How JPM Emerging Markets puts the ’S’ and ‘G’ into ESG

Explore how the JPMorgan Emerging Markets Investment Trust tackles the challenge of ESG in emerging markets.

JPMorgan’s Emerging Markets Investment Trust always embedded ESG in its approach. Its fundamental focus on the long-term growth potential of businesses has sustainability at its core.

ESG and sustainability have been gaining more and more attention in recent years with specific ESG funds increasingly in vogue. However, the concept of sustainability in business is not new and has long been understood by successful long-term investors.

Considering all the factors which could affect a company’s profitability and value in the future leads naturally to a broad definition of sustainability. The JPMorgan Emerging Markets Investment Trust team call this ‘duration’, a concept incorporating ‘ESG’ and more, which forms the foundation of their investment philosophy.

Why is ESG important?

There are essentially three simple reasons why, as investors, we should think about ESG:

Firstly, we all have a responsibility to consider the broader consequences of our investment choices

Secondly, ESG is important to many individual investors from an ethical standpoint

Thirdly and perhaps most importantly, it is entirely consistent with a long-term approach to investing.

On that last point, Investment Specialist Emily Whiting is clear.

‘Put quite simply, it’s because to invest long term you must have companies that do business in the right way. If they don’t, it’s not going to change their price valuation quarter-on-quarter, but year-on-year and decade-on-decade.’

ESG built in

The Trust’s approach to assessing ESG performance is built into the framework by which all companies are assessed prior to making any investment.

‘This is something that’s inherent in all our conversations when we appraise stocks,’ says Whiting. ESG is at the heart of every decision we make.’

The team takes a long-term view because they believe such an approach delivers better results, reduces costs, and allows the power of compounding to translate into investment outcomes. ESG is a key element which affects the long-term prospects of companies and as such it is very important to the team.

‘Rather than seeing ESG as something that restricts our ability to generate returns, I think of it as a necessary part of what we do,’ says Lead Portfolio Manager Austin Forey. ‘Rather than constrain our portfolios, it refines them.’

The challenge of ESG in emerging markets

Until recently, several factors made ESG-focused investing in emerging markets particularly challenging.

Firstly, a lower degree of societal pressure on companies to act responsibly. Also, clear regulation to define and enforce sustainable practices wasn’t always in evidence. Some of these factors persist, however, because the concept of duration has always been built into the Trust’s investment framework, the team has a well-defined approach to evaluating all three factors for EM stocks:

Environmental: Better reporting is making environmental performance easier to measure, with many companies now publishing sustainability reports as a matter of course. However, the team still seeks to understand if companies are actively working to mitigate risks and improve environmental performance.

As well as forming part of the strategic classification assessment, this is addressed by specific questions in the risk profile.

Social: Expectations regarding social responsibility must take into account the local context, including existing social norms, legal systems and stages of development. However, firms have a responsibility to be proactive and not hide behind these mitigating factors.

Governance: When considering governance, the team focuses on two areas: firstly, whether a company shows proper regard for the interests of all shareholders; and secondly, whether it can demonstrate proper stewardship of assets and value over time. One slightly surprising example of where companies tend to fail that first test is in South Korea, where the complicated chaebol system of family ownership often results in little regard being given to minority investors.

The evaluation process

While third party information is useful, the team conducts its own research and makes its own decisions about the sustainability of businesses before investing in them. They engage directly with companies both before and after investing, through the 5,000 meetings they conduct annually with businesses as well as through proxy voting. When sizing positions, both strategic classification and risk profile are considered.

Putting the S and G into ESG

The pandemic has brought to the fore the ‘S' and ‘G’ in ESG and accelerated a trend which the team had already identified. 

‘We’ve noticed it through company meetings over the last couple of years anyway,’ says Whiting. ‘Businesses recognise its increasing importance in how they’re perceived in the marketplace, so they want to talk to us about their governance committee and what they’re doing from a social standpoint.’

The impact of COVID-19 has perhaps been most significant on social responsibility, particularly with those firms which already have a sustainable approach embedded in their corporate culture, recognising their responsibilities not only to their customers and their staff but to wider society. ‘You’ve got Chinese noodle companies providing meals for community hospitals, a Brazilian bank that’s set up a fund to help people in poverty and so on,’ says Whiting. 

Overall, the team’s view is that ESG is integral to the long-term performance of companies and so should be integral to the research process. Ultimately, ESG is not just about ‘doing good’, it’s about ‘being good’ — and that benefits everyone, including investors.

Find out more about the JPMorgan Emerging Markets Investment Trust

To buy this trust login to your EQi account 

 Select JPMorgan Emerging Markets Investment Trust - GB00BMXWN182

Click to visit:

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that 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. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name 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 EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge from JPMorgan Funds Limited or www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

Read the latest edition of DIY Investor Magazine

DIY Investor Magazine

The views and opinions expressed by the author, DIY Investor Magazine or associated third parties may not necessarily represent views expressed or reflected by EQi.

The content in DIY Investor Magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.

DIY Investor Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.