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FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION
Sustainable Investing Investment Perspective on Climate Risk February 2017
“Clients entrust us to manage their portfolios and rely on our deep knowledge of markets, industries and companies. Our investment professionals engage with company management on an ongoing basis to evaluate the drivers of performance, which often include relevant environmental, social, and governance (ESG) factors.
We strive to integrate ESG factors across our investment platforms and communicate transparently with our clients about our efforts. Through our global expertise and industry access, we identify key sustainable investing trends and share best-in-class capabilities from investment approaches to ESG reporting.
Many of our clients have expressed desire to understand and manage climate risk in their portfolios. While approaches and best practices continue to evolve, we believe we are well positioned to help our clients achieve their distinct goals.”
JAMIE KRAMER Head of Strategic Product Management & ESG Lead for J.P. Morgan Asset Management
J .P. MORGAN ASSET MANAGEMENT 3
Our Commitment to Sustainable Investing
Environmental, Social and Governance (ESG) factors are non-financial considerations that are important for stakeholders to keep in mind when assessing a company’s performance.
Issues relating to the quality and functioning of the natural environment and natural systems, e.g., carbon emissions, environmental regulations, water stress and waste
Issues relating to the rights, well-being and interests of people and communities, e.g., labor management, health & safety and product safety
Issues relating to the management and oversight of companies and other investee entities, e.g., board, ownership and pay
J.P. Morgan Asset Management is committed to putting our clients’ interests first. With decades of investment experience and over 1200 professionals, we have a deep understanding of investment portfolios across multiple dimensions and a goal of producing the best risk-adjusted returns that align with our clients’ objectives. Through our engagement and partnership with various organizations, we continually increase our knowledge and views on key ESG issues and best practices. We have been a signatory to the United Nations’ Principles for Responsible Investment initiative since 2007 and are committed to incorporating ESG factors into our investment practices, where material and relevant.
To help drive our commitment, we have established a Sustainable Investment Leadership Team (SILT) which has begun implementing a coordinated strategy for sustainable investing across J.P. Morgan Asset Management. This cross-functional team is comprised of senior leaders spanning across all regions with a deep and diverse set of expertise across asset classes and client channels.
SILT’s mandate includes:
• Promoting internal best practices, including identification and assessment of ESG issues across asset classes and investment offerings.
• Driving thought leadership and innovation through information, education and partnerships to encourage broader awareness and adoption.
• Deepening and broadening current investment capabilities including portfolio analytics, measurement and reporting.
• Sharing our views on Sustainable Investing and helping clients better understand our capabilities across asset classes and investment strategies.
Implementation of our ESG initiatives is driven by sub-working groups focused on advancing specific agenda items:
• Investment Capabilities group engages across asset classes to support systematic ESG integration into standard research and portfolio construction processes where material and relevant, including product idea generation and development of investment solutions.
• Research, Sponsorships, and Membership group manages relationships with various sustainable investing networks and forums, engages with industry experts and data providers, and trains internal investment professionals on ESG trends, competitive landscape and initiatives.
• Marketing & Communications group promotes consistent, compelling, and timely internal and external communication and engagement.
We strive to increase transparency around our commitment to sustainable investing through engaging with our clients throughout our journey to ESG integration, while we continue to be stewards of their capital.
Source: Definitions, PRI; Examples, MSCI.
4 INVESTMENT PERSPECTIVE ON CLIMATE RISK
J.P. Morgan Asset Management is a trusted fiduciary for clients in many different countries and sectors around the world. In meeting our clients’ needs, we consider a multitude of global market risks and investment objectives including a wide range of environmental risks and the impact they may pose to long-term portfolio returns.
Scientific research finds that an increasing concentration of greenhouse gases in our atmosphere is warming the planet, posing significant risks to the prosperity and growth of the global economy. We recognize that climate change may create investment risks and opportunities across the various entities in which we invest on behalf of our clients including companies, sovereigns, real estate and infrastructure. We believe these risks are multifaceted spanning physical, policy, technology and market impacts. Entities that fail to manage these risks may subject investors to losses. Investors should also bear in mind that winners are likely to emerge as global economies adapt to and address the climate challenge. Policy risk has gained focus more recently as climate change-related laws and regulations emerge globally.
As the table above highlights, the energy and utility sectors may be subject to a number of climate related investment risks. In these and other industries, the nature of climate risk is broad while the timing and geographical impacts are uncertain. Firms are beginning to account for greenhouse gas emissions through carbon footprint analysis and investors can use this information to lower the contribution of their investment portfolios to climate change. However, carbon footprint analysis by itself has limitations and not all carbon emissions contribute equally to prospective investment risk. For instance, regulations may be placed in some regions or industries and not others. Secondly, emissions data are backward looking and so it is useful to consider company policies and other forward looking information to gauge how emissions may change in the future. As such, we believe combining quantitative analysis with qualitative assessment is crucial to effectively managing portfolio risks including climate risk.
Climate change as an investment risk
RISK DEFINITION EXAMPLES HIGHLY IMPACTED SECTORS
Physical Impacts from adverse weather conditions and rising sea level that could cause economic losses
• Economic losses in coastal towns • Reduced food productivity • Adverse health conditions
Real estate, infrastructure, sovereigns, utilities
Policy Policies impacting the operational and financial viability of carbon related assets
• Fuel efficiency standards • Emissions trading systems • Greenhouse gas regulations
Utilities, energy, agriculture
Technology Developments in availability and cost of new technologies
• Renewable energy advances • Carbon capture and storage • Fossil fuel efficiency gains
Renewables, utilities, energy
Market Changes in economic conditions that impact carbon-related assets
• Falling fossil fuel prices • Changes in consumer preferences • Reputational risks
Energy, renewables, financials, consumer
J .P. MORGAN ASSET MANAGEMENT 5
At J.P. Morgan Asset Management, our global scale means we are well placed to help our clients manage various challenges and objectives. Our analysts and portfolio managers integrate a wide range of investment risks, including environmental impacts, into the investment process. We focus on risks that are material to cash flows and prospective returns in client portfolios. In-depth, bottom up analysis provides insight into the long-term sustainability of a business or whether the entities we invest in will remain competitive in the future.
Our analysts conduct independent research and have access to third party ESG data providers as well as in-house specialists who maintain a robust meeting schedule to engage with companies around the world. Where climate risk is deemed material to client portfolios, our analysts seek to answer questions such as:
• How will changing environmental regulations impact the business model?
• What are the risks for environmental waste or accidents?
• What is the risk a company’s assets will become stranded?
• What is the time horizon for material climate risks to play out?
• What is the best measure of an entity or activity’s contribution to climate risk?
• How is management positioned to manage such risks?
Areas of focus for climate risk include the energy and utility sectors. In analyzing organisations in this space, we assess whether the company’s assets are worth less than stated, as well as understanding the strategic initiatives companies are embracing to manage their enterprises. For ins