Demystifying ESG Investing Considerations for Institutional Cash Investors

Abstract
The popularity of responsible investing has extended to the fixed-income and liquidity-management fields in recent years. Incorporating environmental, social, and governance (ESG) issues in cash investment decisions makes sense as part of overall credit risk management. In addition to challenges related to disclosure, criteria, measure, and verification, liquidity portfolios face unique challenges in the areas of relevance, concentration, short-termism, and transparency. In this article, the author describes ESG considerations for institutional liquidity investors and explains that rather than buying into a strategy with an ESG label, institutional liquidity investors should engage their managers to include ESG issues in general credit evaluation and monitoring to improve risk management.

TOPICS: ESG investing, portfolio theory, portfolio construction

Key Findings

• The popularity of responsible investing has extended to the fixed-income and liquidity-management fields in recent years. Incorporating environmental, social, and governance (ESG) issues in cash investment decisions makes sense as part of overall credit risk management.

• In addition to challenges related to disclosure, criteria, measure, and verification, liquidity portfolios face unique challenges in the areas of relevance, concentration, short-termism, and transparency.

• Rather than buying into a strategy with an ESG label, the author explains that institutional liquidity investors should engage their managers to include ESG issues in general credit evaluation and monitoring to improve risk management.