Two-thirds of the questions relate to comprehensive factors related to environmental and social factors and governance, while the remaining one-third relate to broader issues related to economic sustainability.
"I think it is important to broaden the definition of (sustainability). Environmental and social factors and governance must be at the core, but we also have to think about the sustainability of the business model," Beck said, referring to the example of Chinese solar panel manufacturers that have stopped or seen their stock prices collapse due to Fraud, or the inability to meet the cost of capital in a sector that has witnessed a significant collapse in pricing power.
She added, "The company can fulfill all the fields in the categories of environmental and social factors and governance and remain non-sustainable," adding that there is no company that passed the 98 points test without raising a vow here and there, and some of them raised up to 40 points.
Based on this analysis, JPMorgan Asset Management found that the top five emerging market shares that it covers, based on its sustainability rating, outperformed the Morgan Stanley Composite Index for emerging markets by 5.6 percentage points annually between February 2013 and December 2019.
On a large scale, this "alpha" or surplus is heading lower for subsequent five-level levels, with the performance of the five lowest "sustainable" companies being the worst, with the exception of a group of companies that are not covered by "JP Morgan Asset Management", which it says are usually in “Relatively volatile heavy industries” such as shipbuilding, or were state-owned companies of “very low quality”.
Beck said that the alpha rate does not start at zero, as expected, because "JP Morgan" covers "a lot" of companies that fall outside the Morgan Stanley Composite Index for emerging markets, such as those in the frontier markets, such as the Nigerian market, and some land shares. The main Chinese class A that has not yet been added to the index.
The volatility data largely show the reverse pattern, as volatility decreases for most "sustainable" companies and is highest for companies that score poorly in the analysis, although the disclosed stocks are relatively well-performing.
Against this backdrop of success in the testing environment, JPMorgan has now launched a fund called "Sustainable Equities for Emerging Markets", using the aforementioned methodology. It excludes the fifth quintile of companies, in addition to operating a comprehensive ban on stocks in sectors such as fossil fuels, weapons, tobacco, and gambling.
The assets raised by the fund will add to the more than $ 2 billion previously managed by JP Morgan in "sustainable" funds, which are part of a broad industry trend. By the end of this year, $ 40 billion, half of all investment industry assets, will be put into operation, under principles governed by environmental, social and governance factors, according to Deutsche Bank forecasts.
"This focus on the environment and society, especially governance, is very important in emerging markets," Beck said. "Companies that do a certain thing well do a lot of things well in emerging markets. Usually, in these markets, the risks do not follow mistakes, but rather the issue of the company will be there in two years. "
But the analysis certainly raises a number of questions. A clear question is the amount of superior performance observed by environmental and social factors and governance measures, or sustainability measures such as “JP Morgan” measures that are driven by sector dynamics.
More than 70 percent of the energy companies in the MSCI Emerging Markets Index are either exposed or in the last five according to the JPMorgan scale, for example. With oil trading above $ 115 a barrel in February 2013, the start of the time series, which would have only ended in 2019 below $ 67, energy stocks were surprisingly less than expected, dropping 12.8 percent in terms of price.
On the other hand, the shares of information technology in emerging markets, which are performing better under the "JP Morgan" method, jumped 122% during the same period. Optional consumer companies - the least likely to be disclosed or denied to the fifth five, with less than 10 percent involved in this bad fate - yielded 10.8 percent returns, which is a modest but still better than 5 percent of the MSCI The compound for emerging markets is the same.
This balance in the sector must have influenced the results of the JP Morgan analysis. Some may argue that this is a good thing, for example, as energy stocks are expected to continue to perform poorly in the coming years amid a backlash against investment in fossil fuel companies, but this is far from guaranteed.
The bilateral divide between energy companies shares on the one hand and information technology on the other shows another contrast in almost all methodologies of environmental and social factors and governance.
JP Morgan said its sustainable equity fund for emerging markets had annual carbon dioxide emissions of only 16 tons per million dollars in market capitalization, compared to 300 tons per million dollars for the MSCI Index.
But these measures depend on the methodology used to calculate it, not only in the case of JP Morgan but every asset management firm.
The environmental impact of fossil fuel companies is largely driven by greenhouse gas emissions that arise when their customers burn fuel, and where companies' emissions themselves from oil, gas or coal are usually a small part of this.
But when it comes to other sectors, such as information technology, companies are usually measured only on the basis of emissions from their own activities, while ignoring the environmental impact of the end-use of their products.
But this last aspect has a significant impact. Sending 20 emails a day for a year releases the same emissions from a car traveling for a distance of 1,000 kilometers, according to EnerGuide, a site run by Sebelja, a Belgian energy distribution company. Capturing and storing millennials with countless quantities of selfies will also have a greater carbon footprint, yet the effect of this end-use is not shown in the categories of environmental, social, and governance factors (the majority of CO2 emissions are generated by end-user devices, rather than centers or networks Technology Companies Data).
Beck said, "JP Morgan" looks at each company regarding the companies in its subsidiary industry and holds five thousand direct meetings with companies annually, but accepted that "our dialogue on how to measure these things is still evolving." "We are intensifying our engagement with companies on climate change," she added.
Separately, some of the superior performance identified by environmental and social factors and governance models, such as the JPMorgan models, may stem from the relative underweight in their models of state-owned companies, which are often punished due to weak corporate governance.
"Country ownership generally means, by definition, that there is less focus on minority shareholders and more on government goals," Beck said, although exceptions may be made
Back to the stock market, there is an issue what would happen if more investors adopt strategies such as environmental and social factors and governance?
Initially, it is assumed that this will provide a very strong impetus to investments related to environmental and social factors and governance (to the extent that the models of different asset managers overlap), which leads to raising the share prices of environmental and social factors companies and “good” governance and putting pressure on the shares of “bad” companies.
But at some point, it makes sense to believe that there could be a bubble in the first category and a value that would fascinate the valuation of the latter, assuming that “bad” companies are positive cash flows and did not need to raise capital, that could eventually end up It is traded until trading on a very attractive dividend yield.
Beck accepted that such a valuation gap could emerge if sustainable investment really started to take off, although she did not think we had reached this stage yet.
"It is normal for me to pay a higher multiplier value for a company with a higher value, so I expect to see a sustainable equity fund on a higher multiplier than a primary fund, but I don't think this necessarily means a bubble," she said.
Moreover, she said, more sustainable companies should achieve stronger earnings growth than less sustainable companies, justifying higher share prices.
“Emerging market stocks achieved negative growth of 8 percent in profits last year, but the best companies (i.e. the most sustainable) continued to achieve profit growth.” This means that while price-to-earnings ratios have risen in most emerging market shares Last year (with the index up), some of the more sustainable companies avoided a higher price-earnings ratio by raising "profits" as much as "price".
There is still another concern is worrying. Much of the recent interest in sustainable investment has been driven by warnings of an environmental catastrophe being spoken by people like Greta Thunberg.
If these warnings are accurate and we have truly entered a world of increasingly common, and increasingly severe natural disasters - from droughts and floods to intense summer temperatures and endless forest fires - does it really make sense to bet on risky assets, such as stocks In general, emerging markets in particular?