As environmental, social and governance (ESG) factors become more ingrained in the investment landscape, managers with deep in-house resources like JP Morgan stand to make a big difference to companies, shareholders and the world in which we live.
‘As we go through our journey as sustainable investors, we’re going to see more emphasis on our internal research and less reliance on third-party ratings,’ said Andrew Robbens, an investment specialist in its International Equity Group.
‘Currently, third-party data providers can tend to be backward-looking but our emphasis is very much on looking forward. Our focus is on wanting to make the world a better place by rewarding those that are already ESG leaders, helping other companies raise their ESG game or taking steps to improve their own ESG profiles.’
Engagement is a vital part of that because it helps companies to ‘find the right way to become attractive to investors like us’, according to Robbens.
‘We want to work with companies to set targets that are ambitious yet realistic. People are investing for meaningful returns – we see ESG as fundamental to delivering a positive outcome to investors.’
The potential to elicit positive change is the reason why JP Morgan does not just rely on negative screening but focuses on engagement. A prime example is its work with companies in the oil and gas sector as they transition to a lower carbon world.
‘If you totally disregard an entire sector – oil and gas companies still account for a significant proportion of the FTSE All-Share – what change can you make? We want to influence behaviour.’
Investing in a responsible way has held even greater significance following the onset of the Covid-19 pandemic for all stakeholders – investors, communities, employees, companies and the economy.
‘Investors have considered ESG factors for decades, us included,’ said Robbens. ‘A company that has good governance has greater chances of success than one that’s mis-managed.
‘But investors now expect more explicit understanding of ESG factors. As the pandemic has shown, companies with high ESG scores tend to outperform.’
Companies that already embraced flexible working were quicker to adapt to national lockdowns and social distancing, while those with good governance were well positioned to absorb some of the shocks emanating from the pandemic.
Meanwhile, the ‘buy local’ movement has benefitted companies focused on local sourcing within the supply chain, while being environmentally friendly and supporting local employment.
JP Morgan’s big push into ESG came five years ago when it established its Global Sustainable Investing Team and committed to incorporating ESG factors across its strategies. Its International Equity Group today boasts more than 100 investors and 80 fundamental analysts around the world and all strategies managed by this group are now fully ESG integrated.
‘Our biggest advantage is the breadth of resource we’ve got supporting the sustainable agenda,’ said Robbens. ‘We have the depth of resource internally to dig deep into the ESG characteristics of a company.’
Proprietary ESG research has been recorded on its investment platform, Spectrum, since its inception in 2017. The framework applies a consistent 40 point ESG Checklist, which asks the same detailed questions of every company under coverage to establish a baseline of their ESG credentials. The team challenges and complements this fundamental research by applying a proprietary weighting methodology to third party ESG data. This results in a score out of 100, the factors being weighted differently depending on the company and the area in which it operates.
‘Everything is recorded from research notes, details of engagement, opinions of analysts, portfolio managers and our investment stewardship team, and it’s available for everyone across the desk to see,’ said Robbens. ‘It gives us a real understanding of the sustainable risks and opportunities for each company and their materiality.’
Just as JP Morgan expects companies to make improvements, so too is the asset manager. ‘This is a journey,’ added Robbens. ‘We are continually improving how we look at sustainability risks. We never stand still.’