Asia Pacific Equity Research
17 January 2023

ESG First Principles
Global and Asia Insight: A comprehensive guide to
ESG strategies, regulations and data
Asia to see further growth in ESG investing supported by secular trends
and a regulatory push. Global ESG AUM reached $2.9tn as of the end of
2021. APAC ESG AUM grew more than 5x between 2016 and 2021 to $121bn,
the fastest growing region in the world. ESG funds currently have a 2% market
share in APAC. Asset devaluation has driven a 24% drop in global ESG AUM
in 2022, yet inflows remained positive. Climate remains the ESG theme
attracting the most investment.
 One acronym, many applications: ESG as a megatrend, alpha driver, andrisk framework. ESG is a framework to (i) capture factors that are not always
directly included in traditional financial accounting but can still affect aninvestment’s value, and/or (ii) align investments with sustainability or ethicalpreferences. The “mainstreaming” of the market drives more focus on the first
purpose, while many still more intuitively associate “ESG investing” with thesecond, prompting debate about what should qualify as a “true” ESG
investment philosophy. In Asia, thematic ESG funds represent the lion’s shareof the market, but penetration of ESG integration and transparency is
increasing, aligning the region more closely with global ESG investing
philosophies.
 “Pro”/ “Anti” ESG is not a clean break: In this note we also explore theseveral areas of overlap in the Venn diagram of “ESG” and “non-ESG”
mandates; many “ESG” considerations (e.g. Governance) are by no means
exclusive to ESG mandates, and many investors may choose to invest in an“ESG theme” (e.g. Energy transition) given its specific growth profile, rather
than its ESG credentials per se. While return remains top priority for investors
in Asia, we expect ESG factors to become more financially material forcompanies and sustainability credentials could eventually be reflected infinancial performance.
 Alphabet soup: the data and ratings challenge, and a path to convergence.
Lack of high-quality and comparable ESG data remains a challenge to enablewidespread adoption of ESG investing and respond to increasingly complex
ESG regulations. Sustainability reporting standards by the IFRS foundation
could pave the way towards global standardization, while Japan will become thefirst country to introduce regulations targeted at ESG data providers. We alsodetail the methodologies of the larger ratings providers in this note.
 The “ESG Bubble” debate highlights the scope for ESG investing to evolve
further, in our view. By definition, ESG frameworks that limit their scope tofactors that are currently financially material will miss those that are soon going
to become financially material and may have a smaller investable universe of“good” ESG candidates. The reliance on backward-looking disclosures andratings can be particularly limiting at a time when many companies areinvesting and adapting at speed to become improved versions of themselves,
and/or increase their exposure to high-growth areas linked to sustainability. In
Asia, “double materiality” remains a nuanced methodology due to a lack ofdisclosure, but a more forward-looking approach in our view could largely
improve diversification and reduce ESG investment concentration in certain
environmental-friendly industries.


The full list of authors and contributors is available at the end of this report.

Asia Pacific ESG Research
Hannah L Lee AC(852) 2800-8886
hannah.l.lee@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited/
J.P. Morgan Broking (Hong Kong) Limited

Paul Xu, CFA, CPA AC(86-21) 6106 6152
paul.xu@jpmorgan.com
SAC Registration Number: S1730522080001
J.P. Morgan Securities (China) Company
LimitedCo Head of Global ESG Reserach& Global Head of Index Research
Gloria Kim(1-212) 834-4153
gloria.m.kim@jpmorgan.com
J.P. Morgan Securities LLC

Co Head of Global ESG Research& Head of EMEA Equity Research
Sophie L Warrick(44-20) 7134-1423
sophie.l.warrick@jpmorgan.com
J.P. Morgan Securities plc

Head of ESG Research
Methodology & Integration
Virginia Martin Heriz(44-20) 7134-5197
virginia.martinheriz@jpmorgan.com
J.P. Morgan Securities plc

ESG & Sustainability ResearchJean-Xavier Hecker(33-1) 4015 4472
jean-xavier.hecker@jpmorgan.com
J.P. Morgan Securities plc

Noemie de la Gorce, CFA(44 20) 7134-4229
noemie.delagorce@jpmorgan.com
J.P. Morgan Securities plc

Lydia Harvey(44-20) 3493-1626
lydia.harvey@jpmorgan.com
J.P. Morgan Securities plc

Khuram Chaudhry(44-20) 7134-6297
khuram.chaudhry@jpmorgan.com
J.P. Morgan Securities plc

See page 106 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that thefirm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Table of Contents
Introduction ..............................................................................3
What is ESG? The “Value vs. Values” Debate .......................4
Why Do Investors Care? ..........................................................8
ESG to Align Investments With Values ...................................................................8
ESG to Generate Alpha .........................................................................................10
Value Meets Values: ESG to Manage Risks...........................................................18
Implications for the Materiality Debate..................................................................21

The Growth of ESG – Flows & AUM Trends .........................26
Tracking Flows: Deciphering “ESG AUM” ...........................................................26
Overview of Global ESG Flows ............................................................................28
Focus on the Sustainable Debt Market ...................................................................33
Where Next? .........................................................................................................34

From Integration to Impact: Shades of ESG Investing........36
Overview ..............................................................................................................36
Integration ............................................................................................................37
Screening..............................................................................................................38
Thematic and Impact Investing..............................................................................42
Investment Stewardship.........................................................................................44
Portfolio Tilting ....................................................................................................47
Case Study: “Managed Phaseout” In Highly Exposed Sectors ................................47

Alphabet Soup: Data, Ratings & Indices ..............................51
Corporate Reporting..............................................................................................51
Third-Party Vendors..............................................................................................55
Ratings..................................................................................................................57
Indices ..................................................................................................................64
J.P. Morgan ESG Index Suite ................................................................................66

ESG in Sovereign Debt: Challenges and Opportunities .....71
Policy and Regulation: Navigating the “ESG Mania” ..........74
Global Overview...................................................................................................74
EU: Attempting to Pioneer in Unchartered Territories............................................79
US: New Regulatory Attempts but Adoption Remains Uncertain ...........................85
UK, Australia, and Canada ....................................................................................87
Asia: The Disclosure Push.....................................................................................87
Perspectives from Emerging Markets (ex. ASIA)...................................................91
Conclusion: Will There Ever Be Convergence of ESG Regulations? ......................92

Glossary ..................................................................................93
J.P. Morgan Global ESG Research .......................................99
Meet our Teams ....................................................................................................99
Our Content ........................................................................................................ 101

