Booming SRI cash funds lack transparency and screening rigour: Novethic

Report says ESG research can add ‘assurance’, however, for cash fund investors.

SRI money market funds, which have mushroomed to become some of the best selling sustainability funds in the current market crisis, often show limited levels of transparency over their investment methodologies and can sometimes allow up to 50% of their holdings to be unscreened against extra-financial criteria, according to a study by Novethic, the French sustainability research house.
Novethic said the French market for SRI cash funds, which invest in a mixture of cash and short-term debt, had seen an “explosion” during 2008, accounting for 31% of SRI assets under management compared with only 5% at the end of 2007, as investors sought safe havens for their investments. It said assets under management in French mainstream money market funds also rose from 32% to 43% during 2008 to reach €490bn.
In its first working paper on SRI money market funds, Novethic looked at 13 such funds worth €6.3bn at the end of 2008. It noted that 6 out of these 13 funds (including the three largest) had recently “converted” to SRI.The report said applying an SRI assessment to money market funds could provide added assurance for products considered low-risk but where some have recently been discredited due to so-called ‘dynamic’ money market approaches such as exposure to sub-prime mortgage loans via derivatives. It said an environmental, social and governance (ESG) overlay could be used to better identify the issuers of debt bought by the funds.
However, it said SRI cash funds provided uneven and limited levels of transparency, notably on screening rules and tolerance thresholds for their investments. It found that while some fund managers categorically exclude securities not reviewed against extra-financial criteria, others allowed a certain percentage, sometimes as high as 50%, in their portfolio. Moreover, it said none of the funds had taken a stance on the issue of investment in tax havens, which it said was considered to have “helped spur the financial crisis”. Securities issued from tax havens, it said, ranked among the top ten fund investments in Novethic’s 13-strong fund panel.
Link to report