As the pandemic took hold many organizations dramatically increased their cash holdings to ensure they had liquidity to weather the economic storm. As that storm has waned and the unknowns become known the need to hold excessive amounts of cash has diminished. We have seen a draw on this cash as it has been utilized for reinvested in other parts of the business.
Nearly two-thirds (65%) of respondents say their cash portfolios are optimised for liquidity, compared with just 38% who say they are optimised for generating returns. But with five major central banks, including the European Central Bank now implementing negative interest rate policies, conservative cash investors face losing money on negative-yielding bonds. There appears to be some unease with this prospect: 44% of non-financial corporates say that seeking higher returns is a key motivation for a more proactive approach to cash over the next 12 months. With interest rates seemingly stuck in low or negative territory for a prolonged period, cash managers may need to get more creative to manage the complexity of negative yields. For instance, they may consider enhanced cash and ultra-short-term bond funds to pick up additional yield on strategic cash reserves.
Seven-in-ten (69%) cash managers say that the integration of environmental, social and governance (ESG) into cash investments will be a mainstream practice within the next three years. Mitigating reputational risk (43%), client pressure (38%) and investment risk (38%) are the main factors driving respondents to accelerate ESG integration within cash holdings. This would mark a step change in ESG within this asset class. And as cash managers accelerate the application of ESG principles to their cash investments, they will need to confront a series of challenges, such as the lack of standardised methodologies for ESG in cash, and issues related to the nature of the underlying assets in money market funds (MMFs).
Covid-19: A Catalyst for Change in the Corporate Treasury
If the pandemic has driven some corporate treasurers to reconsider their cash allocations, it has had an even more dramatic impact on how they view their operating models.
Digital initiatives such as modernising treasury management systems and cash forecasting tools have been on corporate treasurers’ agendas for some time. But the pandemic has increased the urgency of these projects because treasurers need to gain better visibility of liquidity risks, become more actively engaged with cash portfolios and keep their teams connected remotely.
The corporate treasurers we surveyed cite cashflow forecasting amid the turbulence and accessing relevant data from across the organisation as key challenges. Meanwhile, 67% of treasurers at non-financial corporates and 83% at insurers say that the exodus from offices has forced them to accelerate digital transformation plans.
One corporate treasurer in the transport sector says that his company benefitted from rolling out a more robust treasury management system just before the crisis. “It enabled us to connect all of our treasury operations, and that has been massive because everyone around the globe has this ability to view cash-flow positions on a real-time basis,” he says. “It has improved our ability to forecast our needs before they arise, and we can use in real time excess cash that may otherwise sit idle in one location.”
Several corporate treasurers we interviewed believe that the demands of 2020 have also changed their profession for the long term: treasurers may need to be more tech-savvy and understand how they can improve real-time data flows. “We’ve actually carved out part of the team to focus on advanced technologies,” says a group treasurer at a European technology hardware company. “So programming certain bots, and machine learning activities, which will start with smaller business cases and then be rolled out more widely.”
To accompany this shift, senior treasurers’ roles may need to be elevated to a more strategic level. They need to play a part in deciding where to go next in terms of investment in technology, and in upgrading policies and procedures.
Accelerating ESG Integration
The pandemic has also sparked greater impetus for ESG integration across all asset classes - and cash managers are experiencing this too.
Even before the pandemic, demand for ESG money-market products was rising. Assets in the sector rose 15% to US $52 billion during the first half of 2019, after growing 1% through all of 2018.3 This is just a small slice of the US $6 trillion money market sector, but our survey suggests that ESG is set for a rapid climb in cash: 69% of respondents think that the integration of ESG into cash will be mainstream within the next three years, and 56% say the performance of ESG MMFs in the wake of Covid-19 has increased these funds’ attractiveness.
Pressure from clients and needing to align investment practices with wider organisational CSR commitments are strong drivers of ESG integration for corporate treasurers, while asset managers view the application of ESG as an important way to mitigate risk in their cash portfolios (see Figure 10).
-US-based corporate treasurer in the transport sector
The survey respondents who identify as having a proactive, strategic approach to their cash investments more broadly - a group that makes up only 30% of our survey sample - place the most importance on applying ESG to their portfolios (see Figure 11).
This is no surprise, but it suggests that the current drivers to apply ESG to cash, which are partly driven by heightened attention from internal and external stakeholders, may not translate into action as quickly as some anticipate. For ESG cash investments to surge, there needs to be deeper engagement with external fund managers and banking partners, along with more education on ESG integration processes in cash.
