(Bloomberg) - Money market funds targeting European clients have quietly been reclassifying their legal status to market themselves as promoters of ESG, with close to $1 trillion of highly liquid client assets now registered as such.
The designation in question is known as Article 8, which under European Union rules means a financial product “promotes” environmental, social and good governance goals. Asset managers have been attaching it to funds that specialize in ultra-short-term assets at a pace that’s transformed the market since European ESG investing rules were first enforced in 2021.
Money market funds registered as Article 8 currently have $986 billion of client assets, up about 43% since August, according to data compiled by Bloomberg. BlackRock Inc., Amundi SA, and the asset management arms of BNP Paribas SA and Goldman Sachs Group Inc. were the four biggest players, the data show.
Europe has a “fairly broad” definition of Article 8, and it’s clear that market participants and even regulatory authorities have different interpretations, Minyue Wang, director at Fitch Ratings, said in an interview. Against that backdrop, money-market funds can “promote” ESG characteristics as much as other asset classes, she said.
The development feeds into a broader debate over what ESG should and shouldn’t be. In Europe, there are calls for a fundamental review of the region’s ESG investing rulebook, the Sustainable Finance Disclosure Regulation, as continual waves of fund reclassifications leave investors bewildered.
Bloomberg Intelligence estimates that in total, money-market funds with $1.6 trillion of client assets have registered under some form of ESG label. It’s “become the trend du jour,” said Adeline Diab, director of ESG Research for Bloomberg Intelligence.
A spokesperson for BNP Paribas Asset Management said its decision to categorize money-market funds as Article 8 follows “strict ESG guidelines and constraints, including that each fund must have an ESG score that is better than that of its investment universe.”
Spokespeople for Goldman Sachs Asset Management and Amundi declined to comment. BlackRock didn’t respond to a request for comment.
Researchers at Morningstar Inc. regard money market funds as too cash-like to be included in analyses of ESG products. They “tend to be large and can distort the fund flow picture,” said Hortense Bioy, global director for sustainability research at Morningstar. “We prefer to ignore them.”
The total market for Article 8 has swelled to roughly $5.8 trillion, according to Bloomberg data that includes funds of funds and money-market funds. That’s in part as fund distributors put pressure on asset managers to deliver products that cater to demand for ESG from investment clients.
But analysts at Jefferies International Ltd. and Commerzbank AG said the Article 8 market may be headed for a period of upheaval, in light of planned regulatory changes. Europe’s markets watchdog wants to introduce minimum thresholds for the kinds of investment products that can be sold as ESG and sustainable, which might dramatically change the landscape, they say.
According to the Securities and Markets Stakeholder Group, which advises the European Securities and Markets Authority, less than a fifth of funds currently registered as Article 8 would be able to call themselves sustainable if the plan is enforced. ESMA has said it’s still working through consultation responses, but that it expects to move ahead with its proposal later this year.
Money market funds contain highly liquid investment products, meaning they’re often considered an attractive substitute for cash deposits. Asset managers tend to fill them with short-term treasury securities or commercial paper issued by corporations, often banks.
Such investment vehicles have grown in popularity since last month’s banking crisis, as highly liquid funds became a preferred alternative for depositors reacting to the collapse of Silicon Valley Bank and Signature Bank. Even before those shocks, corporations and consumers were opting to shift cash into money-market funds, which generally offer higher returns than bank deposits.
Concern about the US banking sector was a “prominent” driver of cash flows to money market funds in March, Fitch’s Wang said.
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The embrace of ESG by money market funds coincides with a slowdown in the wider market for sustainable investing. Globally, ESG funds drew $29 billion in net new money last quarter, down from almost $38 billion in the previous quarter, Morningstar Inc. said on Tuesday. ESG fund launches in Europe slumped by almost two-thirds, meaning the “cool-down in new sustainable product development was entirely driven by a significant reduction of new sustainable fund launches in Europe,” it said.
(Adds comment from Morningstar in ninth paragraph.)
By Natasha White and Frances Schwartzkopff
With assistance from Amine Haddaoui