JPMorgan's sustainability chief breaks down the 2 strategies she's using to super-charge the firm's ESG research — and explains why companies have already passed a key 'turning point' for further adoption of the theme
- Jennifer Wu, global head of sustainable investing at JPMorgan Asset Management, is leading the firm’s ESG efforts.
- Policy shifts and societal momentum have pushed ESG investing into the mainstream, Wu said.
- These are the two strategies she’s using to super-charge the firm’s sustainability research.
- See more stories on Insider’s business page.
A few years ago, Jennifer Wu, global head of sustainable investing at JPMorgan Asset Management, was on her way home from a month-long ‘mission trip’ to Pakistan on behalf of the Asian Development Bank and had decided to quit her job.
She was exhausted and in the back of a cab, after dealing with “corrupt” government officials who weren’t interested in fixing the problems in the country. Then the taxi pulled up at a traffic light and Wu looked out the window. In the darkness, she could see what appeared to be a mountain, but it wasn’t – it was a “trash mountain.” And at the top was a woman, pulling apart bags, looking for something to eat.
“At that moment, I decided that somebody had to do something about this,” she told Insider. Her early-career experience in research focused on technology and renewable energy, along with her passion for encouraging environmental and societal change, proved to be a natural springboard into the world of environment, social and governance (ESG) research and investing.
Her lightbulb moment in the back of a cab remains at the forefront of her mind.
“No matter what ridiculous things I go through these days – to me – it doesn’t matter. I know exactly why I’m doing this,” she said.
The rest of the investing community is starting to catch up with some of the trail blazers. Equity inflows into ESG products hit a record $271 billion in 2020 and the momentum will continue this year, according to Goldman Sachs.
The big policy shift is underway
For Wu, a “turning point has passed” in the rhetoric of both businesses and investors to such an extent that sustainable investing isn’t going anywhere and public policy is a big part of that.
With President Joe Biden’s new green agenda, the US back in the Paris Agreement, and Asian powerhouses like Japan and China making net-zero commitments, companies know the trend towards adhering to tighter ESG standards is irreversible.
“Policy is going to drive the direction of how we produce energy in the next decade and that is something that we just need to start getting prepared for,” she said, and “that big shift has definitely changed the dialogue.”
Societal momentum is also playing a role, waking up corporates to the fact that they are responsible for change, she said. They now face a choice: continue to be irresponsible, or contribute to the transition. Investors are also coming to realize that the energy transition is a critical component across all sectors and regions.
But, this isn’t an overnight switch, it’s a transition and – as such – investors are trying to navigate that.
Wu shared these two strategies that JPMorgan Asset Management is employing to super-charge its research this year to better inform its clients decision-making.
A new focus on biodiversity
A lot of the focus within ESG has been on climate change and carbon emissions. But it goes beyond that. Biodiversity is financially material to the longevity of many sectors and is now central to JPMorgan’s ESG-focused research, Wu said.
The lack of focus on biodiversity has also been due to a lack of knowledge. “Isn’t it just about birds?” someone asked Wu in a recent meeting.
It’s about how companies coexist with and protect the environment around them, including the air, land, water and wildlife. All industries could potentially harm the environment, so it is about making sure their production has a sustainable future, and will also not undermine the bottom line.
Secondly, investors must consider the connection between the need for biodiversity in the fight against climate change. Despite the hunt for man-made solutions, the best carbon sinks, for example, are forests, natural habitat, wetland and so on, and they absorb huge amounts of carbon dioxide.
“It is so closely linked to climate change, but it’s not a topic that people have looked at a lot about,” Wu said. Whether it is about the use of pesticides, or deforestation for palm oil, biodiversity is so multifaceted that it has become even more important to embed into the bank’s ESG research, Wu said.
Investors are already asking questions about the greenhouse gas emissions of their portfolio companies. Now, they need to include biodiversity into the risk and opportunity assessment. “So you’re actively looking for companies that are actually doing a good job, or a poor job against biodiversity,” Wu explained.
Data, data, data
ESG data disclosures allow investors to create a baseline for their research. But for those that want to make a difference and have an edge on their competitors, they need to do more than just study what is readily available.
Many of the solutions around the industry have used exclusion-based products, whereby investors simply avoid companies unless they are top-performers on third-party ratings, like benchmarks.
For Wu, this isn’t enough. ESG criteria need to be embedded into every part of day-to-day analysis and data is the key to doing so. Investors need to proactively look for different sources of information to build better models.
“This is not nothing new to the investment world,” Wu said, adding analysts already use options such as satellite images to forecast the projected sales of supermarkets, for example, by looking at traffic patterns.
This imagery can then also be used to estimate of carbon emissions more accurately, or to understand potential deforestation activity. This is what Wu has spent the last year doing for JPMorgan – building its own database complete with an original scoring framework. It’s not all that high-tech either. A lot of the metrics are based on available alternative data sets, like those from non-government organisations (NGOs).
“It tells us something forward-looking, or future controversy of these companies,” Wu said.
Importantly this is for more than just one product, it is about creating an underlying foundation for the whole firm.
“It’s hard to do. It’s about changing our behavior,” Wu concluded.
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