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Hannah L Lee(852) 2800-8886
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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Introduction
ESG investing has gained fairly continuous momentum since the rise in the
global sustainability movement in the 1970s, but particularly since 2018, withmarket growth peaking to 40% y/y in 2021. According to Morningstar, sustainable
investing (on their definition of Sustainable Funds) reached US$2.9tn at the end of2021, while the far broader universe of funds that consider ESG in their investment
process could be closer to US$35tn, according to the Global Sustainable Investment
Alliance. As companies have come under regulatory or reputational scrutiny for theirenvironmental, social and governance practices, investors have increasingly
incorporated those considerations into their financial analysis and investment
strategies. The Global Financial Crisis in 2008, Paris Agreement in 2015 and
COVID-19 pandemic further accelerated this trend.
Europe continues to play a leading role in the rise of ESG investing. A unique
combination of regulations and rising demand from asset owners have prompted anincrease in asset managers to launch “ESG funds” in the region over the past decade.
While the true extent of adoption is a matter of intense debate, our view is that the
ESG market is likely to continue expanding globally in the medium term, given boththe proliferation of ESG regulations outside Europe and the growing portion of asset
managers with a global ESG mandate, in addition to the likely growth opportunities
from existing or new companies geared to key multi-year ESG themes such as
Energy Transition or a more Conscious Consumer, which depending on valuation
may appeal irrespective of an investor’s ESG mandate.
The ESG market has experienced rapid growth and profound changes over the
past decade. “ESG mainstreaming” has been one of the most striking trends, leadinga growing number of investors to integrate ESG more explicitly within their financial
analysis (accelerated indeed by certain ESG considerations also becoming morefinancially material, e.g. supply chain traceability). As the market attracted newinvestors, it further diversified in terms of investment strategies, data needs andregulations. While this has spurred unparalleled levels of innovation, it has also
increased the complexity of the ESG market for clients.
ESG investing has more recently faced unprecedented levels of criticism,
including calls for greater transparency from companies, investors and data vendors.
The debate on the merits of ESG itself has also intensified. It is notable that many
visualize the two sides of this debate as simply “Cost of Living vs Action on Climate
Change”, despite ESG encompassing a far broader set of considerations, many ofwhich have been a core part of “non-ESG” investment frameworks for some time(e.g. Governance), and sustainable development striving to deliver on both sides (e.g.
through a “Fair Transition” framework). Ultimately, most such debates stem fromvarying interpretations and a lack of clarity on the purpose of ESG within an
investment mandate, in our view. While we expect that various ESG investment
philosophies will continue to co-exist, clear disclosures from fund managers on therole of ESG in their investment process will be key to ensure trust in the market.
J.P. Morgan’s ESG Primer provides balanced expert insights on the ESG
market, outlining the fundamental drivers behind ESG investing, key investment
objectives and strategies, as well as the current data and regulatory landscapes, andhow to consider what may come next. We plan to update this publication periodicallyto reflect future developments in a fast-evolving market.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

What is ESG? The “Value vs. Values”
DebateWhat is ESG and what purpose should it serve? This first chapter attempts to address
those two questions, highlighting the complexity of ESG that explains most of thechallenges (and criticisms) faced by the industry today. We conclude that there are
varying interpretations on the purpose of ESG, resulting in investors responding
differently to the “value vs values” debate depending on their investment objectives,time horizon, ethical or sustainability preferences, and exposure to systemic risks,
among others.
ESG emerged partly as a response to the limitations of traditional financial
analysis but the picture has since evolved
The term ESG was created to capture a spectrum of factors that, while notnecessarily currently directly impactful for financial accounting and thus not
captured in traditional financial analysis, could still affect an entity’s value over ashort or long-term period. As a result, ESG factors are commonly referred to as “nonfinancial” or “extrafinancial” factors, despite an increasing number of examples of“ESG” factors having a financial impact (higher wage costs or employee benefits,
fines or taxation, or indeed positive top line impact from sustainability-linked
product/solution demand). Because its primary purpose is to address the limitationsof traditional financial analysis and accounting, ESG has been – and will likely
remain - a broad concept, which will continue to evolve as new limitations emerge.
A unique term aimed to capture multiple facets of an entity
Environmental, social and governance factors form the cornerstone of ESG analysis
as we know it today. As discussed above, their common denominator is that they are
difficult to analyze using traditional financial analysis. However, they capture
different (and sometimes contradictory) facets of an entity: environmental factors
stem from a firm’s impacts and dependencies on natural capital, while social factors
capture its impacts and dependencies on human capital.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Figure 1: Examples of impacts on natural capital

Source: Natural Capital Protocol (link).

Source: Natural Capital Protocol (link).

Figure 3: Examples of impacts on human capital

Source: Social & Human Capital Protocol (link).

Figure 2: Examples of dependencies on natural capital

Figure 4: Examples of dependencies on human capital

Source: Social & Human Capital Protocol (link).

Not all environmental and social factors are equally material to all entities (see thesection on Materiality here), whereas governance factors are relevant acrossindustries and regions. Governance factors refer to people, policies and processes
that direct and control the company (link), which are partly defined by the firm’s
own practices, and by local regulation and business environment.
Figure 5: Typical governance factors

Source: J.P. Morgan, based on ISS (link) and the 2018 UK Corporate Code of Governance (link).

5

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

This aggregation of very different aspects of an entity explains many of thechallenges faced by ESG analysis today: a singular ESG rating in absence of context
and further analysis can be a blunt instrument, being an average of three different,
partly unrelated, and sometimes conflicting analyses, which themselves havemultiple verticals. The complexity of ESG analysis also stems from considering both
non-financial and financial characteristics of investees, which may imply uniquetrade-offs and co-benefits.
ESG has also been used as a framework to align investments with ethical orsustainability preferences.
Environmental, social and governance themes form the basis of sustainability
analysis, which aims to assess a company’s sustainability credentials. As a result,some investors have also considered ESG as a framework to select entities that are inline with their clients’ or own sustainability or ethical preferences, inspired partly by
the values-based investing movement (described in more detail here). This evolution
is particularly visible in the expansion of governance analysis, which increasingly
capture companies’ ability to create value for all stakeholders, as opposed tomaximizing shareholder value alone (so-called “stakeholder theories”). This trend
has also prompted a rebranding of ESG factors to “sustainable” factors.
Figure 6: 2019, a turning year for stakeholder theories

Source: J.P. Morgan.

More broadly, ESG has emerged as a transformative framework for the financial
sector to contribute to sustainable development, which is defined as “a developmentthat meets the needs of the present generation without compromising the ability of
future generation to meet their own needs” (Brundtland Report, 1987). In our view,alignment with sustainable development is relatively easier to quantify whenanchored in natural sciences (most of the “E” and some of the “S” factors such as
those related to health and nutrition).
Overcoming the “value vs values” debate
In the next chapter, we discuss the varying interpretations on the purpose of ESG.
ESG investors have historically used (or been perceived to use) ESG both as a tool tocomplement financial analysis and as a framework to align their investments withspecific sustainability or ethical preferences. However, the “mainstreaming” of themarket (as well as many ESG considerations driving financial impact) has led anincreasing number of investors to focus on the first purpose, while the second issometimes perceived as posing potential conflicts with their core fiduciary duty insome jurisdictions (see here). Many however, still intuitively associate “ESG
investing” with the second, prompting debate about what should qualify as a “true”
ESG investment philosophy for asset owners.
In our view, this “value vs. values” debate explains many of the recurring questions
faced by the ESG industry, including whether “Integration” strategies can beconsidered as ESG investing, whether ESG should be renamed “sustainability”, andwhether “double materiality” should become the norm in ESG reporting. In this6This document is being provided for the exclusive use of LEE BINGLE at JPMorgan Chase & Co. and clients of J.P. Morgan.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

context, we view positively the growing emergence of system investing, whichattempts to overcome this debate by recognizing that incorporating values in today’s
investment decisions can contribute to preserve the value of investments over thelong term (see here). Regardless of the investor’s motivation for considering ESG,
and the extent to which they do so, we consider that clear disclosures from fundmanagers on the role of ESG in their investment process will be key to ensure trust in
the market.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Why Do Investors Care?
The rise in ESG investing results from a combination of push and pull factors,
primarily rising demand from asset owners and regulation (covered in a separate
chapter here). In this chapter, we outline the three main motivations for investors toconsider ESG investing in no particular order: (i) aligning with sustainability andethical preferences, (ii) enhancing risk-adjusted returns, and (iii) preserving longterm returns by managing ESG risks and regulations. Identifying clients’ motivations
has implications on the type of investment objectives and processes, which we
discuss in more detail in the fourth chapter.

ESG to Align Investments With Values
ESG investing has its origins in ethics
While ESG is a relatively recent phenomenon, values-based investing is not a newinvestment philosophy. Religious groups already selected investments that werealigned with their own ethical values as early as the 19th century. The rise in sociopolitical movements in the second half of the nineteenth century resulted in the
launch of the Pax Fund in 1971 (the first publicly available mutual fund excluding
investments involved in the Vietnam War), and the first widespread divestment
campaign against the Apartheid regime in South Africa in the 1980s. While scattered,those movements used investments to express specific ethical values, avoid
contributing to negative impacts, and help fostering positive impact.
Figure 7: Ethical values, including responsibility toward society and the environment, have historically fueled sustainable investing

Source: J.P. Morgan.

