ESG resources for liquidity investors

Liquidity investors are looking for funds that meet their financial goals while also promoting ESG characteristics, hear how we solve it.

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We have uplifted an EMEA range of global liquidity products

The Global Liquidity team at J.P. Morgan Asset Management is excited to introduce our suite of Article 8 liquidity and ultra-short duration funds. We’ve taken steps to ensure that our process is not only rigorous and transparent, but relevant to the liquidity spectrum.

We begin by leveraging our firm’s general approach to Article 8. We apply norms- and values-based exclusions across portfolio holdings and test that at least 51% of the portfolio is invested in securities that have met our governance standards and additionally have good environmental or social characteristics. Importantly, we use external MSCI data for this test because it provides additional transparency.

We then add a separate step for Global Liquidity solutions. During the assessment phase we made a critical realisation – one that ultimately led to one of the defining and most differentiating aspects of our approach to Article 8. Compared to other asset classes, liquidity portfolios tend to invest much more heavily in financials, many of which often score well on environmental factors. So when we ran exclusions and tests on the portfolios, they didn’t make a huge impact. We wanted to go further and make sure we made a difference, so we decided to add a third step and score companies on social factors, using proprietary data on employee engagement and diversity.

Differentiating our approach with a focus on social factors

We are prioritising transparency and want to share as much information as possible about how we interpret Article 8 for Global Liquidity solutions and what are the defining features of our process.

As I mentioned earlier, we believe our focus on social factors enhances our process and differentiates it. We also think social considerations are going to be an increasing area of focus for clients, building on the work already undertaken to date by regulators who are exploring enhancing the EU Taxonomy to recognize social objectives in addition to the existing environmental ones.

We also engage with the social factor laggards in our universe to share our framework and thinking on diversity while transparently communicating issues that could affect whether they remain on our approved-for-purchase list.

Focusing on liquidity, seeking yield, managing downside risks from ESG factors amongst others

Managing an Article 8 fund requires increased focus on ESG factors – but we believe that this doesn’t have to be at the expense of our core offering to Global Liquidity clients: liquidity, capital preservation and yield.

In our view, there’s enough diversity in the liquidity and short-term bond universe to be selective and be able to tilt funds towards ESG through our process. In fact, all of our funds being uplifted have been managed in line with the Article 8 criteria and process for some time, so we know our approach works and the formal uplift won’t trigger any changes to the portfolios.

We are excited to announce this uplift of Global Liquidity funds and are especially looking forward to sharing more about our process and thinking in this area of sustainable investing.

Differentiating our approach with a focus on social factors

See every step in our process

We strive to be clear and straightforward about how we incorporate environmental, social and governance considerations into our liquidity solutions. Explore the details of our proprietary three step process.

Intro: Our ESG process for liquidity solutions

We’ve created a proprietary three-step process to incorporate environmental (E), social (S) and governance (G) considerations into our liquidity solutions.

Step 1: Exclusions

We start by excluding (or applying maximum thresholds to) certain issuers and sectors based on international norms and values.

Step 2: ESG rankings

After exclusions, all securities are then ranked using separate E, S and G scores from MSCI, allowing us to focus on securities that clear our threshold.

The majority of investments must rank within the top 80% on their G score, and within the top 80% on either their E score or their S score, if not both.

The aim is to ensure that at least 51% of portfolio holdings have “good” ESG characteristics.

Step 3: Proprietary social scores

Concurrently to the ranking of MSCI scores, the securities are also ranked by our proprietary social factor screen.

The Employee Engagement & Diversity (EE&D) was developed by our Sustainable Investing Research & Data team.

We focus on issuers who rank within the top 80% of this social factor screening, ensuring that at least 51% of holdings have “good” social factor scores based on EE&D.

We also actively engage with the lowest EE&D ranking issuers, particularly on activities related to diversity.

Outro: Designed for liquidity investors

The outcome is a clear and rigorous ESG process that is differentiated by a focus on social factors, and is designed specifically to meet the needs of liquidity investors.

Frequently Asked
Questions

What is an Article 8 investment fund?

