Is ESG integrated into your investment process?
Environmental, social and governance (ESG) factors are integrated into investment processes across J.P. Morgan Asset Management. The practice of integrating financially material ESG factors into investment processes aims to strengthen risk management and contribute to long-term financial returns. Consequently, we believe ESG integration can help deliver enhanced risk-adjusted returns over the long run.
We also believe it is important to align the consideration of ESG factors to the specific style of an investment, such that the integration of ESG information contributes to investment performance. As a global active manager using a variety of investment styles, we integrate financially material ESG factors into the investment process in a manner consistent with the underlying strategy, from the purely quantitative to those based on a combination of fundamental research and qualitative judgements. Because of the variety of actively managed investment strategies, types of investments and investment processes across our firm, financially material ESG factors will differ across investment groups.
As such, we do not mandate that each investment group implement ESG integration in the same way. Instead, we apply key metrics that focus on the robustness of the ESG integration process to determine if an investment group can be considered as ESG integrated. We use a process-focused 10-metric scoring framework to validate the approach applied by the investment groups.
Who conducts ESG analysis within the team?
ESG analysis at J.P. Morgan Asset Management is a collaboration between portfolio managers, research analysts, and the central Sustainable Investing team. As part of our firmwide commitment to ESG integration, research analysts systematically incorporate ESG analysis into their fundamental research process – for example, specific ESG questions are included in the checklist of questions that analysts must complete as part of their due diligence on any potential investment. Portfolio managers have access to this research and take it into consideration during their investment process.
The Sustainable Investing (SI) team also conducts in-depth ESG-focused research on broader sustainable themes, serving as a central point of contact for investors across the firm who want to access more information around important ESG topics. The SI team has also worked over the last two years to build a proprietary, data-driven scoring system that draws on a range of specialised data inputs to complement analysts’ fundamental research and to help portfolio managers build out their ESG view on individual companies.
Please summarise the key ESG metrics that are core to your strategy
To ensure that ESG-integrated investment teams continue to incorporate ESG factors in a meaningful way, we use a consistent 10-metric scoring system. This checklist assesses the integration process of each investment group, recognising that these processes will differ according to the nature of the strategy and investment style. The checklist also considers metrics relating to research and investment management, including initial due diligence and subsequent research practices, documentation of integration methodology and research methods, and ongoing monitoring.
Strategies and products
We continue to develop and enhance a robust range of company-level ESG metrics and data tools for our investment teams. While there is a backbone of metrics that we assess for all industries (and that allow us to make meaningful comparisons across industries) we also consider more specific metrics that help us make meaningful comparisons across companies within specific industries. Increasingly, we focus on forward-looking and outcome-oriented metrics, as we believe this is a more robust approach than looking at historical data or information around ESG policies, which may not necessarily translate into concrete action. The metrics we are incorporating aim to produce a consistent, data-driven view around the material ESG factors of each sector and the companies within, in order to understand the associated ESG risks and opportunities.
Our climate research team is currently building a toolkit of climate-related analytics, which will be key to delivering and reporting on progress towards our firm’s net zero commitment. We have included a range of key emissions-based metrics, which will enable us to calculate baseline emissions for our portfolios as a starting point for future emissions reductions. However, emissions data is backward- rather than forward-looking, so it is also essential to develop capabilities beyond emissions-based metrics to incorporate a view on future climate change risks. These risks are incorporated through scenario analysis metrics, which can consider key aspects of how a low-carbon transition could impact a company, as well as other metrics, such as implied temperature rise, which assess how a company’s own activities are impacting the environment. The tools we are building are also focused on how to identify companies that are more climate resilient and better prepared for the transition to a greener and low carbon economy, as well as those providing solutions to the issue of climate change and its impacts.
How is this research carried out?
Our in-house research capabilities, on both a fundamental and a quantitative basis, are a key strength of our investment processes. Our 300+ global research analysts are at the heart of our understanding of the businesses in which we invest, both from a financial and sustainability perspective. Their insights, industry expertise and corporate relationships are a key component of how we integrate sustainability risks and opportunities into portfolios. Our ESG views of specific companies are the product of our proprietary analyst research, including one-on-one engagements. The breadth and depth of our internally developed research capabilities enable us to assess the ESG credentials of businesses in which we invest with global consistency.
