What is the TCFD?
Recognizing the systemic risk from climate change, the Financial Stability Board in 2015 created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. The TCFD has developed a framework and recommendations for companies to help them appropriately assess and price risks and opportunities related to climate change. .
Why the TCFD matters
Climate change presents important risks and opportunities for investors. We are committed to providing insights, products and capabilities to help our clients navigate the climate transition.
J.P. Morgan Asset Management and our parent company, JPMorgan Chase & Co., have made significant investments towards addressing the global, urgent challenge of climate change within our own company, alongside our clients and in our investment portfolios.
JPMorgan Chase & Co. published its first TCFD report in 2019. We are pleased to present the inaugural TCFD report specific to J.P. Morgan Asset Management, marking a significant milestone in our journey towards providing more transparency and disclosure that is aligned to our stewardship expectations for investee companies.
Considering the impact of climate change across our business and portfolios
By considering the impact of climate change across our global assets under management, we have the potential to create long-term value for our clients and make a wide-reaching impact.
In this report we provide insights into our approach and our ongoing commitment to integrate climate considerations and develop solutions throughout our business and investment processes. We structured it around the four pillars outlined by the TCFD.
Our robust governance around climate change
In 2021, to enhance the governance of our activities related to sustainable investing1, J.P. Morgan Asset Management established the Sustainable Investing Oversight Committee (SIOC). SIOC oversees sustainable investing activities including environmental, social and governance (ESG) Integration as well as the review of our plans for implementing its commitments to the Net Zero Asset Managers initiative (NZAMI). This international group of asset managers is committed to supporting investing aligned with the goal of net-zero greenhouse gas emissions by 2050 or sooner.
1. J.P. Morgan Asset Management takes a global approach to sustainable investing, and the solutions offered through our sustainable investing platform meet our internally defined criteria for a sustainable investment. The evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” or “ESG” investment mean that there is likely to be a degree of divergence as to the regulatory meaning of such terms. This is already the case in the European Union where, for example, under the Sustainable Finance Disclosure Regulation (EU) (2019/2088) certain criteria must be satisfied in order for a product to be classified as a “sustainable investment.” Any references to “sustainable investing,” “SI” or “ESG” in this document are intended as references to our internally defined criteria only and not to any jurisdiction-specific regulatory definition.
ESG integration as a foundation
ESG integration is the foundation for incorporating climate considerations into our portfolios. Our Sustainable Investing team oversees the ESG integration process for all asset classes and has been adding dedicated climate-focused resources to enhance our climate-related data and analytics.
Investment strategies targeting climate solutions
We have added investment strategies with targeted climate objectives , acquired alternative climate solutions providers and made strategic investments to increase our climate data and research capabilities. We have also introduced a framework for transitioning portfolios to a low-carbon environment.
Actively engaged on climate issues
We engage on climate-related issues with the companies in which we are invested. We also participate in industry associations and collaborate with peers on climate matters.
Leveraging ESG research to identify climate-related risks
We identify and assess climate-related risks in our portfolios by leveraging our proprietary qualitative and quantitative ESG research and assessments. Climate-related risks are integrated into the investment process across our portfolios and imbedded in J.P. Morgan Asset Management’s broader multi-layer risk management framework.
We are continuing to develop risk-management tools and research that are focused on assessing companies’ climate-risk exposure and resilience. Our central technology platform provides a hub for our fundamental research analysts to assess companies, share insights and provide updates on engagement efforts, while also giving them access to related quantitative data.
Climate-related metrics & targets
We use a variety of existing carbon metrics, all of which have benefits and limitations. We are currently developing additional climate analysis tools that can leverage the complementary nature of these metrics and take into account both physical climate risks and risks from transitioning to a low-carbon environment.
Comparison of carbon metrics
Source: J.P. Morgan Asset Management, as of November 3, 2021.
* = metrics used by J.P. Morgan Asset Management for reporting
^ EVIC: Enterprise Value Including Cash. Based on the recommendation of the EU Technical Expert Group, EVIC has been recommended by PCAF as the apportioning metric of choice, and the TCFD has also recommended its use for listed equities, corporate bonds and business loans in its latest guidance on carbon metrics
EXPLAINING THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (TCFD) RECOMMENDATIONS
What is the TCFD?
The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information.
The TCFD has developed a set of recommendations to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes.
What are the TCFD recommendations?
The disclosure recommendations set out by the TCFD are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management^ and metrics and targets.
