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, Amundi and the asset management arms of BNP Paribas and Goldman Sachs Group 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 hasn't yet responded to a request for comment.
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 and Commerzbank 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 U.S. banking sector was a "prominent" driver of cash flows to money market funds in March, Fitch's Ms. Wang said.