“Responsible businessconduct sets out an
expectation that all businesses(…) avoid and address
negative impacts of theiroperations, while contributing
to sustainable development in
the countries where they
operate.”ESG investing was fueled by a growing focus on responsible business conduct
The rise in the global sustainability movement, combined with a series of highprofile events from the Exxon Valdez oil spill in 1989 to the Enron scandal in 2001,
heightened scrutiny on companies’ environmental, social and governance practices.
This resulted in the development of international norms, which define a set ofcommon principles that should be followed by companies globally. This in turnprompted the emergence of “corporate social responsibility” policies (later rebranded“sustainability” policies) and the creation in 2006 of the largest global coalition of
ESG investors, the Principles for Responsible Investment (PRI).
Figure 8: The emergence of international norms has accelerated the development of“responsibility” policy from corporates and investors

OECD

Source: J.P. Morgan. UN: United Nations; OECD: Organization for Economic Co-operation and Development; ISO: International
Organization for Standardization; ILO: International Labor Organization.

8

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Figure 9: Founded in 2006, the PRI is now the largest coalition of
ESG investors globally
140

5000
4000

100
80

3000

60

2000

40

Nbr.

$US tn.

120

1000

20

0

1

2

3

We will incorporate ESG
issues into investment
analysis and decisionmaking processes.

We will be active owners
and incorporate ESG
issues into our ownershippolicies and practices.

We will seek appropriate
disclosure on ESG issues
by the entities in which weinvest.

4

5

6

We will promote acceptanceand implementation of the
Principles within theinvestment industry.

We will work together toenhance our effectivenessin implementing thePrinciples

We will each report on our
activities and progress
towards implementing thePrinciples.

2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

0

Table 1: ESG PRI’s members must follow six core principles

Signatories

Asset Owners AUM

Source: J.P. Morgan based on the PRI (link).

Asset Managers AUM
Source: J.P. Morgan based on the PRI (link).

The legacies of values-based investing to ESG - Part One: International norms
For many investors, compliance with international guidelines on responsible businessconduct has become a pre-requisite for including companies in ESG funds: Based on
Morningstar data, 54% of sustainable global funds representing 64% of sustainableglobal AUM included such norms-based screening into their investment process (asof Sept. 2022). This screening typically relies on the assessment of companies’
involvement in “controversies”, which are breaches of the principles and behaviors
established by international norms. As we discuss later, this has notably resulted in
the inclusion of controversy analysis in most ESG ratings (see here).

“The financing of SDGs isestimated to $2.5 trillion peryear by 2030.”
United Nations

The legacies of values-based investing to ESG - Part Two: The Sustainable
Development Goals
Values-based investing also introduced the idea that investments can be selected tocontribute positively to sustainable development, which is “development that meetsthe needs of the present without compromising the ability of future generations tomeet their own needs” (link). In 2015, the United Nations defined 17 Sustainable
Development Goals (SDGs) (link). Today, the SDGs is one of the main frameworks
used by ESG investors to report on the impact of their investments, as shown by theincreasing number of PRI signatories incorporating SDGs in their investment
policies. We expect this trend to continue given the potential financial opportunity
for investors, with the UN estimating the financing gap to achieve the SDGs to beabout US$2.5tn per year by 2030.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Figure 10: A growing percentage of signatories mention SDGs in reporting to the PRI, 2016-2020

Source: J.P. Morgan based on the PRI (link).

Values and impact remain major drivers of ESG investing
Aligning with values and positive impact remain the dominant drivers of ESG
investing, according to Schroder’s annual survey of 770 global institutional
investors, which we consider as one of the most comprehensive ESG surveys
available. Those results seem to confirm the influence of values-based investing on
current ESG practices and the persistence of impact as the ultimate objective,
although risk management and regulatory/industry pressure have also gained
prominence.
Figure 11: Alignment to corporate/internal values and positive impact remain the dominant
drivers of sustainable investment
What is driving your sustainability investment focus?

Aligning to corporate/internal values
Positively impact people and planet through…
Regulatory and industry pressure
Risk management
Potential for higher returns
Emphasis on the energy transition movement
Member pressure
Education and awareness from asset managers
None of the above
0%
2022

10%

20%

30%

40%

50%

60%

2021

Source: J.P. Morgan based on Schroders (link). % Multiple answers allowed. The option “Emphasis on the energy transition
movement” was not included in previous years.

ESG to Generate Alpha
Mainstreaming sustainability by looking for ESG Alpha
While ESG investing started as a value structure, its unprecedented growth since2016 has also been partly driven by investors considering ESG as a tool to generatealpha. The link between ESG and financial performance has been the subject ofmultiple studies (although this exercise remains inherently difficult because the10This document is being provided for the exclusive use of LEE BINGLE at JPMorgan Chase & Co. and clients of J.P. Morgan.

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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

materiality of ESG factors can be hard to quantify, and the definitions of ESG vary
between investors), most pointing to a positive to neutral correlation. J.P. Morgan
Quantitative Analysts conducted similar Research, concluding that stable ESG scores
combined with momentum and fast-moving data could generate “ESG Alpha” (seehere). Beyond alpha, the success of ESG funds has also come from strong clientdemand, which is evidenced by their higher net flows and stronger organic growthsince 2016 compared to their non-ESG counterparts. This trend also prompted fears
of an “ESG bubble”, which we discuss in more detail here.
ESG factors can be financially meaningful and even dominant in the investment
case
There have been numerous instances where ESG factors significantly weigh on thefinancial performance of financial instruments. Environmental factors (in particularclimate change) have been increasingly material, with tangible examples of“transition” costs and opportunities materializing across high-impact sectors: in the
cement industry, J.P. Morgan Analysts have estimated to several billions the cost ofcarbon price in Europe (link), while in the Steel sector analysts expect early
decarbonization movers to win market share in niche end-markets through a
combination of positive mix effect, high barriers to entry and accrued “green premia”(link). More disruptions are also expected from physical climate risks, as highlighted
last summer in our cross-sector risk assessment of low river Rhine water levels(link).
While climate risks have been under particular scrutiny, governance has long been
considered as a material source of idiosyncratic risks and opportunities. For example,
the financial sector has faced several high-profile governance controversies overrecent years, due to weaknesses in internal control and incentive structure among
others (E.g. the mis-selling of Payment Protection Insurance by UK banks, resulting
in a cumulated ~£40bn redress since 2011). Conversely, improvements ingovernance can also result in improved profitability and investment sentiment: For
example, the decision by Axis Bank’s CEO Amitabh Chaudhry to disaggregate thecredit risk function into a separate reporting line straight into the CEO to avoid undue
influences by businesses (among others) directly resulted in lower loan losses and
ROE improvement, which in turn contributed to a rerating in the multiples, reflecting
not just the higher profitability but also improved investor sentiment (link).
Social factors can be equally material: Companies excelling in human capitalmanagement are likely to experience lower turnover, which can in turn translate into
lower frictional costs due to retraining, and improved productivity due to better
employee morale, with a positive impact on the bottom line and, ultimately, on acompany’s share price. According to Glassdoor, an equally weighted portfolio withthe winners of each year’s “Best Places to Work” award among large US corporates
would have outperformed the S&P 500 nine years out of eleven between 2009 and2019 (link). Financial inclusion is another area where an ESG driver can have atangible positive effect on the bottom line; commercial microfinance can be highly
profitable while helping underserved communities to access loans, build a credit
track-record and avoid “loan sharks” whose rates can be several times higher.
The financial importance of ESG drivers is not restricted to the corporate sphere,with several examples of ESG factors driving the performance in Sovereign debt andeven currencies. In October 2019, widespread frustration at social inequalities inChile triggered nationwide street protests and riots that culminated in a process ofconstitutional reform. Between October 18th, when the protests escalated, and11This document is being provided for the exclusive use of LEE BINGLE at JPMorgan Chase & Co. and clients of J.P. Morgan.

