations leading the way on cracking down on such potential mis-selling. ESMA, the European Union's securities market regulator, recently published an ESG supervisory briefing that provides a framework to "ensure convergence across the EU in the supervision of investment funds with sustainability features."
And that includes provisions to combat greenwashing in money-market funds, as well as the entire range of stock, bond, and other types of funds.
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