Thriving, and surviving?
In recent years, awareness of ESG (Environmental, Social and Governance) issues has gathered momentum, both in the corporate – and wider - world. While escalating climate change concerns drove the environmental part of the equation in the years leading up to 2020, the COVID-19 pandemic has brought the ‘S’ and ‘G’ of ESG to the fore. Perhaps the ‘S’ has seen the most notable change for good as corporations recognise their responsibilities not only to their customers and employees but to wider society.
As consumers’ attitudes to ESG evolve, so must business models. It is increasingly evident that effective consideration of ESG factors will become an ever-more important differentiator on corporate reputations, outcomes and share prices. JPMorgan Emerging Markets Investment Trust lead portfolio manager Austin Forey, who has managed the trust for 27 years, believes that upholding ESG principles will be essential for corporate survival in the future. ‘For the best companies, great opportunities abound; for the worst, irrelevance and extinction lie ahead.’
Interest in ESG as an investment philosophy has likewise moved from the periphery of investor consciousness, through adoption by a cohort of climate-conscious Millennials, into the mainstream, as evidenced by the proliferation of ESG-themed funds to meet increased demand. Meanwhile, ESG factors are now increasingly woven into asset management practice. While moral rectitude to some extent drive these changes, it is the recognition that ESG is not an automatic detractor from performance. Indeed, a 2020 study of a sample of sustainable funds showed that the majority had performed better than non-ESG funds over one, three, five and 10 years.1
Committed to ESG
Successful long-term investors and asset managers have long understood the value of a sustainable philosophy. JPMorgan’s Emerging Markets Investment Trust has embedded ESG into its approach for three decades. Its fundamental focus on the long-term growth potential of businesses has sustainability at its core.
Several factors have historically made ESG-focused investing in emerging markets challenging, such as less societal pressure on companies to act responsibly and a lack of clear regulation to define and enforce sustainable practices. However, in 2013 the trust implemented a sustainability checklist and has now fully integrated ESG factors into its research process with the development of a “materiality framework”, which identifies the most important ESG factors in over 50 industry categories as chosen by the trust’s research experts.
The trust’s analysts and portfolio managers employ this framework both to assess potential stock picks - scoring companies on relevant sustainability factors - and also to engage, challenge and interrogate portfolio companies on specific issues. Having such a precise set of criteria allows a far sharper focus on how companies are performing in the areas that are most significant for their industry.
Forey explains that, for a beer company, for example: ‘We might consider its water usage, its manufacturing process. We’ll ask: How responsible is their advertising? How recyclable is the packaging?’ The judgement criteria will be totally different for assessing a software company, for which the questions would focus on, for example: cyber security, data protection, and the treatment of the workforce.
Leaving (less of) a footprint
Forey is proud of the fund’s ESG measurable credentials. Its portfolio naturally tilts towards industries with a significantly better-than-average carbon footprint - to use a common environmental yardstick. In fact, the carbon emissions of the trust’s investments amount to a mere one twentieth of that of the MSCI Emerging Markets Index. So, for every $1M of investment in the JMG portfolio, 8.2. tonnes of carbon emissions are generated per year. In stark contrast, if you simply bought an ETF passively tracking the EM equity index, the same million dollars invested would produce 225 tonnes – a radical difference.
To some extent, having a comparatively carbon-light emerging markets portfolio is simply down to JMG’s natural investment preferences. The team inherently avoids capital and carbon-intensive industries. However, with increasing regulatory, corporate, and client attention paid to ESG barometers, companies’ carbon emissions - and their ability and willingness to transition to sustainable energy sources – will be a critical gauge factor going forward.
Forey firmly believes that the corporate sector should take responsibility for ESG issues not just for carbon emissions but for the necessary economic transition to a sustainable global economy. He remains optimistic both about the contribution that companies can make to this change, and about the investment opportunities this will bring.
Whilst past performance is not a reliable indicator of current or future results, the trust has brought investors emerging markets exposure through a portfolio of innovative, sustainable companies that has outperformed its MSCI benchmark for the last 10 calendar years. Forey is optimistic about the many exciting emerging markets companies with good ESG credentials who offer not only investment opportunities but that will contribute to securing a sustainable future for us all.
1Majority of ESG funds outperform wider market over 10 years, Financial Times, June 13 2020. Past performance is not a reliable indicator of current and future results.