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Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

November 30th, the Chilean peso underperformed Emerging Market currencies byroughly 10%, as investors grew nervous about the scale of the damages toinfrastructure and their impact on the county’s growth. Indeed, by December 2019,“the social and political crisis had already proved more onerous than the 2010 natural
disaster” (link).
Academic research suggests a positive link between ESG and financial
performance
Assessing the link between ESG and financial performance is inherently difficult
because the materiality of ESG factors is often hard to quantify. It also varies basedon the universe of ESG funds considered. A recent meta-analysis from the NYU
Stern Center for Sustainable Business and Rockefeller Asset Management found apositive and/or neutral correlation between ESG and financial performance of bothcompanies and investors in most of the 1,000 research papers published between
2015 and 2020 (link). Interestingly, positive financial performance was more marked
over a longer time horizon and during economic downturns.
Figure 12: Most studies found a positive or neutral correlation
between the ESG and financial performance of corporates…

Figure 13: … and investors’ portfolios, more pronounced for thoseadopting a low-carbon strategy

Breakdown of studies by conclusion (positive, mixed, neutral or negative
correlation between ESG and financial performance), in %Breakdown of studies by conclusion (positive, mixed, neutral or negative
correlation between ESG and financial performance), in %

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%
0%

0%
Positive

Mixed
All ESG Themes

Neutral

Negative

Climate Change

Source: J.P. Morgan, based on NYU (link). Mixed means that the same study found a positive,
neutral or negative results.

Positive

Mixed
All ESG Themes

Neutral

Negative

Climate Change

Source: J.P. Morgan, based on NYU (link).

This finding is consistent with one of the most quoted meta-analysis conducted over
2,000+ empirical studies in 2015, which showed a negative correlation between ESG
and financial performance in 10% of cases only (link). This study also found thatgovernance-related aspects had the highest proportion of both positive and negative
correlations, with the environmental pillar offering the most favorable relation
overall (measured by the share of positive findings minus the share of negative ones).
In our view, these results may partly reflect (i) the difficulty of isolating the effect ofgovernance factors, as a company’s environmental and social credentials may bepartly linked to elements of its governance such as risk management, incentives
structure, and innovation strategy (link), and (ii) the stronger disagreement on theassessment of companies’ governance and social performance (discussed in detail inthe section on ESG Ratings here). There is also substantial academic researchhighlighting linkages between good performance along the governance and social
pillars and lower cost of Sovereign debt (here and here).

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Figure 14: Study found a higher proportion of studies evidencing a favorable relation between
environmental and financial performance
Breakdown of studies between positive, neutral and negative findings

G

E

S
0%

10%

20%

30%

40%
Positive

50%

60%

Negative

Neutral

70%

80%

90%

100%

Source: J.P. Morgan based on the Journal of Sustainable Finance and Investment (link) n=664 studies. Favorable relation measured
as share of studies with positive findings minus the share of studies with negative findings.

ESG equity funds performed better on average than non-ESG peers
Analysis by the European Securities and Market Authorities (ESMA) shows that
ESG-labelled UCITS equity funds domiciled in Europe outperformed non-ESG
funds by 0.057 percentage points on average between April 2019 and September
2021 (based on monthly gross performance). This results holds even after controllingfor differences in sectoral exposures (link).
Table 2: ESG funds increased their exposures to healthcare,technology, and industrials between 2019 and 2021, which performed
well over the period
Equity funds’ change in sectoral exposures
Change in mean exposure (%)
ESG
Non-ESG
Basic materials
-0.55
-0.16
Communication
3.52
4.92
Consumer cyclical
-0.63
-0.65
Consumer defensive
-2.29
-0.88
Energy-1.62-1.26
Financials
-3.02
-1.51
Healthcare
2.26
1.27
Industrials
1.34
-0.04
Real estate
-0.30
-1.42
Technology
1.58
-0.24
Utilities
-0.31
-0.02

Return (%)
24%
-8%
36%
5%
-25%
52%
25%
40%
-65%
14%
15%

Source: J.P. Morgan based on ESMA (link) and Morningstar. The right column represents thereturn of the MSCI Europe sectoral indices. Data calculated between April 2019 and September
2021.

Table 3: Even when controlling for differences in sectoral exposures,
ESG funds still performed better than non-ESG funds
Regression analysis of EQ fund performance (dependent variable: monthly
gross performance)
ESG
Basic materials
Communication
Consumer cyclical
Consumer defensive
EnergyFinancials
Healthcare
Industrials
Technology
Utilities
Intercept
Observations
R2

Regression Analysis
0.057
0.009
0.009
0.010
-0.006
0.017
0.014
0.006
0.009
0.017
-0.002
2.958
124,250
0.699

Source: J.P. Morgan based on ESMA (link) and Morningstar. Significance levels: 0.01.

Additionally, ESMA’s study shows that funds focusing on the S or G pillars strongly
outperformed non-ESG funds. On the other hand, it found that the performance of Efocused funds was not statistically different from the performance of non-ESG funds.

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Table 4: Social and Governance-focused funds outperform environmental funds
Regression analysis of EQ fund performance (dependent variable: monthly gross performance)
Model with the ESG focus-0.0003
0.257
0.141-1.061

Environmental
SocialGovernance
Undefined

Source: J.P. Morgan based on ESMA (link) and Morningstar. Significance levels: 0.1 for G, 0.05 for S and the “undefined category”.
Based on monthly gross returns calculated between April 2019 and September 2021. The difference of performance between S or G
funds on the one hand and E funds on the other hand was statistically significant at the 5 % confidence level.

ESG bond funds exhibited higher risk-adjusted returns over the past five years.
The European Fund and Asset Management Association found that ESG bond funds
recorded slightly lower gross returns than their traditional counterparts on average
between 2010 and 2021 (4.0% vs 4.7%, respectively), but higher risk-adjusted
returns over the past 5 years.
Figure 15: ESG bond funds exhibited slightly lower gross returns
than non-ESG funds in average between 2010 and 2021…

Figure 16:…But higher Sharpe Ratios over the past five years
Sharpe Ratio (SR) of UCITS bond funds

Yearly gross returns of UCITS bond funds (% of net assets)

12

SR 1 Year

10
8

SR 3 Years

6
4
2

SR 5 Years00-22010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
ESG
Non-ESG

0.1

0.2

0.3

ESG

Non-ESG

0.4

0.5

0.6

Source: J.P. Morgan based on EFAMA (link) and Morningstar.
Source: J.P. Morgan based on EFAMA (link) and Morningstar.

J.P. Morgan quantitative analysis shows that introducing an ESG factor can
improve risk-adjusted returns
In their analysis of the returns of the MSCI Europe and MSCI Europe ESG Index
between 2010 and 2022, J.P. Morgan Quantitative analysts found that ESG scoresprovide good insight into selecting companies that will show positive long/short(L/S) returns.

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Figure 17: MSCI ESG scores provide good insight into selecting companies that will show
positive long/short returns…
MSCI ESG Factor Strategies in MSCI Europe ESG Leaders Index

160
150
140
130
120
110
100
90
80
2010

2011

2012

2013

2014

2015

2016

ESG Long

2017

2018

ESG Short

2019

2020

2021

2022

ESG L/S

Source: J.P. Morgan Quantitative and Derivatives Strategy, MSCI.

