Strategy looks to invest in issuers “actively” shifting towards renewables, environmentally sustainable practices.
JP Morgan Asset Management (JPM AM) has launched its new actively managed Green Social Sustainable (GSS) bond fund, which will focus on issuers embedding sustainability deep in their value propositions and policy priorities.
Liam Moore, Investment Specialist at JPM AM, told ESG Investor that the strategy will invest in issuers “actively in the process of shifting its business model towards renewables, or more environmentally sustainable practices.”
On environmental exclusions, Moore confirmed that the strategy will “usually” exclude firms that derive revenue from fossil fuels, or generating significant power from coal, oil and gas, or from nuclear sources. However, as the asset manager “want[s] to invest directly in the transition to a sustainable and inclusive economy”, it may invest in issuers as they integrate sustainability into their business models.
The strategy looks to offer investors “high quality core exposure” to a wide opportunity set of GSS bonds from corporate, sovereign and supranational issuers, across developed and emerging markets.
It will be available both as a SICAV – the JPMorgan Funds – Green Social Sustainable Bond Fund (SICAV), and as an ETF, the JPMorgan ETFs (Ireland) ICAV – Green Social Sustainable Bond UCITS ETF. JPM AM said these are some of the industry’s first actively managed funds to be benchmarked against Bloomberg’s new Global Aggregate Green Social Sustainability Bond one-to-ten-year index.
According to JPM AM, a broader range of stakeholders are now taking steps to address social as well as environmental challenges, which has helped drive the rise in interest in sustainable fixed income strategies. These include companies, governments, foundations and multilateral institutions issuing social and sustainability bonds to fund community development and to facilitate access to essential services and aiming to reduce poverty and inequality, create jobs and empower communities.
Massimo Greco, Head of EMEA Funds at JPM AM, said: “The need for innovative solutions has never been greater. And with bonds increasingly coming back in favour as part of a diversified portfolio, we’re delighted to be able to offer an actively managed and diversified core fixed income strategy that’s been designed with a great deal of care and consideration, as the strategy seeks to explicitly align with environmentally and socially beneficial projects.”
The firm expects the funds to find demand in the wealth management and institutional sectors, including charities.
Stringent inclusion criteria
Moore said JPM AM had put a number of measures in place to ensure bonds included in the fund justify their sustainable status.
“We want to see that the green issuance framework is directly integrated into the company’s core business model, and we will subject issuers to a stringent set of inclusion criteria before buying a bond,” he said.
JPM AM will apply a “heightened monitoring approach” to the bonds, ensuring the manager engages appropriately and holds issuers to account on the deployment of the proceeds.
“Having filtered the investment universe via the strategy’s exclusion policy, we then apply a robust set of inclusion criteria to ensure that every single investment we make can genuinely be considered to be contributing to the fund’s sustainable objective,” said Moore. “We assess investments at both the issuer level and the individual bond – or issuance – level.
All of the bonds in JPM AM’s new GSS strategy will be linked to sustainable activities, in line with the principles set out by the International Capital Markets Association (ICMA). The ICMA framework requires GSS-linked bond issuers to be aligned along four key principles: use of proceeds, project evaluation and selection, management of proceeds, and reporting. JPM AM requires analysts to use a proprietary questionnaire to verify alignment of GSS bonds in the fund with the ICMA principles.
The bonds qualify as sustainable investments under the EU Sustainable Finance Disclosures Regulation (SFDR), meaning the ‘use of proceeds’ will need to be directed to projects and activities that contribute towards a more sustainable and inclusive economy. The new funds will qualify as Article 9 under EU SFDR.
The strategy will also have exclusions for issuers such as “violation of global norms”, or those with significant revenue streams from the production of tobacco or weapons to act as a minimum safeguard for the portfolio.
It will be managed by Stephanie Dontas, Ed Fitzpatrick and Usman Naeem and developed in partnership with JPM AM’s Sustainable Investing team, with over 70 analysts working within the firm’s Global Fixed Income, Currencies and Commodities (GFICC) group offering expertise on the strategy.
“At the issuer –level, it is paramount that the issuers to whom we extend credit exhibit good governance, regardless of the types of projects being financed by the bond,” Moore said. “Once we have established good governance, we then drill down on the use of proceeds for the individual issuance.”
GFICC analysts will verify the alignment of each bond issuance to ICMA standards and conduct “rigorous fundamental, quantitative and technical research”, JPM AM said.
The firm underlined duration risk as an “important consideration” in the strategy’s design, with JPM AM’s strategy offering a lower structural duration compared to the typical longer duration of green bonds.
Duration risk is important to investors as the more duration risk a strategy has, the more sensitive the portfolio is to increases in interest rates. “With the core interest rates now looking more likely to approach a peak in the coming months, the risk of further such capital losses as we saw in 2022 has reduced, but duration risk nevertheless remains a consideration when allocating to fixed income,” said Moore.
The strategy caps the broader benchmark’s duration at 10 years, as client feedback revealed they “would prefer a structurally lower duration profile than the [roughly] seven years currently for GSS bonds”. Moore also said. “We believe that many of the projects requiring GSS bond issuance are urgent, so a shorter timeframe makes sense.”