Exclusionary screening is the process of removing from an investable universe those sectors, industries or companies whose activities or practices are inconsistent with an investor’s values, standards or norms
JPM – Exclusionary – Transcript
Aubre Clemens: Exclusionary screening has been popular for some time. It was actually the first sustainable investment offering available. And it's usually just to allow for people to not have exposure to areas that they don't feel comfortable owning. It can be single stocks, industry sectors, or in some cases, for the faith-based exclusions, it's usually a combination. We see tobacco, gaming, alcohol and weapons. Other areas that have become more popular recently have been fossil fuels where people do not want to have exposure to companies that have fossil fuel reserves. One of the key areas that a client should focus on when excluding stocks from a portfolio is performance, because when you take something from a universe you are going to impact performance in some way. Additionally, that does bring in some tracking error because if you are going to exclude industries or sectors or specific stocks you are going to lead to some dispersion relative to an index. So if we're going to use a manager that does allow for screens, we don't want you to be giving up performance for investing this way. So for us it's really important to be able to find a manager that can give you the returns that are in line with the traditional benchmark but also allowing you to have those exclusions that make you feel comfortable or that are in line with your expectations or specific stocks you are going to lead to.
JPM - Exclusionary Screening - Text Alternative Script
Black text on a white screen.
Text on screen:
Opinions expressed are those of the speakers and may differ from those of other JPMorgan employees and affiliates. Neither JPMorgan nor any of its affiliates can represent that the statements or opinions expressed today will materialize.
This is not an investment research video. The views and strategies described may not be suitable for all investors. This video is not intended as personal investment advice or as a solicitation or recommendation. If you are considering any investment or strategy, you should speak with your JPMorgan representative before investing. Past performance is no guarantee of future results.
Please read important information at the end of the presentation.
• NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Ms. Clemens, a woman with strawberry blonde hair and blue eyes, stands in a room with a wall-sized window. Text appears, briefly, on screen.
Text on screen:
Exclusionary screening has been popular for some time. It was actually the first sustainable investment offering available.
Text appears, briefly, on screen.
Text on screen:
And it's usually just to allow for people to not have exposure to areas that they don't feel comfortable owning.
Infographics illustrate accompanying text.
Text on screen:
Exclusionary Screening. Common exclusionary screens include:
- adult entertainment;
- animal testing;
- firearms and weapons;
- stem cell research;
- nuclear power.
It can be single stocks, industry sectors, or in some cases, for the faith-based exclusions, it's usually a combination.
A montage: cigarettes being mass produced, a close-up of a slot machine; alcohol is poured from a bottle into shot glasses; silhouettes of oil drills against a blue sky with clouds.
We see tobacco, gaming, alcohol and weapons. Other areas that have become more popular recently have been fossil fuels, where people do not want to have exposure to companies that have fossil fuel reserves.
Close-up of Ms. Clemens.
One of the key areas that a client should focus on when excluding stocks from a portfolio is performance, because when you take something from a universe, you are going to impact performance in some way.
A 10-year line graph shows the S&P 500 ex Energy Index outperforming the S&P 500 by illustrating that the S&P 500 - ex Energy - peaked at $345.69 on December 2017, while, at the same time, the S&P 500 peaked at $247.40. Black text appears at the top of the chart.
Text on screen:
Exclusionary Screening. Over time, the S&P 500 ex Energy Index has outperformed the S&P 500. Growth of $100 using monthly index returns.
Text at the bottom of the screen.
Text on screen:
Source: Bloomberg, as of March 31st 2017. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Additionally, that does bring in some tracking error because if you are going to exclude industries or sectors or specific stocks, you are going to lead to some dispersion relative to an index.
Close-up of Ms. Clemens.
So, if we're going to use a manager that does allow for screens, we don't want you to be giving up performance for investing this way. So, for us it's really important to be able to find a manager that can give you the returns that are in line with the traditional benchmark but also allowing you to have those exclusions that make you feel comfortable or that are in line with your expectations.