Their analysis also showed that the ESG factor performs better in the broader
universe rather than in the “ESG compliant” universe. The ESG factor showed verystrong performance in the MSCI Europe Index with a solid Sharpe of 1.45 andmanageable drawdowns at 5.6%, and lower performance in the MSCI Europe ESG
universe. Conversely, the short leg excelled in the ESG compliant index, contributing
to improve the overall L/S factor.
Table 5:… With reasonable Sharpe Ratios and lower drawdowns
ESG Factor Strategies Performance and Risk Metrics | MSCI Europe Indices
MSCI Europe
T-StatAnn.RetAnn.Vol
SharpeHit-Rate
Max DD
ESG Long
3.83
4.9%
3.4%
1.45
68.6%
-5.6%
ESG Short
1.07
1.9%
5.2%
0.38
57.0%
-10.1%ESG L/S
1.52
2.7%
4.9%
0.55
52.3%
-6.1%
MSCI
1.47
7.9%
16.3%
0.48
55.8%
-26.6%
Benchmark

T-Stat
2.70
-0.65
2.83

Ann.Ret
3.8%
-1.1%
4.7%

MSCI Europe ESG
Ann.Vol
Sharpe
3.7%
1.01
4.0%
-0.26
4.5%
1.06

Hit-Rate
70.9%
48.8%
64.0%

Max DD-11.6%-12.95
-8.0%

1.58

8.5%

15.9%

58.1%

-25.0%

0.53

Source: J.P. Morgan Quantitative and Derivatives Strategy, MSCI. Period: Aug’10 to Sept.’17.

J.P. Morgan quantitative analysts also found that the change in the ESG score (i.e.,
its Momentum) was a better guide to how the company’s ESG profile may bechanging compared to the level of the ESG score. Risk-adjusted returns were higher
for stocks combining a high and rising ESG score (6%), vs high and falling (3.5%),
low and rising (0.1%), and low and falling (-0.6%).
Table 6: Performance of each quadrant in MSCI ACWI (excess returns)
ESG QuadrantHigh & RisingHigh & Falling
Low & Rising
Low & Falling

Ann Ret
6.0%
3.5%
0.1%
-0.6%

Ann Vol
7.9%
5.9%
7.1%
10.3%

Sharpe
75.0%
60.0%
1.0
-6.0%

Max DD-8.4%-7.9%-22.5%-25.3%

Hit Rate
57.0%
57.9%
49.5%
50.5%

# Months
107
107
107
107

Source: J.P. Morgan Quantitative and Derivatives Strategy based on MSCI ESG. Period: Aug’10 to Sept.’17.

The final step of their analysis was combining an ESG factor with its Momentum.
While Momentum had better returns than both stand-alone ESG and combined
ESG/Momentum, the combination strategy has a third of the volatility and single
digit drawdowns (compared to -38% for Momentum).
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Table 7:… A combination of ESG & Momentum improves risk-adjusted returns
Stand-alone ESG, JPM Momentum, and ESG + Momentum 50:50. [Long only, Excess Returns]
ACWI Region
Returns
Volatility
SharpeHit Rate
ESG Scores (IAS)
0.5%
4.7%
0.10
51.3%
Composite Momentum
6.0%
14.6%
0.41
54.7%
ESG + Momentum
3.5%
4.9%
0.70
57.3%

DD
-9.0%
-38.5%-8.9%

T-Stat
0.38
1.47
2.24

Turnover
75%
650%
480%

IC
0.7%
3.0%
1.8%

Source: J.P. Morgan Quantitative and Derivatives Strategy. Period: Aug’10 to Sept.’17.

J.P. Morgan’s stock allocation tool ESGQ
ESGQ is J.P. Morgan’s proprietary ESG score, calculated over 5,000 stocks on amonthly basis. It comprises three building blocks: (i) stable ESG scores from large
providers such as MSCI and Sustainalytics that capture the long-term corporate
responsibility profile of a company, (ii) faster-moving ESG data (Arabesque,
RepRisk) that isolate news flow on potential ESG controversies, and (iii) momentum
to capture changes in sentiment and price behavior. Since 2018, returns of the stablecomponent have been on an upward trajectory for long strategies and the long leg of
L/S strategies. Sharpe ratio has been healthy, at about 1% while peak to through is
lower than the broader market. Risk-adjusted returns are even higher for stocks
combining a high & rising ESG score (6%), vs high & falling (3.5%), low & rising(0.1%), and low & falling (-0.6%). The trend is captured through the momentum
component of ESGQ. Please click here to learn more.
Figure 18: ESGQ methodology

Figure 19: Top & Bottom ESGQ price performance relative to equalweighted benchmark

Index of Excess Returns

240

120

60
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
ESGQ (L)ESGQ (S)

Source: J.P. Morgan Quantitative and Derivatives Strategy. Data on ESGQ Europe.
Source: J.P. Morgan Quantitative and Derivatives Strategy.

ESG funds have driven higher inflows
The success of ESG funds can also be measured by the strength of client demand.
Net flows to ESG funds included in Morningstar’s sustainable funds universe haveoutpaced that of conventional funds by a significant margin over the recent past.
Between 2016 and 2021, the average organic growth rate (calculated by dividing the
cumulative flow for the quarter by the beginning total net assets) reached 14% inaverage, compared to 2% for conventional funds. While growth in inflows has
decelerated since the peak in Q1 2021, particularly since the beginning of 2022, it
has shown stronger resilience overall than that of the broader market. In our view,
this is because challenging macroeconomic conditions have so far not fundamentally
impacted the structural drivers of ESG investing (regulations and client demand),16

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although they may contribute to reshape some of the current ESG practices, as werecently discussed in a separate publication (link).
Figure 20: Net flows to ESG funds have largely outpaced those of
conventional funds…
Organic growth (%)

35%

15%
5%
0%
-5%

7%

6%

6%

20%
10%

9%

8%

23%

25%

Organic growth (%)

10%

30%

30%

Figure 21: …Although the pace slowed down since Q1 2021

13%

11%
5% 4%

3%

1%

4%
3%

1%

5%

2017

2018

ESG Funds
Source: J.P. Morgan based on Morningstar.

2019

2020

Conventional Funds

6%

2%

3%
1.5%

1.2%

0.9%

1.1%

1%

1%

-0.6%
2Q22

3Q22

0.2%

0%

0%
2016

6%

2021

-1%
3Q22

-2%
1Q21

2Q21

3Q21

ESG Funds

4Q21

1Q22

-0.4%

Conventional Funds

Source: J.P. Morgan based on Morningstar.

Thoughts on the “ESG Bubble” Concept
The rapid growth in ESG flows prompted the Bank for International Settlements toforewarn in September 2021 “about the possibility that a bubble might develop” and“signs that ESG assets’ valuations may be stretched” (link). J.P. Morgan European
Utilities analysts have flagged that pure renewable players were significantly more
expensive than integrated utilities (link), while the J.P. Morgan EMEA ESG teamregularly highlighted the high price-to-earnings (P/E) ratios of clean tech stocks(link). However, the popularity of the low-carbon/clean technology segment of the
ESG market may not be representative of the overall tilt of the broader ESG market,
in our view, which follows more diverse investment strategies than one mightassume, as we discuss in the fourth chapter. For example, the P/E of equity indicesbased on ESG ratings are broadly in line in with their non-ESG counterparts.
The ESG Bubble debate does, however, highlight the scope for ESG investing toevolve further, in our view. By definition, ESG frameworks that limit their scope tofactors that are currently financially material will miss those that are soon going tobecome financially material, and may have a smaller investable target universe of“good” ESG candidates. The reliance of ratings on disclosure (or estimateddisclosure) is by nature more backward-looking, which can be particularly limiting at
a time when many companies are investing and adapting at speed to become
improved versions of themselves, and/or increase their exposure to high-growth areas
linked to sustainability. These things combined provide an opportunity for investors
to consider ESG in a manner that is more forward-looking and comprehensive in ourview, which could in turn, improve diversification and reduce crowding.

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Figure 22: J.P. Morgan European Utilities analysts prefer exposure to the energy transition theme
via the cheaper, larger integrated utilities than pure players
Median EV/EBITDA across our European Utilities coverage

Networks / Regulated

Renewables

Integrated
0.0x

2.0x

4.0x

6.0x
FY22E

8.0x

10.0x

12.0x

14.0x

16.0x

FY23E

Source: J.P. Morgan European Utilities as of Sept. 21st 2022. “Network/Regulated” excludes water utilities (United Utilities, Severn
Trent and Pennon).

