Sustainable Investing: The momentum is building
With interest surging, two of our top specialists answer today's most pressing questions.
Sustainable Investing, including the use of environmental, social and governance (ESG) criteria, is surging in popularity. Ideas & Insights sat down with Lance Schiff, Portfolio Manager on the Specialized Strategies Team, and Aubre Clemens, Global Head of Sustainable Research, to dive into the converging global forces behind its rise, the performance question, and what’s ahead.
J.P. Morgan: Tell us about your role in Sustainable Investing at J.P. Morgan.
Lance Schiff: I’ve been at J.P. Morgan for 20+ years. In addition to being a Portfolio Manager on a multi-asset income investment (launched in 2010), I head up a Sustainable Equity as well as Fixed Income solution, which we introduced nearly two years ago. Thus, I am responsible for the allocation decisions across underlying fund investments that comprise those solutions. While the past 11 years have been devoted to portfolio management, previously I was an Asset Class Lead in Manager Due Diligence, and proudly identified the first environmental, social and governance (ESG) focused fund to our platform.
Aubre Clemens: I've been with the firm for 15 years. I’m responsible for going out to meet with different asset managers, to kick the tires and really assess exactly how they are considering ESG criteria in their investment process. I ask them to demonstrate how they’re incorporating ESG criteria. The manager should be able to articulate how ESG is actually driving decisions made. We want to ensure the strategies we work with consider ESG factors because they think it adds value—to reduce risk or provides an opportunity for long-term outperformance. It’s very important to make sure that we have the right managers doing this the right way.
J.P. Morgan: How does sustainable differ from “just investing”?
Schiff: It’s more holistic. You're complementing traditional approaches with ESG considerations—and doing so throughout whether it be how you evaluate the economy, market developments, portfolio construction or the actual investments. A sustainable lens is where the “puck is going” and favors a longer time horizon. It embraces weighing the risk/reward of short-term decisions, which at times are recklessly made without fully considering or caring about the lasting repercussions. I liken a sustainable philosophy to the view that healthy eating and consistent fitness will provide better results relative to a crash diet.
Clemens: Exactly. And though the sustainability metrics can be nonfinancial, they can be extremely important to a company’s long-term growth. From an “s” perspective, the social side, how you treat employees to ensure they are motivated in the workplace impacts a company’s culture and drives Innovation. For example?1 Being more aware of these issues gives you a better, fuller picture of a potential investment.
J.P. Morgan: Skeptics say investors have to sacrifice returns to invest sustainably. What’s your point of view?
Schiff: I think it provides a broader perspective, which should allow for better investment decisions and may enhance risk-adjusted returns. As an example, years back many emerging market investors made sizable investments in select energy companies, given the potential to access offshore oil. Fortunately, one of the fund managers I invested with had environmental concerns, but predominately avoided these stocks, given governance risks including accounting accuracy and bribery. So there is often a benefit with avoiding some of the biggest risks, at a company or an industry level. In terms of opportunities, Sustainable Investing may help identify companies associated with quality growth, higher profitability, a positive transition, as well as favorable regulatory and thematic tailwinds.
Clemens: If you look at ESG indices versus traditional stock indices from a global perspective (United States, International and Emerging Markets), you'll find that over time they tend to perform in line to slightly better based on risk-adjusted returns.
J.P. Morgan: Do you see any other drivers for growth in the future, aside from investor interest and new products?
Schiff: The interaction among many stakeholders is the driving force behind the tremendous momentum. Just to name a few, government policy and regulation and associated commitments, investor demand, the response from asset managers, how companies want to be perceived, and the evaluations from the likes of ESG rating companies.
A key emphasis is enhanced and more standardized disclosures—“if you can’t measure it, you can’t improve it.” For example, we increasingly see executive compensation being tied to ESG initiatives. Shareholders want to see more, which we observed recently when a seemingly insignificant shareholder surprisingly got seats on the board of a major oil company, hoping to force climate change action. Even central banks are looking to incorporate environmental risks to their economic outlook.
The momentum is undeniable.
Clemens: I agree. There is the strong investor demand. There’s also been significant growth in new products and solutions. Five years back, there were about 200 sustainable strategies globally.2 Today, there are more than 1,000.
Another key driver will continue to be the consumer. If you’re buying clothes, you’re probably more aware of the materials used, how it was made and where, and if there’s a way to recycle it. Companies are having to adjust their business models. If you take a look at some of the big integrated oil companies, a lot more R&D spend is being made to become more energy-efficient. Changing demographics, policy and regulations, innovation and social factors are changing people’s consumer preferences, and companies that want to remain competitive in 10 years have to change.
J.P. Morgan: What’s your advice for someone starting out in Sustainable Investing?
Clemens: I recommend taking a step back to understand what sustainable investing means to you. What are you looking to accomplish? Do you want to avoid certain exposures, to invest in themes aligned with your views, or in strategies that actively consider ESG into the investment process?
And it doesn't have to be all or nothing. Some people dip their toes in, with maybe only a U.S. equity allocation. Others want more fully built-out allocations across all asset classes.
J.P. Morgan: What are you most excited about it in Sustainable Investing, and do you have any predictions for the future of sustainable?
Clemens: I'm excited to see how it continues to grow and gain more traction within portfolios. A lot of really interesting themes right now are starting to gain a lot of traction—circular economy, clean energy, diversity and inclusion. I think these will be areas of focus for our clients in the future, not only because they are sustainable, but because they're offering you differentiated earnings growth versus other parts of their portfolios.
Schiff: The renewable powered train has left the green-certified station, so to speak—clients will inevitably have ESG investments, whether they realize it or not. Take investments in corporate bonds and how the composition of index funds were altered amidst COVID-19 as credit rating agency downgrades reflected cash flow concerns stemming from social considerations such as health and safety across employees, customers and supply chains. However, a broader adoption of ESG inputs will continue to raise the bar, and there will be varying degrees, which means we will need to continue to evolve in order to continue to identify and deliver the compelling and convincing offerings.
At J.P. Morgan, we believe in the power of Sustainable Investing to drive both long-term growth and positive impact. No matter your situation, investment experience or interests, we’re here to help and answer your questions on Sustainable Investing. Talk to your J.P. Morgan team to learn more about Sustainable Investing and how it may help you achieve your long-term goals.