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The ESG Interview: A Marathon and a Sprint

Jennifer Wu, London-based Global Head of Sustainable Investing at JP Morgan Asset Management, discusses the uphill struggle of obtaining data to support sustainable investment decisions.

There is a certain irony in the fact that the advent of sustainable investing – which advocates delayed gratification through responsible deployment of capital and other scarce resources – has led to so many wanting more, at speed. More information, that is.

Investors want more information from issuers, on more aspects of their operations and impacts. Asset owners want more information from asset managers, in terms of ESG integration, active engagement with issuers and evidence of impact. And everyone wants more guidance and leadership from governments on the vision for a low-carbon future and the rules for getting us there, which will help to drive action by corporates and direct capital from investors.

If only our decades-long pursuit of consumerism, globalisation and exploitation of natural resources had been more heedful of a wider range of data and metrics, our need for them today might not be quite so urgent.

The irony is not lost on Jennifer Wu, London-based Global Head of Sustainable Investing at JP Morgan Asset Management and committed marathon runner. In her two and a half years in the role, Wu has been responsible for building out the firm’s sustainable investment platform, with the aim of seamlessly integrating ESG analysis and related activities and processes, such as ESG-focused stewardship, with its existing capabilities and solutions.

“We’re in a pretty tricky position,” acknowledges Wu, referring to the collective data challenge. “Companies don’t have the obligation to disclose. How can we more accurately assess the ESG or sustainability performance of these companies? That’s the big problem, no matter how sophisticated you are in using data or sending analysts to engage with companies to get that piece of information.”

Previously at BlackRock, where she led efforts to create innovative solutions and analytics for sustainable investing, Wu’s current role includes leading JP Morgan Asset Management’s Sustainable Investing Leadership Team, a firm-wide senior group tasked with sharing best practice to embed sustainable investment across asset classes and markets.

Like the global process of building a framework for sustainable investment, Wu’s task is both a marathon and a sprint. And it involves providing more value, based on more inputs, without overloading issuers, investors or intermediaries such as themselves.

Base levels, biodiversity and beyond

The key shared challenge for asset managers and owners is obtaining and interpreting information on ESG risks and opportunities from issuers.

Institutional clients can redesign their investment policies and implement exclusions, says Wu, but it’s still hard for them to be certain capital is flowing in line with investor values and priorities. “The risk is that we’re penalising companies because they don’t disclose, or we’re rewarding companies because they put more resources into their CSR (corporate social responsibility) reports or engaging with shareholders.”

Getting the necessary information to make ESG-informed investment decisions can be a moving target, says Wu. Often, it involves addressing longstanding concerns and data gaps, such as those that allow potential blindness to human rights abuses along supply chains. In parallel, investors are looking at issuers from new perspectives, with many calling for greater transparency on employee health and benefits in the wake of the Covid-19 pandemic, for example. In a hyper-connected digital world, more information is available from third parties, but it takes time and skill to sort the signal from the noise by verifying, interpreting, and integrating the most relevant and valuable inputs.

This ESG data challenge is never ending and ever changing, but consensus around core metrics can increase efficiency and insight. Wu says mandatory audited disclosure of Scope 1 and 2 emissions, for example, should be regarded as a base level requirement. “The issues will change, and the scope may expand, but we don’t even have that yet. And that’s a problem for us as a global investor ,” she says, suggesting there is an opportunity at COP26 for governments to show leadership.

“In terms of mandating what companies absolutely have to disclose and have audited, let’s start with the basics,” she says, nevertheless asserting that ambitions on reporting should continue to rise.

At the same time, voluntary and issue-specific metrics and data series have proved themselves invaluable to ESG-based investment, becoming more widespread and ultimately even mandatory. Wu notes the value to investors of gender pay gap data, as well as the growing use of other gender diversity metrics, such as the ratio of females on the board, senior management and across the workforce. But it can be harder to assess and distinguish between companies’ policies in these and other areas, posing challenges to reporting frameworks.

