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Integrating ESG into liquidity management

Contributor
  • Deborah Cunningham

    Chief Investment Officer Global Liquidity Markets

CIO Deborah Cunningham walks through the process.

Time Transcript
0:03 Hi, Deborah Cunningham, Chief Investment Officer of the Liquidity Markets here at Federated Investors.
0:09 What role do ESG factors play in liquidity markets?
0:13 They are key as far as the assessment of minimal credit risk and high quality issuers, which we are required to do from a Rule 2a-7 standpoint for all of our liquidity products. ESG factors are assessed as part of our qualitative inputs into the credit analysis process, and depending upon the issuer and the industry, there could be different emphasis on the E, the S, or the G. From an E perspective, environmental types of concerns generally are front and center when we’re looking at something like our oil company exposures and the industries that we might have in the energy sector. From a social perspective, it’s oftentimes the consumer types of entities as well as pharmaceuticals. So we have nutrition concerns, we have opioid crisis concerns that could be front and center when we’re looking at that type of consumer or a pharmaceuticals type of company. When we’re looking at the governance issues, this is probably the most impactful in the context of the issuers that we’re using, our preeminence from the use of financial services types of companies within our money market funds is quite high, and when we’re looking at the qualitative inputs, it’s generally focused around what their scorecard is like within the firm, what the records from a regulatory perspective might show, and ultimately it’s an issue that can be as important as a lot of the quantitative factors that we’re reviewing for those entities.
1:48 In what ways does Federated integrate ESG factors into liquidity management?
1:54 We definitely use it through our credit process. We use both third party providers, such as MSCI and Sustainalytics, but then we really place a higher emphasis on the proprietary information we receive from Hermes Asset Management. As far as that proprietary information goes, there’s a QESG scorecard that incorporates a lot of that third party data, in addition to engagement notes that come from the equity ownership services aspect of our Hermes brethren in the London office. So we are utilizing the information that comes from those analysts on specifically the fixed income side as well as the engagement side to help us determine whether or not there are qualitative factors that weigh into our one through five rating scale. Generally speaking, when we’re looking in the qualitative factors and the ESG factors that are associated with an issuer, it may have the potential to increase an issuer’s rating by one, decrease an issuer’s rating by one, or keep it neutral. In any case, we’re not looking at something that essentially is a game changer for an issuer, but rather modifications up or down our one through five scale.
3:11 Disclosure: Views are as on 11/8/2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Rule 2a-7 is a rule under the Investment Company Act of 1940 regulating money market mutual funds. Rule 2a-7 imposes various requirements on the money market fund’s portfolio, including regulation related to maturity, credit qualification and diversification. Federated Investment Management Company 19-30175 (11/19)

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Rule 2a-7 is a rule under the Investment Company Act of 1940 regulating money market funds. Rule 2a-7 imposes various requirements on the money market fund’s portfolio, including regulation related to maturity, credit qualification and diversification.

Federated Investment Management Company