J.P. Morgan Asset Management is making sweeping changes to the way it evaluates the companies in which it invests, joining a fast-growing group of managers that are incorporating environmental, social, and governance factors into their strategies.
The initiative was announced at J.P. Morgan’s investor day on Tuesday.
Jennifer Wu, head of sustainability for the firm, told Institutional Investor that the asset manager has been working on the idea since 2016, but the recent proliferation of ESG and other data has now made it easier to incorporate these factors into the firm’s investment processes.
As part of the sustainability effort, JPMAM is enhancing its research and other processes, including increasing its engagement with companies around five priorities, including climate change. The firm is also using in-house research to determine whether specific ESG factors are material.
Wu added that a big part of J.P. Morgan’s effort was a decision to develop a proprietary scoring system, using its own data scientists and artificial intelligence capabilities, as opposed to using off-the-shelf information from third-party ratings agencies.
“We are in the business of forecasting, but the information ratings agencies use and the conclusions they would give us are only about current ESG performance of a company,” said Wu in an interview. “We care about the future. If we want to do this well, and use ESG to better manage risks and identify new alpha opportunities, then we have to go back to individual companies and determine ourselves what are the ESG issues that really matter.”
Wu added that the ESG data that is available today is “far better” than what was available even three years ago, including alternative data sources and public information that companies themselves now disclose.
“That opens up doors for us as investors,” she added.
The new framework will tap into the firm’s machine learning algorithms and natural language processing techniques that can generate sentiment signals, find alternative data sets, and gather insights on sustainability beyond corporate disclosures, according to Wu.
“Once we make an investment decision, for instance, we might say this company isn’t doing well overall on ESG, but we might know that a company is well prepared for water scarcity issues,” she said. “This is not just a way for clients to express their values, like excluding certain companies from their portfolios. ESG factors play an important role in generating alpha.”
J.P. Morgan is also investing in ESG capabilities across the firm to keep up with global regulatory initiatives. While it’s too early to say how asset management regulations may specifically evolve, it’s clear that regulators, especially in Europe, want to be more active on sustainability and other issues.
“Regulations will shift demand and supply in the market, whether that’s subsidies for different sectors or policies in Europe,” Wu said. “We need to understand what is important to a particular company we invest in, as well as understand policies. We can’t be caught off guard.”