Figure 23: Low-carbon indices have significantly higher P/E than mainstream ESG indices
P/E for selected ESG and non-ESG indices

100
90
80
70
60
50
40
30
20
10

Jan 21
Jan 21
Feb 21
Feb 21Mar 21
Apr 21
Apr 21
May 21
May 21
Jun 21
Jul 21
Jul 21Aug 21Aug 21
Sept 21
Oct 21
Oct 21
Nov 21
Nov 21
Dec 21
Dec 21
Jan 22
Feb 22
Feb 22
Mar 22
Apr 22
Apr 22
May 22
May 22Jun 22
Jul 22
Jul 22Aug 22Aug 22
Sept 220

MSCI WorldMSCI World ESG Leaders
DJS World Composite

S&P Global Clean Energy
MSCI Global Alternative Energy Index

Source: J.P. Morgan based on Bloomberg.

Value Meets Values: ESG to Manage Risks
Many sustainability megatrends relate to sources of systemic risks
There has been growing recognition over the recent years that while certain
companies can be beneficiaries (usually via innovation), sustainability megatrends
often link to issues which not only pose idiosyncratic risks to specific companies, butalso systemic risks to global economies. In its annual survey of global risks, theWorld Economic Forum highlighted the potential economic, societal and political
disruptions from climate action failure, biodiversity loss, and social cohesion erosion,
among others. While governance factors are less considered as a source of risk in thiscontext per se, they are seen as necessary resources to manage future disruptions.

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Figure 24: Most global, systemic risks identified by the World Economic Forum are linked toenvironmental and social factors
Most potentially damaging risks (top row) and risks they will aggravate (bottom row)

Source: WEF, The Global Risks Report, 2022 (link).

System Research assesses linkages between sustainability and systemic risks
Systemic risks linked to sustainability megatrends have highlighted theinterconnectivity between economic, political, social and ecological systems (link). A
growing field of “systems research” has emerged to better understand these links,
such as the Dasgupta review on the economics of biodiversity commissioned by the
UK Government in 2021, which considerably enhanced knowledge on the role ofnatural capital in global economies. As we will discuss later, systems research is also
increasingly used by financial regulators to assess the potential impact ofsustainability megatrends on financial stability (see here).

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Figure 25: The Dasgupta review highlights the linkages
between natural capital, human capital and the broader
economy…

Source: Dasgupta Review (link).

“Focusing on system health(…) over the long term will
positively impact financial
and economic returns.”
Lukomnik & Hawley

Figure 26:…and the decorrelation between produced capital on one hand, andhuman and natural capitals on the other
Global wealth per capita, 1992-2014

Source: Dasgupta Review based on Managi and Kumar (2018).

Considering sustainability values to preserve “beta”?
From an investor standpoint, systemic risks can significantly affect financial returns.
This is particularly true for large and diversified asset owners (so-called “universal
owners”) such as pension funds, sovereign wealth funds, foundations andendowments, which own a large proportion of the world’s economies and thus are
overwhelmingly exposed to macroeconomic conditions. Therefore, it has beenargued that such investors have an interest to promote business practices of theirinvestees that do not fuel sustainability-related systemic risks to preserve the longterm financial performance of their portfolios (Lukomnik & Hawley,2021).
“Universal owners (…) – exist to serve their beneficiaries. Because these funds arewidely diversified and their returns depend primarily upon the performance of thefinancial market as a whole (beta), they can best serve beneficiaries and satisfy theirlegal duties by preserving the health of the whole economy and the environmental
and social systems on which it depends.”
Cambridge University (link)
When value meets values: The rise in system investing
The emergence of universal ownership theories was followed in 2015 by the creationof The Investment Integration Project, the first organization advocating for “system
investing” by both asset owners and managers (link). System investing is based on
the recognition that financial and economic systems from which investors generate
returns, are dependent on, and impacted by the health of other systems, including theenvironment and societies. ESG investing is used as a framework to incorporate

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sustainability values, manage companies’ externalities1 and thus, preserve “system
health” and long-term financial value.
Figure 27: The view from system investors: considering sustainability values to preserve longterm financial performance

Reducenegative
externalities

Limit
sustainabilityrelated systemic
risks
Preserve social
andenvironmental
systems

Preserve longterm financial
performance

Source: J.P. Morgan.

ESG as a tool to position portfolios to successfully navigate policies andregulations
Rising public awareness on environmental and social issues – from climate change
and biodiversity loss to rising inequalities and consumer protection – has resulted in
populations increasingly calling on their governments to take more action, which has
in turn driven new policies and regulations. This can have implications both at thesector level, through tectonic shifts in the competitive landscape, and at the company
level, via additional taxes and costs among others, which can ultimately affect thevalue of both debt and equity instruments. Therefore, knowledge of current andfuture ESG themes can help investors to anticipate shifts in the regulatory and policy
landscape and position their portfolios accordingly.

Implications for the Materiality Debate
We have identified three main drivers for investors to consider ESG factors in theirinvestment process:(i) Generating alpha by integrating ESG as a complementary tool to financial
analysis(ii) Creating positive impact or avoiding negative impact based on a set ofsustainability or ethical preferences, and(iii) Managing the health of environmental and social systems to preserve portfolio
returns over the long term.
These various motivations imply different investment objectives, time horizons, anddefinitions of reasonable investors (link) and fiduciary duty (link). More practically,
they also imply different data and information needs:
1 Externalities occur when the creation of economic value results in a cost for the environment or the society (see theglossary here).
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 Investors using ESG to uncover Alpha need information about ESG risks andopportunities that could have a financial impact. This is usually referred to as thefinancial materiality perspective, although in practice most financial materiality
perspectives focus more on current, rather than potential financial materiality, in
our view.
 Other ESG investors need a broader range of information on both ESG risks toenterprise value, and ESG impacts on the company’s stakeholders across thevalue chain. This is usually referred to as the double materiality perspective.
Figure 28: The EU based its ESG regulations on a double-materiality approach, which consider
both risks/opportunities and impacts.

Source: EU Commission, 2019 (link).

Fiduciary Duty and ESG: Engine or brake?
The compatibility between ESG investing and fiduciary duty has been a recurrent
debate in the ESG market. Fiduciary duty is the legally binding duty of investors
toward their beneficiaries and generally involves a duty of both care and loyalty. In a
recent survey of asset owners by Morningstar, 22% of respondents identified
fiduciary duty as a driver in choosing to invest in ESG, while the same proportion
indicated that they consider it as a barrier (link) owing – among others – to aperceived trade-off between sustainability and financial performance. In our view,
how investors position themselves on this debate primarily depends on (i) local
regulations and (ii) clients’ specific mandates. Narrow interpretations of fiduciary
duty may result in some investors focusing solely on short to medium term financial
interests of beneficiaries, while broader interpretations may involve consideringclients’ sustainability and ethical preferences, exposure to (inherently longer term)
sustainability-related systemic risks, and the financial interests of future generations.
Better data on the link between financial and sustainability performance, combinedwith transparency on the measurement of sustainability performance, will be key toinform this debate, in our view.

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The double materiality lens is better suited to meet the needs of all categories of
ESG investors, in our view
While we recognize that reporting based on double rather than financial materiality
would be more demanding for companies, this lens addresses the needs of a broader
set of investors by providing information on both risks and impacts, in our view.
Information on impacts could then be equally used by “alpha-focused” investors because a company’s current ESG impacts may drive tomorrow’s financial risks (socalled “dynamic materiality”). Therefore, a more inclusive approach to corporate
reporting could allow investors to be more forward-looking in their assessment ofenterprise value, by capturing evolving relationships between impacts and risks overtime. For further details, please read our Materiality Matters report (link).
“A reporting entity’s impacts on people and the environment can also affect theentity’s business model and therefore create or erode its enterprise value (the socalled ‘rebound’ or ‘boomerang’ effect). The extent to which they create or erode
enterprise value may change over time (the so-called ‘dynamic materiality’).”EFRAG (link)
Figure 29: A double-materiality approach enables one to capture the dynamic nature ofmateriality

Source: EU EFRAG, 2021 (link).