With the rise of ESG disclosures over the last decade, alongside big data and advanced technologies that enable us to better understand how sustainability-related issues impact financial outcomes, we are now able to do even more to help clients navigate ESG considerations and build stronger portfolios. Our proprietary, data-driven ESG scoring system is based on identifying key ESG factors across around 80 sub-industries. Our ESG scoring system leverages high-quality specialist third-party ESG data to complement and challenge our own fundamental research, allowing us to assess the extent to which companies face and manage financially material ESG risks and opportunities, and helping us to reduce our reliance on third-party ratings and increase transparency around specific elements of a company’s overall ESG profile.
While data from external ESG ratings providers is important, we use it as one input alongside our own methods for proprietary analysis. Our quantitative ESG research and data-driven scoring system will continue to complement our qualitative fundamental analyst research, which provides valuable insights into hard-to-quantify issues and important forward-looking perspectives.
How do you measure your success regarding ESG?
Our progress on ESG is measured in a number of different ways. Individual strategies will be assessed against both appropriate index benchmarks, and on specific ESG key performance indicators, as we look to understand their performance from both a financial and an ESG-focused angle. From a forward-looking perspective, our internally developed Sustainable & Inclusive Economy Guidebook offers a broad framework for how we think about the transition to a more sustainable future. It identifies seven key challenges, alongside a range of business activities which we believe can transform these challenges into sustainable outcomes. Our progress in building and managing strategies that correspond to this framework will be an important indication of our success as a sustainable asset manager.
We also measure our firm’s success in terms of our active ownership outcomes. Active ownership is woven into our heritage, and our stewardship approach taps into a deeply resourced network of over 1,000 investment professionals globally, with investment teams across the firm and stewardship specialists working side-by-side to manage ESG risks and to systematically incorporate engagement insights into our investment decisions. In 2021, we implemented an approach to tracking engagement progress and recording milestones where objectives have been achieved. The aim is to make sure our engagements are impactful and investee companies are responding in a constructive fashion over time. It also allows us to identify areas where progress is slow and to enable constant improvement of our engagement methodology and framework to achieve better outcomes.
Is your business a signatory to PRI?
J.P. Morgan Asset Management has been a signatory to the United Nations Principles for Responsible Investment (PRI) since February 2007. We were one of the earliest signatories, and signed up because the PRI’s vision of a robust framework for institutional investment based on a responsible approach to ESG-related matters aligns firmly with our own long-term, forward-looking investment philosophy. We recognise a need to combine our fiduciary duty to our clients with our duty, as a large asset manager, to promote systemic positive change within our industry. We view the PRI as a key tool to support global cooperation around issues that have the potential to pose significant risks to our investments and our industry. We are committed to ensuring that our business activities are underpinned by the principles of ESG integration, active ownership, education and accountability, among numerous others.
Are you disclosing climate change policies in line with the Task Force on Climate-Related Financial Disclosures (TCFD)?
We have reported according to the recommendations of the TCFD at the level of our parent company, J.P. Morgan Chase, since 2019. We will publish our first J.P. Morgan Asset Management-specific TCFD report in 2022, which will outline how we are considering climate change-related risks and opportunities in the context of both operational sustainability and investment management activities. We are also working to build out and formalise our policy around climate change and to disclose how we expect this policy to impact our business activities, as well as how we intend to address our own environmental impacts.
In a general sense, our climate change policy takes into account both physical and transition risk. An asset’s resilience in the context of global temperature rises and its attendant impacts is determined by its vulnerability to physical risk. An asset’s competitiveness in the face of the coming low-carbon transition can be determined by its level of transition risk. Both of these risk types are routinely assessed as a key input into the investment decision-making process. Moreover, we know that the materiality of physical and transition risk is dependent on sector, region and instrument, such that our investment process relies on a sector- and region-specific assessment of each asset’s resilience and competitiveness, and the climate-related risks and opportunities to which it is exposed.
Has your business signed up or committed to any other campaigns relating to ESG?
J.P. Morgan Asset Management has a history of taking action to address climate change and other significant ESG issues. In October 2021, we became signatories to the Net Zero Asset Managers Initiative. We will share interim decarbonisation targets for a proportion of our in-scope investments, alongside a strategy for implementing these targets later this year. We are members of Climate Action 100+, a collaborative engagement vehicle focused on companies that are systemically important emitters, as well as those that have a significant opportunity to help drive the clean energy transition. Our Global Head of Investment Stewardship is also co-chair of the Institutional Investors Group on Climate Change (IIGCC) and J.P. Morgan Asset Management helped co-author the IIGCC’s Net Zero Stewardship Toolkit. We also participate in numerous initiatives related to other ESG issues – for example, we signed up to a letter coordinated by the UN PRI highlighting the use of conflict minerals in the supply chain of major technology companies, and we are members of the 30% Club, an investor initiative committed to promoting diversity and inclusion.
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