“I don’t think we can ever get to the stage where there is one (set of) frameworks that will work for all, partly because every industry is different,” says Wu, pointing out the principles-based approach taken by standards-setters’ sectoral reporting guidelines.

One area highlighted by Wu as needing more attention is measurement of biodiversity risks. The run-up to the UN Convention on Biological Diversity in October has increased focus, notably through the establishment of the Task Force on Nature-related Financial Disclosures. Wu sees biodiversity and climate change as inextricably linked, partly due the scope for natural carbon sinks, many of which are suffering alarming levels of degradation and pollution, to sequester emissions.

The pandemic has heightened investor awareness of biodiversity loss, she says, through a deeper understanding of the relationship between public health and natural resources. Overall, these concerns are only slowly morphing into investment flows toward firms and initiatives aiming to mitigate, protect or replace use of natural resources.

“I don’t think it’s being fully appreciated just yet, because of the complexity of the issue. But I’m glad it’s been talked about a lot more with investors, and we have more data and a better understanding of measuring some of these issues. Biodiversity is foundational to a lot of industries and business operations,” she says.

Intense engagement

While regulations and reporting frameworks evolve, data gathering and analysis must continue apace, much of it derived from a more intense level of corporate engagement.

Wu says JP Morgan Asset Management is delving deeper into the plans and strategies of firms to understand their ESG-related risks, opportunities and impacts. “We ask them so many more questions now, beyond the standard ESG issues. We want to go very deep on transition plans. We want to challenge firms on capex decisions as they relate to potential impact on environmental issues.”

There are inevitably pros and cons. The work can be labour-intensive, the information highly technical, dealing with the complex minutiae of operations. “It makes the depth of our conversation with companies a lot richer, but it also means more work on both sides, for the companies to be prepared and make changes, and for us to be asking the right questions,” she says.

This can lead to pressures on resources and relationships. From a resource perspective, JP Morgan Asset Management has trained all its 200+ analysts globally to embed ESG in their day-to-day processes, rather than asking a dedicated team of specialists to engage with all covered firms on ESG themes.

“We don’t just rely on a small group of people to have conversations with companies around ESG issues; it needs to be in every single conversation,” says Wu.

Asking analysts with existing relationships to probe firms on ESG issues, she says, allows for both depth and context, with findings integrated into an overall picture. “It’s also effective because our corporate engagement is not separate from our investment decision-making, unlike a passive fund. If we gather information that makes us doubt a company’s commitment to improve on certain ESG metrics, that could change our investment decision.”

Wu sees corporates also looking to streamline engagement in response to the volume and depth of shareholder interest, for example holding roundtable discussions with groups of investors on specific subjects. “We also collaborate with our peers, informally, to share ideas on some of the companies that we collectively own,” she says. “But the companies that are doing a good job are the ones which are very proactive.”

As part of efforts to integrate ESG-based stewardship efficiently, Wu says JP Morgan Asset Management ensures information is shared broadly across analyst teams. Natural language processing tools are being deployed, including one called ThemeBot, which analyses vast quantities of third-party sources to flag potential ESG-related concerns for further investigation. The firm’s skills base has widened too, with in-house research capabilities augmented by specialists, including climate scientists. “You need to have expertise to be able to digest that data to understand what it means to a particular company or asset class,” says Wu.

Picking up the pace of change

But what about the pressure on relationships from engagement aimed at change? Asset owners typically want firms to address ESG-related concerns quicker than managers and directors can comfortably execute alongside day-to-day operational issues and shorter-term considerations.

In many cases, they expect asset managers to be the messengers on these concerns, as well as the enforcers, in terms of escalating engagement in the event of inaction or delay. This can sour relations with a corporate that may have a wider relationship with the investment manager or its parent. This applies as much to JP Morgan Chase as much as any global financial institution with a broad spread of financing relationships as it adjusts its operations and priorities to new realities.

