A framework to build stronger portfolios for a low-carbon world
The carbon transition investment framework that underpins our JPM Carbon Transition Global Equity UCITS ETF (JPCT) is designed to help our clients manage the risks of climate change, capture the opportunities and contribute to solutions.
A proprietary framework for the transition
The Sustainable Investing Team at J.P. Morgan Asset Management, in partnership with our Quantitative Beta Solutions group, has developed a proprietary framework for investing in the low-carbon transition. By identifying companies best positioned to benefit from this transition, we can build a portfolio that seeks to achieve a meaningful reduction in carbon emissions – without relying on exclusions or sector deviations – and also take advantage of the opportunities presented by the transition.
Our quantitative framework leverages data sourced directly from companies, insights from third parties, and data from our quantitative research and artificial intelligence team.
Evaluating company preparedness
Our research suggests that there are three key ways that companies can prepare themselves for the transition to a low-carbon world. Analysis of company performance against these three key pillars forms the basis of our framework.
Managing emissions: We look at how companies are managing their site emissions and the emissions generated by their consumers and suppliers, as well as whether they are positioned to benefit from the shift towards more sustainable solutions. We not only consider backward-looking measures of emissions, but also indicators of their forward trajectory.
Managing resources: Beyond greenhouse gas emissions, how companies manage other resources has an important part to play in the transition. We evaluate metrics related to the company’s electricity usage, how it uses water and how it manages its waste.
Managing climate-related risks: We consider how well a company is positioned to withstand physical risks that could occur as a result of climate change, and whether it is exposed to reputational risk – has it faced environmental fines, for example?
Using alternative data
To address limitations and gaps in traditional sources of corporate information, we draw on our expertise in artificial intelligence and big data. Our proprietary technology tool, ThemeBot, uses natural language processing to screen more than 10,000 stocks globally, and rapidly analyses hundreds of millions of data sources to identify stocks with the highest exposure to the innovative climate solutions that will play a vital role in the transition.
Building a portfolio for the transition
The transition to a low-carbon economy will impact all sectors, and the sectors most highly exposed to climate change issues are the same sectors that will need to make the biggest changes to get us to a low-carbon future. Rather than reduce emissions simply by excluding companies in high carbon sectors, we want to encourage change and engage with these companies through our ownership and stewardship.
The end result is a portfolio that takes overweight positions in those stocks with the highest carbon transition scores and underweights in those most exposed to transition risk, but with similar regional and sector exposures to the Russell 1000, a significant reduction in carbon intensity and an improvement in resource efficiency.