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    1. Demystifying ESG

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    Demystifying ESG

     

    Once a niche area of finance, environmental, social and governance (ESG) investing is now very much a mainstream phenomenon. We believe ESG factors can play a role in the long-term financial performance of companies and therefore can have a material impact on investment performance. Below, we break down the component parts of ESG to explain how each factor can be taken into account in the investment decision making process:

    Environmental

    The E in ESG is the most well-known component. It regards issues relating to the quality and functioning of the natural environment and natural systems - for example, carbon emissions, environmental regulations, water stress and waste. These are some of the biggest challenges currently facing our planet and tackling them will require collaboration between governments, companies and consumers around the world. This factor is more than just encouraging people to turn off their lights; it is a vital consideration for companies in all lines of business. While renewable energy producers and electric car makers are some of the most well-known solution providers when it comes to environmental factors, companies looking to develop ways to preserve the environment can be found across all sectors of the economy.

    Social

    Social factors cover a broad array of considerations for companies, from diversity and inclusion to the treatment of their workforce, customers, suppliers and the wider community. These issues are increasingly in the spotlight and the risks for companies are clear. A company that doesn’t provide a safe and healthy working environment, for example, is less likely to have a happy and productive workforce. Similarly, a company that cuts corners on product safety or mis-sells products risks long-term reputational damage. These factors are likely to have a direct impact on bottom lines.

    Governance

    Governance relates to how companies are structured and run from the top down. A robust corporate governance system that ensures high levels of transparency, accountability, oversight and respect for investors and key stakeholders is imperative for a well-functioning company. This includes making it clear what company management are paid and how they are incentivised. Another key component is the diversity of company boards. An independent and diverse board with the relevant knowledge and experience often results in more effective, objective decision-making and improved long-term value creation.

    Why is ESG important for investment decisions?

    A large and growing body of academic evidence has found a positive link between ESG characteristics and the financial performance of companies1. Here are some of the main reasons we believe ESG factors will play a material role in the long-term financial prospects of companies:

    Consumer sentiment: Recently, there have been powerful shifts in consumer sentiment away from firms with poor ESG ratings towards more responsible alternatives. There is now a greater consideration by consumers as to the impact of their spending on the planet and society. These changes create compelling opportunities for investors to favour those companies that have responded by incorporating ESG considerations into their operations, or those offering products and services that directly address sustainability challenges.

    Regulatory risks: Not only are companies under pressure from their customers to act responsibly, they are also under increasing scrutiny from governments. Significant policy changes will be required to get the climate trajectory back on track, both in the form of “carrots”, such as new spending on climate-friendly projects, and “sticks”, which include new taxes and regulations. Those companies that are already addressing environmental issues, for example, are likely to be more insulated from the regulatory risk associated with the transition to a net-zero economy, such as the increasing costs associated with carbon-intensive activity.

    Capital costs: Research from MSCI found that companies with strong ESG attributes benefited from a lower cost of capital compared to companies with poor ESG scores, in both developed and emerging markets during a four-year study period2. Lower capital costs make it cheaper for companies to invest and grow their businesses.

    Considering ESG criteria when making investment decisions is as much about doing well as it is about doing good. We believe that the assessment of financially material ESG factors is integral to an effective and holistic risk management process, which can not only align portfolios to sustainable outcomes, but also potentially enhance returns.

    Find out more about J.P. Morgan Asset Management’s approach to ESG integration.

    1 Gunnar Friede, Timo Busch and Alexander Bassen, “ESG and financial performance: Aggregated evidence from more than 2,000 empirical studies,” Journal of Sustainable Finance & Investment, 5:4 (2015), 210-233.
    2 MSCI, “ESG and the Cost of Capital" (2020)

    NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations

     

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be.; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only. For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2022 JPMorgan Chase & Co. All rights reserved.

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