Source: State Street Global Advisors Reset and Refocus 2020 survey of 300 cash managers between 20 August 2020 and 11 September 2020. Q: What are the primary motivations for your organization to apply ESG factors to its cash investments? (% ranking in top three)
Source: State Street Global Advisors Reset and Refocus 2020 survey of 300 cash managers between 20 August 2020 and 11 September 2020. Q: How important is ESG to your firm’s money market investment strategy? Based on a scale 0–10, 0 not important and 10 extremely important. The above depicts percentage of respondents that responded 8–10 on the overall scale
Addressing the Complexities of ESG in Cash
Organisations may have the ambition of piling cash into ESG assets, but executing those ambitions in a way that meets investment, regulatory and stakeholder demands is far from straightforward. The top concerns among our survey respondents mainly relate to the technical and informational challenges of implementing ESG within cash funds (see Figure 12).
Source: State Street Global Advisors Reset and Refocus 2020 survey of 300 cash managers between 20 August 2020 and 11 September 2020. Q: What would be your primary concerns in integrating ESG into your cash investments? (% ranking in top three)
The nature of the underlying assets in cash funds presents particular challenges for ESG integration. For instance, prime funds, where most ESG integration has been focused to date, typically hold a high concentration of around 30 AA- or A-rated global banks that access the market daily. This means that approaches to scoring banks’ ESG performance tend to lean heavily toward a focus on governance — because it is difficult to accurately assess environmental and social factors for global bank assets.
What’s more, applying an ESG filter could exclude some banks from an MMF’s approved list, meaning that funds would need to increase their exposure to other prime instruments in order to meet requirements around issuer concentration. This poses other ESG monitoring challenges. More broadly, every investment into an ESG MMF should come with significant scrutiny of the ESG filter or approach. Each fund has its own methods, and these have to align with the investor’s own beliefs. This is something that cash managers will have to discuss in detail with their providers, because the sector currently has no standardised methodology.
The impact on liquidity within cash funds is a lesser concern among our survey respondents when it comes to ESG, but it is an important consideration given the nascency of the market and the relatively recent introduction of many ESG-labelled MMFs.
“In any case where our organisation’s accounts make up somewhere around 15% of the assets, we would want to be absolutely sure that the instruments within the MMF are fully liquid and that there are no other impediments to being able to quickly get a large chunk of money out,” says a US-based head of cash investments at a global asset management firm.
The group treasurer in the technology hardware industry takes a similar stance. “The priority for us would be ensuring that the fund is made liquid enough so that we could call the money daily if we needed to,” he says. “While holding instruments that satisfy sustainability criteria.”
Getting cash managers comfortable with these processes and their implications for the make-up of money market securities within funds is a key step toward deeper integration of ESG.
Cash has often been overlooked as a strategic asset class, with many organisations happy to settle for allocations that provide low risk and operational ease. But now, more than ever, there is a need for deeper engagement with cash strategies.
As we move into 2021, the role of cash managers may be under scrutiny like never before - and they must be ready to rise to these challenges. This is how:
Businesses and investors will be hoping for a less volatile environment ahead in which to build their recovery, but they will also be braced for more turbulence. Ensuring they can access liquidity in real time will be at the forefront of cash managers’ priorities. Yet, at the same time, they may want to counter the impact of low and negative yields, whether through minimising surplus cash on the balance sheet or by looking for new cash investment solutions.
In 2021 investors may benefit from managing their cash more proactively, and this survey suggests they are ready to do so. State Street Global Advisors has a range of enhanced cash, ultra-short-term bond and separately managed account solutions that can help.
As they look to align cash investing activities with ESG objectives in the wider organisation, cash managers will need to engage with their banking and investment partners on emerging methodologies in this space. A better understanding of how ESG cash funds are assessing securities and adhering to liquidity and regulatory requirements will build confidence in these solutions and support accelerated adoption.
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For four decades, these principles have helped us be the quiet power in a tumultuous investing world. Helping millions of people secure their financial futures. This takes each of our employees in 31 offices around the world, and a firm-wide conviction that we can always do it better. As a result, we are the world’s third-largest asset manager with US $3.47 trillion* under our care.
* This figure is presented as of December 31, 2020 and includes approximately $75.17 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
1 Money market funds swell as investors shelter from Covid crisis, Institutional Asset Manager, June 2020.
2 EFAMA International Statistical Release Q2 2020.
3 ESG money market funds grow 15% in first half of 2019, Financial Times, July 2019.
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