December 2019
Sustainability is fast becoming a key investment driver for liquidity investors. A fifth of respondents to our J.P. Morgan Global Liquidity Investment PeerViewSM survey said they are already taking account of environmental, social and governance (ESG) factors in their investment decision making. And this number is set to grow quickly, with the survey suggesting that within two years almost half will do so.
A long commitment to sustainability
What can liquidity managers do to ensure that they can live up to their clients’ expectations when it comes to sustainable investing? At J.P Morgan Asset Management, we have a long commitment to sustainability, having been a signatory to the United Nations-supported Principles for Responsible Investment (PRI) initiative since 2007. Our asset management product lines are annually rated for their commitment to the PRI rules — of the 11 products under review, 9 are currently graded “A”.
We’ve made sure that our commitment to sustainable investing touches every part of our business, from senior management to our investment desks, and from risk management to technology. In our liquidity portfolios, for example, ESG analysis is a natural part of the research carried out by our credit analyst and quant teams. Also, our Sustainable Investment Leadership Team (or SILT for short) and our dedicated sustainable investing resources work together to drive a coordinated strategy for sustainable investing across all of our asset management businesses.
Integrating ESG factors into liquidity portfolios
Sustainability is fully integrated into our global liquidity investment process at all levels, from our philosophy through to the security selection process. Our philosophy, for example, contains the following statement:
“As fixed income investors, we expect the issuers in which we invest to conduct business in a sustainable manner and to demonstrate high standards. We take into consideration, where relevant and material, ESG issues alongside other market risk factors as part of our rigorous investment and risk management processes that help us to avoid event and headline risk, identify ESG-related industry trends and best practices and ultimately reduce reputational risk for our clients.”
Guided by this philosophy, ESG factors are a natural part of our security selection. We’re fortunate in this regard to have a large and experienced team of 20 investment grade corporate credit analysts1, who take account of ESG factors in their fundamental analysis of issuers — hard wiring sustainability into our liquidity portfolios.
Building sustainable liquidity strategies
The size of our credit analyst team means that each analyst is able to focus on one sector, or just a few sectors at most, covering roughly 40-50 corporate issuers (at the parent level). This means that we can conduct rigorous fundamental credit research, including analysis of ESG factors, and assign each issuer with an ESG score.
Our proprietary fundamental ratings are crucial for risk control, as they guide tenor and concentration limits in our funds, to varying degrees, depending on product style. Our portfolio managers will also use both our fundamental credit ratings and ESG scores as they evaluate potential trades, and build and monitor our liquidity portfolios on an on-going basis. ESG scores are therefore an important factor in determining relative value.
ESG scores are also incorporated into the Global Liquidity team’s monthly governance meetings to highlight higher and lower ESG-rated issuers, as well as scoring our credit portfolios on a cap-weighted average basis.
ESG in practice
This all sounds impressive, but what does it mean in practice? The recent treatment of Scandinavian banks by our liquidity funds makes a good example, after several of the region’s lenders hit the headlines due to anti-money laundering issues.
Our own analysis had suggested that action should be taken on several of these names relating to governance concerns, leading to the suspension of one name and the curtailing of limits on others.
Overall, we look to engage positively to highlight ESG issues, either through analyst touchpoints, or via portfolio managers, who will use ESG factors to decide whether or not to purchase a security and pass their feedback to brokers and issuers.
Proud to be sustainable
I’m proud that J.P. Morgan Global Liquidity has built a professionally and culturally diverse team, employing women and men in portfolio management, distribution and analytics across Asia, Europe and North America.
Together, we’re working to ensure that the same commitment to sustainability is reflected in all our cash and Managed Reserves strategies.
To find out more, please visit www.jpmgloballiquidity.com or contact us at [email protected]
Footnote
- As at November 2019.
