The purpose of JP Morgan Asset Management’s (JPMAM) proprietary scoring system is to help the firm’s investment professionals better identify forward-looking ESG risks and opportunities, as well as to construct portfolios that deliver enhanced risk-adjusted returns, according to statement released today.
The framework will tap into the firm’s data science capabilities, such as machine learning algorithms and natural language processing, and will source alternative data to gain insights on sustainability beyond corporate disclosures. JPMAM reckons that data science can help advance sustainable investing, both by mitigating risks and generating alpha.
“The tool is in development and we aren’t stating a timeline at this point,” a spokeswoman told FSA.
However, she outlined the process, which draws on information collected through regular contacts with companies and raw data from specialized data providers and third-party ESG rating agencies, such as information on consumption, carbon emissions, and the diversity of boards of directors. In addition, the framework is expected to use unconventional data as well, deploying machine learning algorithms and natural language processing that can generate sentiment signals to gain insights on sustainability beyond corporate disclosures.
“So pulling that all together into the scoring system, we are seeking to combine artificial intelligence with human research to better enable sustainable investing,” said the spokeswoman.
The tool will be implemented across all investment teams covering listed companies, she added.
“Factors like lack of standardisation, lack of transparency in ESG reporting, limitations of third-party ESG data providers – all those are challenges to overall ESG integration, which we are working towards in the investment processes of all of our active strategies,” she said.
Many investment managers now routinely advertise the inclusion of ESG analysis into their investment processes, across a widely-recognised range of five styles, namely: exclusionary screening, positive screening, ESG integration, impact investing and active stewardship.
At the start of this year, Hong Kong’s Securities and Futures Commission listed 21 funds authorised for sale in the territory that passed its ESG “disclosure filter”. These included funds managed by Alliance Bernstein, Allianz GI, Amundi, BNP Paribas AM, Blackrock, Fidelity, HSBC GAM, Janus Henderson, Jupiter and Schroders.
Some managers are also making efforts to disaggregate the specific contribution of ESG factors to a portfolio’s total return — – including JPMAM for its fixed income funds.
However, there remains a reliance on the corporate ESG ratings supplied by third-party agencies, such as MSCI and Sustainalytics, despite widely-held reservations about their consistency and accuracy. Several firms are developing their own ESG screening models, and others such as State Street Associates share with JPMAM a confidence in the efficacy of artificial intelligence and machine learning to improve ESG evaluation.
Climate risks
Concurrently, JPMAM’s “investment stewardship” model aims to prioritise “climate risk, governance issues, strategy alignment with long-term objectives, human capital management and stakeholder engagement. Annual reporting will incorporate these key performance indicators in the firm’s company engagement policies.
“Our portfolio managers and investment analysts work with companies on improving elements of their operations and strategy that they deem to have a financially material impact on their profitability over the long term,” the spokeswoman said.
JPMAM is placing particular emphasis on climate risks, which it believes will directly affect the ability of companies to create long-term shareholder value. The firm intends to discuss with companies ways to embed and disclose climate risk considerations into corporate strategy as outlined by the Task Force on Climate-related Financial Disclosures, which was set up in 2015 by the Financial Stability Board.
However, “assessing climate risk does not mean exclusions,” said the spokeswoman.
“We expect managements to engage with investors, and to articulate how the company intends to navigate the risks and opportunities posed by climate change and the oversight provided by the board on progress of implementing such plans,” she said.
Currently, JPMAM has 11 dedicated sustainable products across different investment styles and asset classes (but not authorised for sale to Hong Kong or Singapore retail investors), with $2bn in AUM out of $2trn AUM in total, as of 31 December 2019, according to the statement.