The term Article 8” refers to a section of the EU Sustainable Finance Disclosure Regulation (EU SFDR) detailing a class of products that promote social and/or environmental characteristics, but do not have sustainable investing as a core objective.

Article 8 products differ from Article 9 products, which meet a higher threshold by having a sustainable investment objective. Article 6 products do not meet the criteria for Article 8 or Article 9 products.

It s important to understand Article 8 products in the context of the EU SFDR, including its goals and its scope.

The EU SFDR came into effect on 10 March 2021 and is designed to re orient capital towards sustainable growth and help clients make better sustainable investing choices.

What is the EU SFDR and why is it important?

The EU SFDR came into effect on 10 March 2021 and is designed to re-orient capital towards sustainable growth and help clients make better sustainable investing choices.

The primary goals are to provide greater transparency on environmental and social characteristics, and sustainability within the financial markets, and to create common standards for reporting and disclosing information related to these considerations.

Increasing transparency and introducing standards supports two important additional considerations. First, it makes it harder for asset managers to “greenwash” their products – in other words, they cannot simply brand a product with an environmental, social and governance (ESG) or sustainable label, without being transparent with regards to how this is achieved.

Second, it provides investors with a significantly improved ability to compare investment options in terms of the degree to which ESG factors are a consideration within the investment decision-making process, which helps them make informed decisions that align with their investing goals.

Which types of financial products are impacted by the SFDR?

The scope of the EU SFDR is relatively broad, applying to all financial market participants and financial advisers based in the EU, as well as investment managers or advisers based outside of the EU, who market (or intend to market) their products to clients in the EU under Article 42 of the Alternative Investment Fund Managers Directive (EU AIFMD).

The disclosures apply to UCITS, AIFs, separately-managed portfolios and sub-advisory mandates, as well as to financial advice (provided within the EU or by an EU investment firm).

The EU SFDR aims to help investors to choose between products by mandating increasing levels of disclosures, depending on the degree to which sustainability is a consideration. Three different product categorisations result from the EU SFDR and they each have a distinct level of disclosure with regards to sustainable investing and ESG considerations.

“Article 6” products either integrate financially material ESG risk considerations into the investment decision-making process, or explain why sustainability risk is not relevant, but do not meet the additional criteria of Article 8 or Article 9 strategies.

Article 6 financial products must disclose the manner in which sustainability risks are integrated into their investment decisions as well as an assessment of the likely impacts of sustainability risks on the returns of the financial products.

“Article 8” products promote social and/or environmental characteristics, and may invest in sustainable investments, but do not have sustainable investing as a core objective.

“Article 9” products have a sustainable investment objective.

Article 8 and Article 9 financial products feature details on a variety of sustainability and ESG topics. The table below highlights a sample of the topics, though it is not a complete list.

Sample of topics featured in the disclosures for both Article 8 and Article 9 products

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Binding elements of the investment strategy

The binding elements of the investment strategy used to select the investments to attain each of the environmental or social characteristics promoted and/or the sustainable investment objective.

Strategy implementation

The investment strategy that guides their investment decisions based on factors such as investment objectives and risk tolerance.

Sustainable investments

The sustainability indicators that they use to measure the environmental or social characteristics they promote and/or attain their sustainable investment objectives.

Binding elements

Highly liquid Allows diversification across different industries. Wide range of maturities allows terms to be targeted precisely.

Good governance practices

The policy to assess good governance practices of the investee companies, including sound management structures, employee relations, remuneration of staff and tax compliance.

Asset allocation

The planned share of investments in specific assets including: the minimum proportion used to meet the environmental or social characteristics promoted by the financial product, in accordance with the binding elements of the investment strategy; the minimum proportion of sustainable investments when the financial product commits to making sustainable investments (as defined by the regulation); and the purpose of the remaining proportion of the investments.

Derivatives

Any use of derivatives to attain the environmental or social characteristics they promote and how the use of derivatives meets those characteristics. A financial product with a sustainable objective must disclose how the use of derivatives attains the sustainable investment objective.

