Jessica Matthews Global Head of Sustainable Investing, J.P. Morgan Private Bank
Daniel Rourke Head of ESG Integration, Private Bank
For example, greenhouse gas emissions (GhGs) are classified as a material factor for majority of industries in the transportation sector, but not for industries within healthcare, where access and affordability is more of a concern. 10
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.
ESG offers a path to potentially generate real and sustainable return in investment portfolios. Indeed, seminal research by Harvard Business School found 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 investing with an ESG lens has historically delivered consistent returns—and how it may help you meet your own personal financial goals.
Investors are increasingly factoring in ESG metrics into their investment decisions. In a recent J.P. Morgan survey, the percentage of investors who believed that integrating ESG analysis into their portfolios helped improve their returns 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 stronger cash flow metrics and less-frequent severe incidents.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. The potential two-pronged result? The potential for enhanced results and helping drive positive change.
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 approaches. 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 Khan, Mozaffar, George Serafeim, and Aaron Yoon. “Corporate Sustainability: First Evidence on Materiality.” The Accounting Review 2016 91:6, 1697-1724.
2 “ESG Flash Survey,” J.P. Morgan Capital Advisory Group, December 2020.
3 Guido Giese, Zoltan Nagy, Linda-Eling Lee, “Deconstructing ESG Ratings Performance. Risk and Return for E, S and G by Time Horizon, Sector and Weighting,” MSCI ESG Research LLC, June 2020
4 Rohit Mendiratta, Hitendra D. Varsani, and Guido Giese, “How ESG Affected Corporate Credit Risk and Performance”, The Journal of Impact & ESG Investing Special Issue on Climate: Part 2, Volume 2, Issue 2, Winter 2021
5 ESG - Environmental, Social & Governance Investing: Introducing the 'Human Capital Factor'. J.P. Morgan Securities plc. 18 March 2021.
6 Harvard Business Review, "The Case for Investing More in People", September 2017.
7 CWR, “8 Things You Should Know about Water and Semiconductors,” July 2013.
8 Bloomberg, “Making Chips Requires Lots of Water and, Gulp, Taiwan has a Drought,” February 2021.
9 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.
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 nota 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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