Jessica Matthews Global Head of Sustainable Investing, J.P. Morgan Private Bank
Eli Fadil Sustainable Investment Associate, J.P. Morgan Private Bank
For example, electric utility companies play a key role in generating and distributing power, so greenhouse gas emissions (GhGs) are a material factor; on the other hand, cybersecurity issues may be less front and center. But for a financial payments company, it’s the other way around: Cybersecurity issues are paramount, while GhGs likely play a less significant role in analyzing risks and opportunities.
Materiality can also depend on whether you’re looking at E, S or G. Governance factors, such as board structure and diversity, are generally considered foundational and broadly applicable to all sectors. However, when looking at environmental and social factors, investors can benefit from focusing on a narrower set of factors with the highest (most material) impact.
Effective ESG integration offers a path to potentially generating real and sustainable return in investment portfolios. Indeed, a Harvard Business School study finds that high performance on material ESG metrics is a driver of investment return, whereas non-material factors did not prove predictive of future performance.1 Here, we’ll explore how and why ESG integration can deliver consistent returns—and how it may help you meet your own personal financial goals.
Clearly, more and more investors now look to ESG as a source of investment returns. For example, in a recent J.P. Morgan survey, the percentage of investors who believed integrating ESG analysis provided the opportunity to generate return more than doubled between 2019 and 2020.2
Beyond the positive sentiment, what does the data tell us? We see mounting evidence to suggest that integrating ESG analysis—whereby investors may identify positive signals as well as risks to avoid—can strengthen investment performance. ESG equity indices have performed in line with, or in some cases outperformed, traditional indices. Equities with higher ESG ratings tend to be more competitive and profitable, driving strong returns.3 Similarly, bonds that have higher ESG scores tend to have higher average credit quality.4
Though ESG investing isn’t a new concept, some are still in the early days of adoption. The quantity and quality of ESG data are improving, and investors are becoming more sophisticated in interpreting what the data means from a business perspective. We think investors will be best served when they focus on material ESG factors and effective ESG integration. The potential two-pronged result? Enhanced investment results and positive social impact.
At J.P. Morgan Private Bank, we can help you integrate Sustainable Investing into your portfolio. We have a dedicated Sustainable Investing team that collaborates with world-class due diligence and portfolio management teams to develop innovative, customizable solutions. We are a passionate educator, sharing relevant sustainable investing topics and trends, helping you to be as informed as possible as we work together to help meet your goals. Reach out to your J.P. Morgan team to learn more.
1 Mozaffar N. Khan, George Serafeim, and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality.” Harvard Business School Working Paper No. 15-073, March 2015.
2 “ESG Flash Survey,” J.P. Morgan Capital Advisory Group, December 2020.
3 Guido Giese, Linda-Eling Lee, Dimitris Melas, Zoltán Nagy and Laura Nishikawa, “Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance,” Journal of Portfolio Management 45 (5) 69-83, July 2019.
4 MSCI ESG Research and Barclays Research monthly data from August 2009 to April 2016. ©2019 MSCI ESG Research LLC. Reproduced by permission; no further redistribution.
5 Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance,” Journal of Portfolio Management, MSCI (2019)
6 A CIB Index utilized as a part of ESG scoring processes
All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
8 CWR, “8 Things You Should Know about Water and Semiconductors,” July 2013.
9 Bloomberg, “Making Chips Requires Lots of Water and, Gulp, Taiwan has a Drought,” February 2021.
10 FactSet. Data as of 4/27/2021. Maiwan Semiconductor 25.5x NTM P/E versus select peers (Tower Semiconductor, ASE Technology, Vanguard, United Microelectronics) ranging from 13.4x to 21.4x NTM P/E.
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Sustainable investing (“SI”) and investment approaches that incorporate environmental social and governance (“ESG”) objectives may include additional risks. SI strategies, including ESG SMAs, mutual funds and ETFs, may limit the types and number of investment opportunities and, as a result, could underperform other strategies that do not have an ESG or sustainable focus. Certain strategies focused on particular sectors may be more concentrated in particular industries that share common factors and can be subject to similar business risks and regulatory burdens. Investing on the basis of sustainability/ESG criteria can involve qualitative and subjective analysis and there can be no assurance that the methodology utilized, or determinations made, by the investment manager will align with the beliefs or values of the investor. Investment managers can have different approaches to ESG or sustainable investing and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. ESG or sustainable investing is not a uniformly defined concept and scores or ratings may vary across data providers that use similar or different screens based on their process for evaluating ESG characteristics. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG/ SI performance.
J.P. Morgan takes a global approach to sustainable investing and the solutions offered through our sustainable investing platform meet our internally defined criteria for a sustainable investment. The evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” or “ESG” investment mean that there is likely to be a degree of divergence as to the regulatory meaning of such terms. This is already the case in the European Union where, for example, under the Sustainable Finance Disclosure Regulation (EU) (2019/2088) certain criteria must be satisfied in order for a product to be classified as a “sustainable investment”. Any references to “sustainable investing”, “SI” or “ESG” in this material are intended as references to our internally defined criteria only and not to any jurisdiction-specific regulatory definition.
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