Thursday, 10 May 2018 17:00

JPMorgan endorses ‘sustainable’ investing as a way to outperform the market

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The idea of centering one’s investments around moral considerations has been gaining steam in the U.S., with such strategies attracting new attention and inflows, and it is starting to receive some high-profile endorsements from some of Wall Street’s biggest names.

JPMorgan Chase & Co. JPM, +0.78%[1]  is the latest financial institution to advocate for so-called “sustainable” investing, writing that it was mature enough to be considered a viable strategy on returns grounds, as opposed to a niche option for investors who want to put their money in places that don’t violate their personal beliefs.

“We find that ESG investment no longer requires foregoing returns as companies that are socially responsible are likely to lead in overall management capabilities,” JP Morgan wrote. ESG refers to environmental, social, and corporate governance, or the three primary screens that are used in evaluating securities on sustainable metrics.

“ESG investing is now moving into the mainstream and gravitating from negative screening of sinful industries to more quantitative, data-driven and index approaches as the availability and quality of ESG metrics and reporting have increased,” the investment bank wrote. Socially responsible investing “recognizes the fiduciary role for companies and issuers to act in the best long-term interests of beneficiaries.”

Whereas “moral investing” used to simply omit stocks that went against some personal beliefs—for example, they wouldn’t hold alcohol or tobacco companies, a trend that continues today with BlackRock BLK, +1.20%[2]  introducing funds that don’t hold firearm-related stocks—improved data has allowed for more nuanced portfolio construction, tilting away from companies that pollute or don’t treat their employees well, for example. Morningstar recently introduced its “portfolio carbon risk score,” which evaluates companies on both their carbon footprint and “how vulnerable a company is to the transition away from a fossil-fuel-based economy to a lower-carbon economy.”

Socially responsible investing has been a growing theme on Wall Street, and there is increasingly robust data indicating that ESG screens can lead to better returns by avoiding companies that could prove vulnerable to scandals or environmental issues. According to Morningstar[3], two-thirds of sustainable stock funds available in the U.S. finished in the top half of their respective categories in the market’s recent pullback. Few sustainable funds underperformed the S&P 500 SPX, +0.93%[4]  over that period.

“While sustainable funds pursue a range of investment strategies, a common element among them is that the consideration of ESG factors leads to a preference for companies that manage material environmental and social issues effectively...

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