Determining materiality has become a key differentiator for ESG investors andvendors
ESG investors have different definitions of materiality depending on the drivers andobjectives of their investment strategy. As a result, new methodologies have emerged
to determine the materiality of ESG factors. Two developments have been
particularly important, in our view: The development of industry-specific materiality assessment, which enables toassess ESG factors most material to a specific sector. In our view, this approachhas facilitated the integration into existing financial analysis frameworks, which
is itself industry-specific.

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Table 8: Industry-specific materiality assessment has helped integrate ESG into existing financial
analysis
Most material ESG themes for the oil and gas, and banking sectors according to the Sustainability AccountingStandards Board (SASB).
Oil & Gas (E&P)
Investment banking and brokerage
Greenhouse Gases (GHG) Emissions
Employee Diversity and Inclusion
Incorporation of Environmental, Social, and Governance
Air Quality
Factors in Banking & Brokerage
Water Management
Business Ethics
Biodiversity Impacts
Professional Integrity
Security, Human Rights, & Rights of Indigenous
Systemic Risk Management
Peoples
Community Relations
Employee Incentives & Risk Taking
Workforce Health & Safety
Reserves Valuation & Capital Expenditures
Business Ethics & Transparency

Environmental

SocialGovernanceSource: J.P. Morgan based on SASB (link). Classification between E, S and G themes by J.P. Morgan. We discuss SASB in moredetails here.

 The development of a “value chain approach” by the Capitals Coalition, whichassess material ESG impacts and dependencies across a firm’s full value chain.
This has become the reference framework for investors who consider ESG
impacts on all stakeholders (as opposed to only shareholders or creditors),
including suppliers and customers. We note that recent regulations have tended toincrease companies’ responsibility toward sustainability risks and impacts in their
supply chain, from the disclosure of conflict minerals under the US Dodd-Frank
Act, to the UK Modern Slavery Act and the recent EU Proposal for a
Sustainability Due Diligence Directive (link), which suggest that supply chain
management is becoming increasingly financially-material.
Figure 30: Impact-focused investors typically base their materiality assessment of a company’s
entire value chain…
Example of value chain mapping for the apparel industry

Source: Natural Capital Protocol: Apparel Sector Guide (link). Based on Trucost 2016.

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Figure 31:…As most material impacts and dependencies can occur far outside the company’s
direct operations
Environmental impacts and dependencies of the apparel industry

Source: Natural Capital Protocol: Apparel Sector Guide (link).

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The Growth of ESG – Flows & AUM
TrendsThis chapter provides an overview of global ESG flows using Morningstar data2, andanalyses the range of definitions of “ESG AUM”. AUM invested under an ESG
mandate or strategy tripled globally between 2016 and 2021, reaching c.6% of global
AUM as at Q4 2021. While active equity funds domiciled in Europe continue torepresent the lion’s share of the market, there are signs that it is diversifying in termsof geographic focus and investment style. We also introduce the sustainable debt
market, which has been a key component of ESG investing, using data from the
Climate Bond Initiative (CBI).

Tracking Flows: Deciphering “ESG AUM”
Providers use different definitions of ESG funds
Estimates of ESG funds, and hence of flows and performance, vary widely between
data vendors. In this note, we use Morningstar’s sustainable fund universe as aconservative proxy for the ESG market, which was estimated to US$2.9tn in Q4
2021 and US$2.2tn in Q3 2022. Comparatively, Bloomberg’s estimate of ESG AUM
was closer to US$5.4tn in H2 2022 while the Global Sustainable Investment
Alliance’s was around US$35tn in 2020 (data is aggregated from regional andnational reports from GSIA members, except in Europe, where it is estimated basedon secondary industry data). Those discrepancies reflect differences in the way
vendors define and track ESG funds, a tangible evidence of the varying
interpretations of what constitutes an ESG fund discussed in the first chapter.
Morningstar’s sustainable universe includes funds where ESG factors drive
investment decisions
Since August 2022, Morningstar’s sustainable universe comprises funds where ESG
factors play a “central” role in the overall investment process. Funds are broken
down in two categories: (i) general ESG investment products; and (ii) sustainability
themed investments.

2 The scope of ESG funds does not include “ESG integrated funds” which consider ESG criteria in the investment

process but do not make ESG considerations the focus of investment process. It also excludes money market funds,
feeder funds, and funds of funds to avoid double counting.
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Figure 32: Morningstar’s taxonomy of ESG Funds

Climate Action

Morningstar’s
Sustainable Fund
Universe

General ESG
Investments

Healthy Ecosystems

Sustainability
Themed Investments

Basic Needs

Resource Security

Human Development

Source: J.P. Morgan based on Morningstar.

General ESG investments funds are defined as followed:“General ESG Investment products use ESG criteria as a central focus or binding
factor in their security-selection and portfolio-construction process. (…) These
investment products endeavor to promote sustainability and minimize negative
impact, without focusing on a specific theme or area of action.”
Unlike General ESG funds, sustainability-themed investments typically focus on
specific ESG themes:“Sustainability Themed Investment products explicitly target exposure to one ormore sustainability themes as part of their investment process. (…) Beyond their
thematic focus, these investment products may or may not employ the approaches
used by General ESG Investments in their investment decisions.”
Data suggests that Morningstar excludes a large portion of integration funds
from its sustainable universe
Morningstar excludes funds where ESG factors are not “central” to the overall
investment process, which we believe could de facto exclude some integration funds,
where ESG factors are “generally no more significant than other factors in theinvestment selection process” (see here).
As of September 2022, Morningstar’s sustainable funds universe excluded about
60% of funds classified as Article 8 under SFDR, resulting in YTD inflows looking
quite different compared to the broader SFDR universe (discussed by J.P. Morgan
European Financials Analysts in their latest EU SFDR Fund Update link). While we
acknowledge that integration is an important component of the current ESG market,
we consider Morningstar’s sustainable fund universe as a more conservative andaccurate estimate of the market.

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Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Table 9: 60% of SFDR Article 8 Funds do not qualify as “sustainable” according to Morningstar

EU SFDR
Categories

Article 8
Article 9
Total

Yes

Sustainability Categories
No
N/A
Total

3,701
1,126
4,827

5,938
21
5,959

228
40
268

9,867
1,187
11,054% of SFDR funds in
Morningstar’s
sustainable funduniverse
38%
95%
44%

Source: J.P. Morgan based on Morningstar.

Overview of Global ESG Flows
In this section, we summarize some of the key trends that have shaped the ESG
market since 2016 using Morningstar’s universe of sustainable funds and conclude
by contrasting with some of the dynamics observed on a broader universe of ESG
funds, based on data from the GSIA.
ESG investing reached a record US$2.9tn in 4Q 2021
The total amount of global ESG AUM has multiplied by 3.3x between 2016 and 4Q
2021, increasing the market share of ESG AUM relative to global AUM to 5.8%
from 3.3% over the period. This represents a 27% CAGR in ESG AUM over theperiod compared to 12% only for non-ESG AUM.
Figure 33: ESG AUM reached US$2.9tn in Q4 2021, representing a 27% CAGR since 2016
Total AUM (US$bn) and market share (%) of global ESG funds

3,500
3,000

4.9%

2,500
2,000

3.3%

3.6%

3.6%

5.1%

5.4%

5.6%

5.8%

5.8%

5.8%

5.8%

7%
6%
5%

3.9%

4%

1,500

3%

1,000

2%

500

1%

-

0%
2016

2017

2018

2019

2020

1Q21

AUM (US$bn.)