“If clients want companies to move a lot quicker, or they want to be more aggressive on certain issues, that’s our job, because we’re managing their money,” says Wu, but she believes few asset owners are ready to take the ultimate sanction. “If you want to make such a drastic change so soon, the only option potentially is divestment, and you have to live with the financial impact of that, in terms of investment performance.”

More clients, she says, are at the stage of gathering information and exploring their options for leveraging influence.

“They want us to provide more information about the engagement that we’re having and our assessment, i.e. how likely is this company going to be able to reduce its emission by 30% in the next nine years? Is that a realistic target I should prepare for across my whole portfolio?”

Asset owners with particularly strong views on managing ESG risks can and do manage voting and engagement activity themselves, but Wu favours an integrated approach to stewardship and investment, with the information from the former helping to shape the latter. “We’re using engagement and voting as a way to potentially get companies to give us more information, or for us to effectively voice our concerns, and we always have the ability to direct capital to another company,” she says.

Earning the right

On the other side of the fence, asset managers are having to fight much harder for the right to represent the views of asset owners, Wu admits. Just as much more is expected of investee companies, much more is also expected of asset managers, in terms of fitness of business model and value proposition for a sustainable future. She points to three recent shifts which reflect the extent to which asset owners’ expectations have risen.

First, clients want much more detail about how ESG risks and opportunities are factored into security selection, even if the portfolio in question is not explicitly sustainable. This can include informal calls from clients asking why a stock in a given portfolio is not highly rated by a third-party agency, a situation which can arise if JP Morgan Asset Management has fresher information through recent engagement.

Second, clients increasingly want to know more about where managers stand on the bigger ‘global’ or ‘systemic’ ESG issues beyond how they might impact individual stocks or portfolios. To this end, JP Morgan Asset Management identified five core themes in its 2020 Stewardship Report, i.e. those most likely to impact firms across sectors, such as human capital management.

Third, Wu has seen a marked rise in the range and depth of ESG themes raised by clients, and notes a particular spike in dialogue and queries about the firm’s views on executive compensation proposals during the current AGM season.

“Clients want much more interaction on these issues, asking how we assess some of these proposals; are they right and fair or overcompensating? How we demonstrate the way we think about engagement and voting has become more critical. Asset owners want to be able to collect that information and potentially report back to their board or constituents,” she says.

More change on the way

While there has been an urgency to Wu’s work over the past two-plus years, and an impatience for more decision-useful data, the marathon-runner is aware of the importance of pacing herself for the long haul, as well as preparing for new, perhaps steeper, challenges.

She is alert, for example, to the growing interest globally among clients in achieving impact beyond management and integration of ESG risks into the investment process. But she also sees a need for an ongoing evolution in the understanding of ESG risks, with those once seen as long-term soon beginning to loom larger and assuming more material importance.

“Some people want to make a clean cut between what is and is not financially material. Ultimately, I think a lot of those ESG issues will become financially material at some point. If you consistently treat people very poorly, it will have an impact on your bottom line at some point. That’s my view and I think clients are starting to shift toward that view too,” she says.

Implicit in this take is an appreciation of the continuing need for flexibility and expansion, not only in reporting and engagement frameworks, but in the funds and solutions made available by asset managers. Achieving impact often means looking beyond a reordering or one’s existing portfolio of listed securities, including to alternatives assets.

JP Morgan Asset Management boosted its claims to offer exposure to sustainable real assets when it announced this week the acquisition of Campbell Global, a forestry management and timberland investing firm, which has US5.3 billion in assets under management and manages 1.7 million acres globally.

Increasingly, says Wu, sustainable investing can imply a reassessment of strategic asset allocation.

“Clients want not necessarily to just avoid risks but to create positive impact by allocating capital to climate solutions, beyond just renewable energy to areas like agriculture, transportation, and nutrition. A lot of those technologies and solutions are in the private space. When we talk to clients about alternatives, as part of their overall allocation, there is a lot more focus on the sustainable opportunities.”

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