Thought Winter 2008

Focus on Socially Responsible Investing

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J.P. Morgan has been assisting clients with SRI/ESG monitoring for the past 10 years.

Socially responsible investing (SRI) seeks to combine financial returns and social good. In particular, government funds, endowments and foundations are under increasing pressure to adopt SRI strategies, and this has had the effect of pushing SRI into the mainstream. Many asset owners and investment managers have signed up to the United Nations Principles for Responsible Investment, which asks signatories to pursue a policy of active engagement with companies on environmental, social and governance (ESG) issues (http://www.unpri.org/principles/ ), but few have developed an effective approach to implementation. Many commentators argue against the moral subjectivity of ESG-particularly in pension funds, if certain restricted activities represent good financial returns-while others have debated the potential gains in performance and question whether they can make a significant impact on corporate behaviour.

At J.P. Morgan we have been assisting our clients with SRI/ESG monitoring for the past ten years. Traditionally, this was conducted by banning lists of companies by asset identifier, coding restrictions based on economic or industry sectors, or comparing portfolios to SRI/ ESG benchmarks and highlighting exceptions.

However we have now sourced additional data from Institutional Shareholders Services (ISS), part of the RiskMetrics Group, enabling us to provide enhanced screening methodologies that integrate both top-down research on a company specific basis as well as bottom-up research on an issue basis. The research process focuses on primary source documentation, including reviews of company filings, corporate websites, policy statements and/or corporate, social or environmental reports.

The integration of this data into our compliance reporting services allows clients to set parameters based on over 275 data elements which are then coded into the application by J.P. Morgan compliance reporting staff; an example is depicted in the screenshots below.

Thought Magazine

The report shows the restriction set to report any companies in the specified portfolio which are involved in the production of landmines; giving us the asset identifier, asset industry, company description, nominal market value and the percentage of the portfolio invested in each company. Each new compliance report generates an entry into the client's breach register; this functionality allows the user to manage the life cycle of the violation and add comments and updates which can all be saved within the application, and reviewed or reported on at a later date. In addition, all of the restrictions, reports and breach register fields are customisable for each fund, as part of our standard service.

We anticipate this enhancement will help our clients to identify companies with whom they should consider engaging with to discuss environmental, social or governance issues, as opposed to companies that they should automatically exclude from their portfolios.

This enhancement will help our clients to identify companies with whom they should consider engaging with to discuss environmental, social or governance issues.

SRL/ESG Criteria Categories Our additional new functionality is based on over 275 data elements enabling negative and positive screening of portfolios for SRI/ESG criteria categorized under:
Animal Welfare Adult Entertainment Alcohol Bioengineering/GMOs Contraceptives CountryTies: Burma Iran Libya Northern Ireland North Korea Sudan Syria Diversity	Environmental Performance Ethics/Security Faith-based values (e.g., Islamic & Catholic) Firearms Gambling Human Rights Labour Relations Nuclear Power Predatory Lending Stem Cell and Cloning Tobacco Weapons/Military

For more information, please visit our Website at www.jpmorgan.com/wss

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