Other investments

Any investments that are not sustainable or do not have environmental and/or social characteristics, their purpose and a description of any minimum environmental or social safeguards. Funds with a sustainable objective must disclose how the proportion and use of these investments does not affect the delivery of the sustainable investment objective on a continuous basis and whether they are used for hedging or relate to cash held for liquidity.

Principal Adverse Impacts

Whether they consider principal adverse impacts on sustainability factors, including in the determination of significant harm in relation to sustainable investments.

Benchmarks

When there is an objective of reducing in carbon emissions and explain how the reference benchmark qualifies as an EU Climate Transition Benchmark or an EU Paris-aligned Benchmark and indicate where the methodology used for the calculations of that benchmark can be found.

EU Taxonomy

The minimum extent that sustainable investments with an environmental objective are aligned with the EU Taxonomy. These accompanying disclosure requirements are extensive and include (but are not limited to): the division between environmental and social objectives; EU Taxonomy-aligned activities expressed as a share of turnover, capital expenditure and operational expenditure; the minimum share of investments in transitional and enabling activities; and the minimum share of sustainable investments with an environmental objective that are not aligned with the EU Taxonomy.

The EU Taxonomy Regulation (EU TR), which introduces standard environmental criteria within the EU, came into effect on 1 January 2022. From 1 January 2023, elements of the EU TR will be integrated into the disclosure obligations set out by the EU SFDR.

Article 8 products will need to state if they have any investments in sustainable investments and, if so, will need to disclose whether these investments are in activities aligned with the EU TR.

Article 9 products, which by definition have sustainable investment as an objective, will have to disclose whether their sustainable investments are in activities aligned with the EU TR.

You can find more information on the EU TR, and how it interacts with the EU SFDR, here.

What are Sustainability Risks and Principal Adverse Impacts?

To achieve the EU SFDR’s goal of improving sustainable finance by increasing transparency and creating standards, asset managers and advisers must disclose the manner in which they consider two key factors: Sustainability Risks and Principal Adverse Impacts.

The EU SFDR outlines specific definitions for Sustainability Risks and Principal Adverse Impacts:

Sustainability Risks refer to environmental, social or governance events, or conditions, such as climate change, which could cause an actual or a potential material negative impact on the value of an investment.

Principal Adverse Impacts are any negative effects that investment decisions or advice could have on sustainability factors. Examples could include investing in a company with business operations that significantly contribute to carbon dioxide emissions, or that has poor water, waste or land management practices.

Financial products must disclose the manner in which Sustainability Risks are integrated into investment decisions and the assessment of likely impact of Sustainability Risks on the return of the product. They must also disclose how Principal Adverse Impacts on sustainability factors are considered.

For asset managers, the incorporation of Sustainability Risks and Principal Adverse Impacts takes place at several points in the investment process.

Checklist for asset managers incorporating Sustainability Risks and Principal Adverse Impacts into the investment process

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Policies

Maintain and comply with sustainability risk and adverse impact policies.

Due Diligence

Maintain, monitor and updates ESG due diligence policies.

Portfolio Construction

Maintain and update risk disclosures at a product level and incorporate new risk and impact considerations in decision-making.

Engagement

Reflect additional ESG metrics and considerations in engagement practices and databases.

Research

Incorporates additional ESG metrics and considerations in checklists and quantitative scoring.

Risk Management

Includes updated risk management policies on sustainability risks.

Operations and technology

Build and maintain architecture, systems and processes for disclosure of adverse impact metrics from June 2022.

Product manufacturing framework

Develop and maintain framework for product classification aligned to Article 6, 8 and 9.

It is important to note that regulators continue to review the Principal Adverse Impacts and financial product disclosure requirements in the EU SFDR Delegated Regulation.

EU SFDR explained

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Liquidity Insights

Market Insights

Portfolio Insights

Liquidity investors are looking for funds that meet their financial goals while also promoting ESG characteristics, hear how we solve it.

What is the EU SFDR and why is it important?

Which types of financial products are impacted by the SFDR?

What are Sustainability Risks and Principal Adverse Impacts?

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