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J.P. Morgan Asset Management

PRI reporting framework 2020

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
85.4 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1.5 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1.1 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
12.0 %
Total actively managed listed equities 152.4%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

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.

ESG Integration

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.

Exclusions

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.

Best-In-Class

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.

Additional

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.

Research process

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.

 

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

As described above, the majority of products are ESG integrated , in addition we have a range of dedicated sustainable funds which apply exclusions and a more explicit best-in-class strategy. Exclusionary screening is typically a mixture of top-down, sector or activity-driven and bottom-up stock based exclusions. Typically, where there is scope to reform a company, we will engage rather than exclude, except for cases where change is very unlikely or impossible. The best-in-class strategies will usually use a combination of seeking companies with a high score, according to our proprietary checklist and/or third-party scorecards, as well as being subjectively identified as best in class.


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

We apply negative screening in two ways:

1) Client mandated - where requested by Clients, assets are typically screened due to specific activities (e.g, alcohol, tobacco, gambling or weapons manufacturing).  Country-specific screening is only generally conducted in relation to government sanctions.

2) Product specific – one key pillar for our Sustainable strategies focuses on negative screening.  These consider the Febelfin principles and screen out for certain industriesThe strategies that come under these are the GEM, European and Global sustainable strategies.

Positive best in class screening

We have 4 sustainable equity funds (Intrepid, Europe, Global and GEM sustainable equity), which we categorise as having a best-in-class approach.  These strategies go beyond the negative screening criteria and look to invest in companies that are best in class in their respective industries.  We look to identify these using tools developed by the respective teams.  Core in the identification of businesses that meet this criteria is the engagement undertaken by the teams with corporates.

Norms based screening

We subscribe to an alert service for norms-based violations from a specialist provider (ISSEthix).  Our sustainable strategies mentioned above use this to exclude companies from their respective investment universe where the registration statement for the product specifies.

Screened by

Description

We have five Sustainable Equity Funds currently (Intrepid Sustainable Equity, European Sustainable Equity, Global Sustainable Equity and, most recently Europe Sustainable Small Cap and Emerging Markets Sustainable), which we categorise as having a best-in-class approach.

Screened by

Description

We subscribe to an alerts service for norms-based violations from a specialist provider (ISS Ethix). These flag alleged and proven violations of UNGC Principles.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

We prohibit investment in controversial weapons in all of our funds marketed in Europe. In addition, exclusions applicable to individual strategies are restricted on our trading systems for all in-scope portfolios, and reviewed on a regular basis.

Any change in screening criteria would be applied in the same as any other change in process for our strategies and would be notified in a timely manner to clients.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

          ESG teams, Analysts and Portfolio managers can apply judgemental overrides to external research, or correct material inaccuracies
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

Our ESG views about companies are part of the foundation of our research process. We have multiple tools to assess any companies’ ESG credentials which includes external providers’ data  .

However, the vast majority of our views about companies’ ESG credential comes from proprietary research and primary engagement carried out by the respective investment teams. We endeavor to meet companies that we invest in at least annually and in most instances many more times than this. We have internally developed tools, which differ between investment teams, to assess the ESG credentials of any business. We have developed a 40 question ESG checklist which has been now rolled out across the majority of our equity desks. These are updated at least annually, or whenever a material change takes place. In addition to this, analysts and portfolio managers will look to identify the material ESG issues for companies and will engage with the companies on these issues. These engagement are continuous throughout the year, and can be multi-year

 


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

As described above, most of the fund AUM at JPMAM is ESG integrated. We have a small portion of themed funds, including the JPM Global Socially Responsible Fund, and the JPM Global Healthcare Fund. The Global SRI Fund is constructed out of a screened universe supplied by a specialist third-party advisor (E Capital Partners (www.ecpigroup.com); the Global Healthcare Fund invests primarily in pharmaceutical, biotechnology, healthcare services, medical technology and life sciences companies. That fund uses a screen for stocks within the gene therapy space and thereafter is entirely systematic computer based investing. Our total AUM for themed funds is 4,774 ($MM) 

 


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

We have been working towards the objective of ensuring systematic integration of ESG factors into our various investment processes wherever possible. As at December 2019, we now have some 354 strategies across all asset classes which are fully integrated, representing USD1.3 Trillion of our long-term assets under management. Of these, 205 strategies/USD234bn relate to Listed Equities, representing some 85% of our Global Equities strategies. We continue to work towards our stated goal of 100% ESG integration in all of our in-scope strategies and asset classes by the end of Q1 2020.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]

The portfolio managers use a variety of ESG inputs in their decision making process. Our ESG score (combined checklist plus quant score) is available to all teams across equities and is a direct input into the Behavioural Finance ESG funds such as European and Global sustainable strategies). Beyond this, the use of ESG varies by investment type.

Approximately USD300bn AUM is managed by fundamental research processes. ESG checklists have been completed for all investible stocks in this universe (2400 stocks) and we have either implemented or are implementing Strategic Classifications, which are an analyst judgement on the quality of a business, including ESG. Previously about half of the funds used Strategic Classifications and half used ESG outliers process - a process where the central Investment Stewardship team vetted all stocks for ESG quality.

The Behavioural Finance processes rely on the quantitatively derived ESG score (checklist and/or quant score) for assessing the ESG quality of their potential investments, although only a small portion of funds is directly run this way.

On top of formal investment processes, we also record all ESG engagements in the Spectrum database; all investment teams regularly review these as part of their investment decision making process.


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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