Fade to black text on a white screen.
Text on screen:
This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio's investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPM. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch. Prior to Brexit (Brexit meaning that the United Kingdom leaves the European Union under Article 50 of the Treaty on European Union, or, if later, loses its ability to passport financial services between the United Kingdom and the remainder of the EEA), J.P. Morgan Bank Luxembourg S.A., London Branch is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from us on request. In the event of Brexit, in the United Kingdom, J.P. Morgan Bank Luxembourg S.A., London Branch is authorized by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cantena Adalberto 4, Milan 20121, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In addition, this material may be distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission—CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
• May contain references to dollar amounts which are not Australian dollars;
• May contain financial information which is not prepared in accordance with Australian law or practices;
• May not address risks associated with investment in foreign currency denominated investments; and
• Does not address Australian tax issues.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2019 JPMorgan Chase & Co. All rights reserved.
Exclusionary screening, which is also known as negative screening, is the process of removing from an investable universe those sectors, industries or companies whose activities or practices are inconsistent with an investor’s values, standards or norms.
Long considered the harbinger of sustainable investing, exclusionary screening was first used by faith-based groups and other organizations as a way to abstain from investing in companies whose practices they deemed unacceptable. This includes avoiding so-called “sin” stocks such as tobacco, weapons, gaming and alcohol. Typically, this means excluding investments in companies that derive more than a certain amount of their revenues from activities deemed undesirable by the investor.
Common exclusionary screens
Top exclusion criteria for European investors
Investments in tobacco stocks have far outpaced those of global equity markets since December 30, 1994.
Tracking error—or the difference between a portfolio’s returns and the benchmark it is meant to match or exceed—may also be affected. As a result, many investors use separately managed portfolios to structure their investments to closely track a reference benchmark with minimal sector or regional biases.
As the popularity of different approaches to values-driven investing continues to grow, information on companies’ business involvement and revenue exposures will continue to play a critical role in enabling investors to judge performance and make informed decisions on the potential impact of their investments. This includes data available from third-party sources such as Bloomberg or organizations such as the Sustainability Accounting Standards Board.
The Sustainable Investing Series
Investors around the world are increasingly interested in ways to use their capital to help support and achieve positive environmental and social outcomes. In this series, we outline the various approaches to integrate environmental, social and governance (ESG) considerations into your investment strategy.
All index performance information has been obtained from third parties and should not be relied on as being complete or accurate. Indices are shown for comparison purposes only. While an investor may invest in vehicles designed to track certain indices, an investor cannot invest directly in an index.
The S&P 500 Index is a capitalization weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component’s price change is proportional to the issue’s total market value, which is the share price times the number of shares outstanding. “S&P 500” is a trademark of the parent company, “The McGraw-Hill Companies, Inc.” (source: www.standardandpoors.com).
S&P 500 Ex-Sector Indices. These float-adjusted, market capitalization weighted indices include all companies in the S&P 500, excluding one or more sectors. Company classifications are based on the Global Industry Classification Standard (GICS®).
The S&P 500 Ex-Energy Index is designed to provide broad market exposure except for members of the energy sector.
The Dow Jones Sustainability Europe Index ex Alcohol, Tobacco, Gambling, Armaments & Firearms and Adult Entertainment Index is designed to measure European sustainability leaders as identified by RobecoSAM through a corporate sustainability assessment. The index represents the top 20% of the largest 600 European companies in the S&P Global BMI based on long-term economic, environmental and social criteria. It excludes companies that generate revenue from alcohol, tobacco, gambling, armaments and firearms, or adult entertainment.
The MSCI World Tobacco Index is composed of large and mid cap stocks across 23 developed market (DM) countries.* All securities in the index are classified in the tobacco industry (within the consumer staples sector) according to the Global Industry Classification Standard (GICS®).
The MSCI World Index captures large and mid cap representation across 23 DM countries.* With 1,648 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
* DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.