Method of ESG integration at JPMAM
Our objective as an organisation is to be 100% ESG integrated across all our active investment strategies over time. We approach this task in the following manner. Our Sustainable Investment Leadership Team (SILT) has set out specific criteria based on the research and investment management process, documentation and monitoring. Within those buckets, we look at how ESG is considered by analysts, PMs, proprietary research around it, use of third party data, the thoroughness of documentation and how systematic the oversight and maintenance is of ESG positioning. All investment teams globally (not just for direct equities) have to present on each of the criteria and are assessed by a panel of investment specialists across the business. Those that reach a sufficient score are deemed to be integrated; those that do not are given feedback on what they need to do to improve.
The motivation behind these efforts comes from several areas. First, we believe that ESG is a good additional criteria for predicting future returns. We notice a high correlation between stocks we would deem "quality" from a financial point of view and those with good ESG practices. As long-term investors, we think negative ESG outliers are likely to be impacted negatively by regulation and social backlash eventually. Second, we are responding to client demand. Our client base increasingly wants communication on ESG efforts within the firm. While we have always engaged with companies on these issues, we have become more systematic about recording and reporting our efforts.
We are close to achieving full integration status for all of our equities strategies. As of December 31st 85% of our strategies have been verified as integrated. All strategies thus verified have a substantial focus on ESG matters in the investment process, verified by reporting and monitoring processes. We have a stated ambition of being 100% integrated by the end of 1Q 2020.
Dedicated sustainable investing funds
While almost all our strategies are ESG integrated, we also have dedicated sustainable investment strategies which build upon ESG integration. These funds include our five exclusion products and our five Best-In-Class Sustainable Equity Funds.
We currently have five funds that are exclusion only products this includes US REI (ESG) ETF, Europe REI (ESG) ETF, Global Emerging Markets REI (ESG) ETF, Global REI (ESG) ETF, and Global Socially Responsible Fund. We use exclusions in two main ways. Firstly there are client mandates which require us to exclude certain stocks, usually for ESG reasons. These are coded into our trading systems to ensure full compliance. Secondly we have some ESG strategies which automatically exclude certain sectors based on ESG criteria. For instance, defence, tobacco, fossil fuel producers, etc.
We currently have five Best-In-Class funds: JPMorgan Intrepid Sustainable Equity Fund, JPMorgan Funds-Europe Sustainable Equity Fund, JPMorgan Funds-Global Sustainable Equity Fund, JPMorgan Funds-Europe Sustainable Small Cap and JPMorgan Funds-Emerging Market Sustainable Fund. These funds adopt an investment style that involves investing only in companies that lead their peer group in respect of sustainability performance whilst, where the registration statement for the product specifies, also applying a set of exclusions that are outlined in our exclusions policy.
We have a limited range of equities thematic funds that focuses on broader themes. Our Healthcare fund is the largest such example with 4.65bn AUM as of Dec 2019. Here we invest only in the healthcare sector, and we use a variety of further metrics to ensure we avoid ESG outliers within this space. Although the investment process is not a part of the global equities team, we also have a t Genetic Therapies fund managed by Beta Strategies team, which is a fully systematic thematic fund.
We have several research processes which contribute to ESG integration in our work:
1) We have a 40 question checklist which has been answered for 2400 stocks globally (over 90% of investible market capitalisation), producing a unique proprietary database of ESG issues across our investible universe.
2) We have a quant-led ESG score process which incorporates the 40 question checklist, but also produces scores for stocks not currently covered by a human analyst. The quant part of the process uses third party ESG data but it re-weights it based on analyst and PM feedback.
3) The bulk of our equity funds are human-led strategies. For these, we have a Strategic Classification framework which is either implemented or about to be implemented, for 2400 stocks that we cover. These classifications provide a grade for each stock on the quality of the business, and ESG is an explicit part of the grading process.
4) On top of the above, the emerging markets team is introducing a 5 question, scored checklist for each sub-sector that they cover. The intention of this list is to provide a materiality framework for each sub-sector, such that we can find best in class businesses at a more granular level. If successful, it will likely be incorporated in other parts of the business.
5) We frequently deep-dive into specific ESG topics for particular stocks or sectors, where we identify them as material to our investment process. Recent examples of this include flaring in the US oil fields, environmental impact of fast fashion in Europe and corporate governance in insurance companies in Asia.