Disclose the organization’s governance around climate-related risks and opportunities.
Recommended Disclosures
a) Describe the board’s oversight of climate-related risks and opportunities.
b) Describe management’s role in assessing and managing climate-related risks and opportunities.
Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.
Recommended Disclosures
a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
Disclose how the organization identifies, assesses and manages climate-related risks.
Recommended Disclosures
a) Describe the organization’s processes for identifying and assessing climate-related risks.
b) Describe the organization’s processes for managing climate-related risks.
c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Recommended Disclosures
a) Disclose the metrics used by the organization to assess climate- related risks and opportunities in line with its strategy and risk management process
b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.
^Risk management does not imply elimination of risks.
How will the TCFD recommendations be implemented?
The TCFD suggests that all financial and non-financial organizations with public debt or equity implement its recommended disclosures in their public annual financial filings.
The TCFD also encourages asset managers and asset owners, including public- and private-sector pension plans, endowments, and foundations, to implement the disclosure recommendations, report them to their beneficiaries and clients through existing means of financial reporting, when possible, and disclose publicly via their websites or other public avenues of disclosure.
Global regulators are at different stages of mandating TCFD disclosures. Regulators across Asia-Pacific (APAC) are making TCFD disclosures for Asset Managers mandatory, starting with Singapore in June 2022, followed by Hong Kong (Phase 1) in August 2022.
In the UK, the Financial Conduct Authority (FCA) has adopted the same disclosure recommendations set out by the TCFD structured around the four thematic areas. However, the new disclosures require some significant enhancements to existing regulations. These include:
Product-level reporting
Scenario analysis
Enhancements to carbon metrics reported
How is J.P. Morgan Asset Management implementing the TCFD recommendations?
J.P. Morgan Asset Management has decided the best way to meet our climate-related requirements is to adopt a globally consistent approach, and to address any nuanced local requirements via local addendums.
Our parent JPMorgan Chase & Co. released its first TCFD report in 2019. In 2022, J.P. Morgan Asset Management is presenting its own TCFD report, marking a significant milestone in our journey towards providing more transparency and disclosure that is aligned to our stewardship expectations for investee companies.
What is the impact to our clients, our portfolios and the financial services ecosystem?
Climate-related disclosures currently range from discretionary to regulation-mandated reporting requirements. While the consistency and implementation of these disclosures is still evolving, we believe the result will be an increase in the quality of information and transparency, benefiting clients, our portfolios and the broader financial services ecosystem.
While we believe that our clients will ultimately benefit from greater climate-related disclosures, the impact may vary. For example, institutional asset owners may be more likely to find the disclosures more immediately useful as they establish their own sustainability goals, explore ways to lower their carbon footprint and seek to capitalize on the transition to a lower-carbon economy.
Some of our investee companies may begin to disclose in line with the TCFD recommendations, which will provide our portfolio managers with more granular information when considering candidates for a portfolio. Improved disclosure may also help with our climate-related engagement efforts with investee companies.
Generally, we expect that an increase in information on climate-related matters can help capital flow toward climate-friendly businesses and solutions.
What are the J.P. Morgan Asset Management publication dates?
*In line with the Hong Kong Securities and Futures Commission Phase 2 requirements, J.P. Morgan Asset Management will calculate the portfolio carbon footprints for funds managed by J.P. Morgan Asset Management (Hong Kong) based on the positions of the fund as at its financial year-end (after 20 November 2022).
Is the TCFD complementary to the Net Zero Asset Managers initiative (NZAMI)?
In November 2021, J.P. Morgan Asset Management became a signatory of NZAMI, which involves supporting investment aligned with the goal of net-zero greenhouse gas emissions by 2050.
Summary of disclosure alignment to TCFD guidance for all sectors and supplemental guidance for asset managers
Board’s oversight of climate risks and opportunities
Legal entity boards oversee senior management, providing challenge of business activities and controls, including sustainability-related matters.
Management’s role in assessing and managing risks and opportunities
We created the SIOC to oversee sustainable investing activities, including our commitments under Net Zero Asset Managers initiative.
Business units and functional groups are responsible for overseeing climate-related risks and opportunities as part of oversight in their respective roles.
Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.
Transition risks and opportunities (Policy and Legal, Reputation, Market and Consumer Preferences, Energy and Technology Transformations) are particularly important in the near term (3 to 10 years), while physical risks (acute and chronic) are increasingly important over longer time horizons (up to 30 years), although these will vary by asset class and risk type.
Describe the impact of climaterelated risks and opportunities on the organization’s businesses, strategy, and financial planning.
A preliminary assessment of a subset of our equities portfolios found the highest risk exposure within the Extractive Minerals sector. Transition risks from Policy and Legal impacts were highest, while most transition related opportunities were from shifts in Market and Consumer preferences.
Describe how climate-related risks and opportunities are factored into relevant products or investment strategies.*
Describe how each product or investment strategy might be affected by the transition to a low-carbon economy.*
ESG integration in our actively managed investment processes considers financially material ESG factors, including climate-related risks and opportunities. Our broad product capabilities and global research allow us to partner with clients to meet their needs across a spectrum of solutions, including strategies that incorporate risks and opportunities of climate change.
Describe the resilience of the organization’s strategy, taking into consideration different climaterelated scenarios, including a 2°C or ower scenario.
We are in the process of developing our firmwide approach to scenario modeling, formalizing the work that is currently being done by a number of investment teams. The approach will assess the resilience of our assets under management to different futures, including achieving net zero by 2050.
*Reflects recommendations that are included in the Supplemental Guidance for Asset Managers, which incorporates updates to the guidance for the financial sector released by the TCFD in 2021 (https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf)
Describe the processes for identifying and assessing climaterelated risks.
Describe how material climaterelated risks for each product or investment strategy are identified and assessed. This might include a description of the resources and tools used in the process.*
We identify climate-related risks through our ESG quantitative and qualitative research. ESG Integration in our actively managed investment processes considers financially material ESG risks, including climate-related risks. We are currently in the process of further developing and integrating our dedicated climate-related capabilities into the central technology platform.
Describe engagement activity with investee companies to encourage better disclosure and practices related to climate-related risks in order to improve data availability and asset managers’ ability to assess climate-related risks.*
As an active investment manager, we consider engagement with investee companies to encourage positive change an integral part of our investment process across asset classes. Climate risk is one of our firmwide investment stewardship priorities. We discuss our investment stewardship approach in the Strategy section.
Describe the processes for managing climate-related risks.
Describe how material climaterelated risks for each product or investment strategy are managed.*
Describe the processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
We employ a multi-line defense approach to managing risks in client portfolios. As primary risk owners, investment teams are responsible for considering climate as a core topic in our investment analysis, alongside all other material financial risks, as part of ESG integration. In addition to J.P. Morgan Asset Management’s risk management process, Investment Directors monitor and assess how investment teams are incorporating material sustainability risks into their investment strategies. Our independent Risk Management and Compliance functions are part of the second line of defense.
^Risk management does not imply elimination of risks.
*Reflects recommendations that are included in the Supplemental Guidance for Asset Managers, which incorporates updates to the guidance for the financial sector released by the TCFD in 2021 (https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf)
Metrics to assess risks and opportunities, including in products and strategies
We are evaluating the most appropriate metrics to use for assessing climate related risks and opportunities, taking into account data and methodology, quality and availability, the needs of our clients, and regulatory requirements.
GHG emissions for assets under management*
Our carbon exposure metrics for our assets under management for 2021 are:
Total financed emissions: 126 MtCO2e
Carbon Footprint: 134 tCO2e/$million invested
WACI: 200 tCO2e/$million revenue
Targets to manage risks and opportunities
J.P. Morgan Asset Management signed up to Net Zero Asset Managers initiative in 2021, supporting investment aligned with the goal of achieving net-zero GHG emissions by 2050 or sooner.
*Reflects recommendations that are included in the Supplemental Guidance for Asset Managers, which incorporates updates to the guidance for the financial sector released by the TCFD in 2021 (https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf)
Our sustainability resources
Provided for information only, not to be construed as offer, research, investment recommendation or advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations, may or may not come to pass. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Investments involve risks. This includes illustrations of macro trends which may or may not come to pass. Investors should seek professional advice before investing.
JPMAM defines ESG integration as the systematic inclusion of financially material ESG factors (alongside other relevant factors) in investment analysis and investment decisions. In actively managed assets deemed by J.P. Morgan Asset Management to be ESG integrated under our governance process, we systematically assess financially material ESG factors including sustainability risks in our investment decisions with the goals of managing risk and improving long-term returns.
Diversification does not guarantee investment return and does not eliminate the risk of loss.