2Q21

3Q21

4Q21

1Q22

2Q22

3Q22

% of global AUM

Source: J.P. Morgan based on Morningstar.

Europe continues to dominate the market with >80% of global AUM
Close to three quarters of new ESG funds globally have been launched in Europe
between 2016 and Q3 2022, resulting in the region domiciliating a large majority of
ESG AUM (84%). The market share of ESG funds relative to total AUM is currently
at 30% in Europe, compared to 2% in APAC and 1.3% in the US.

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Figure 34: The lion’s share of ESG flows still go to funds domiciled inEuropeFigure 35: The market share of ESG funds reached 30% in Q3 2022 inEuropeBreakdown of global ESG AUM by region of domiciliation (as of Q3 2022), %Market share of ESG funds by region (based on AUM), %2016 2017 2018 2019 2020 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q2235%

4%26.0% 27.1%
24.9%
23.6%
25%
18.3%19.8%
20% 17.1%17.6%
15%
30%

12%

28.5% 28.7% 29.1%

29.9%

10%
5%

84%
EuropeUnited States

Source: J.P. Morgan based on Morningstar.

0%

Rest of world

0.8% 0.7% 0.7% 0.8% 1.4% 1.5% 1.7% 1.9% 2.1% 2.0% 1.9% 1.9%
0.6% 0.6% 0.6% 0.7% 1.0% 1.1% 1.2% 1.2% 1.3% 1.3% 1.3% 1.3%
EuropeUnited States
APAC

Source: J.P. Morgan based on Morningstar.

There are signs of geographic diversification with APAC growing the fastest
A growing percentage of ESG AUM have been domiciled in the US and moremarginally in the rest of the world in recent years, with APAC showing the fastest
growth. Meanwhile, ESG investors have increasingly adopted global investment
universes. Further regulations outside Europe (described here) could contribute toaccelerate these trends, in our view.

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Figure 36: ESG investors are increasingly looking for global opportunities
Breakdown of global ESG AUM by geographic focus by year, %Total ESGAUM ($UStn.)
3Q22

49%

26%

13%

5%

6%

2.23

2021

49%

28%

13%

5%

6%

2.94

12%

5%

6%

2.10

2020

45%

32%

2019

40%

38%

12%

5%

6%

1.47

2018

38%

41%

12%

5%

5%

1.12

2017

36%

42%

11%

5%

5%

1.19

2016

36%

42%

12%

5%

4%

0.90

0%

10%

20%

30%

40%
Global50%
Europe

60%
US

APAC

70%

80%

90%

100%

ROW

Source: J.P. Morgan based on Morningstar.

Active equity investors still represent the majority of ESG investors.
Between 2016 and Q3 2022, equity investors represented 57% of ESG AUM on
average, followed by fixed-income investors at 22%. On the other hand, theproportion of ESG AUM under passive investing increased to 25% from 9% over theperiod (we discuss ESG indices in more details here).

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Figure 37: Equity represented 57% of global ESG AUM on average
between 2016 and Q3 2022

Figure 38: The share of passive investing grew to 25% from 9% overthe period

Breakdown of global ESG funds’ AUM by asset class, US$bn

Breakdown of global ESG AUM by investment style, %

3,500

3Q22

75%

25%

3,000

2021

76%

24%

2,500

2020

80%

20%

2,000

2019

84%

16%

1,500

2018

87%

13%

1,000

2017

90%

10%

2016

91%

9%

500
2016
Equity2017
Fixed Income

2018

2019

Mixed Allocation

2020

2021

0%

3Q22

20%

Other asset classes

Source: J.P. Morgan based on Morningstar.

40%

60%

ActivePassive80%

100%

Source: J.P. Morgan based on Morningstar.

The growth in new ESG funds has surpassed the growth in AUM
Has the growth in ESG funds been driven by the creation of new funds or thereclassification of existing conventional funds as ESG? Data seems to suggest theformer. Between 2016 and Q4 2021, the annual growth in new funds increased more
rapidly than AUM under ESG mandates, at 35% vs. 27% (2022 could be the firstyear of YoY decrease).
Figure 39: The number of new ESG funds increased by 35% on average between 2016 and Q4
2021
Number of ESG funds by inception year

1149

1200
1000
764

800
600
400

383

469

515

2018

2019

623

252

200
0
2016

2017
EuropeAPAC

United States

2020

2021

3Q22

ROW

Source: J.P. Morgan based on Morningstar.

To gain insights into the proportion of funds that have been reclassified assustainable in the course of their lifespan, we compared the inception date of ESG
funds with the date at which Morningstar classified them as “sustainable”. Since
2018, most funds have been classified as sustainable by Morningstar within a year ofinception. Although not a perfect measure, this suggests that reclassification may
have been a limited phenomenon in Morningstar’s sustainable fund universe over the
past four years (we acknowledge that this conclusion may not apply to the broader
SFDR universe).

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Figure 40: Most ESG funds were classified as “sustainable” by Morningstar the same year as
inception, suggesting that reclassification has become a limited phenomenon
1200
1000
800
600
400
200
0
2016

2017

2018

2019

2020

2021

Sept.22

Sustainable classification received at inception
Sustainable classification received after inception
Source: J.P. Morgan based on Morningstar as of Sept. 2022. “Sustainable classification received after inception” includes funds thatwere classified by Morningstar at least a year after inception.

Taking into account ESG integration funds shows a different picture of the ESG
marketAs previously discussed, data suggests that Morningstar excludes a large proportionof integration funds from its sustainable universe (see here). To gain insights into a
broader spectrum of ESG funds, we use data from the GSIA (link). It suggests thatfunds considering ESG factors as part of the investment process (including those thatincorporate ESG factors in the context of their financial analysis) could represent asignificant portion of assets across all regions, at 36% on average globally in 2020.
The GSIA also estimates that US ESG AUM surpassed European ESG AUM in
2020, suggesting that ESG investing may be a more global phenomenon.
Figure 41: The GSIA estimated at 36% the market share of ESG funds
globally in 2020

Figure 42: The GSIA estimated that ESG AUM in the US surpassed
those in Europe in 2020

ESG AUM as a % of total AUM, including by region

Evolution of ESG AUM by region ($US)
25,000Europe20,000

US$bn.

Australasia
Global Av.

15,00010,000
5,000

US

-

Japan

North America

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Source: J.P. Morgan based on the GSIA (link). See our analysis of the GSIA 2020 Report for
more details (link).

Europe2016

Australasia
2018

Japan

2020

Source: J.P. Morgan based on the GSIA (link). See our analysis of the GSIA 2020 Report for
more details (link).

In our view, diverging data on the ESG market mostly reflects the varying
interpretations, or lack of clarity, on the purpose of ESG within an investment
mandate. As we expect that various ESG investment philosophies will continue toco-exist, we believe that clearer disclosures from fund managers on the role of ESG
in their investment process could help to track ESG market trends more accurately.
Until then, considering complementary datasets such as Morningstar and the GSIA
may remain investors’ best solution to monitor the diverse dynamics of the ESG
market.

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Focus on the Sustainable Debt Market
In this section, we introduce the sustainable debt market using data from the Climate
Bond Initiative (CBI). Since the issuance of the first green bond in 2008, thesustainable debt market has evolved to play a central component in fixed-income
ESG investment strategies. A company’s record at issuing sustainable debt may also
be considered by non-fixed income investors as part of their assessment of thecompany’s overall ESG credentials.
Use of proceeds vs. linked instruments
The sustainable debt market can be categorized by two main types of instruments:
 “Use-of proceeds” instruments, which are bonds and loans where proceeds
exclusively finance green, social or sustainable projects, referred to as green
bonds, social bonds, and sustainable bonds, respectively (source: ICMA).
 “Linked” instruments, which are bonds and loans where proceeds exclusively
finance improvement in the issuer’s sustainability credential(s) within apredefined timeline (source: ICMA). This category also includes “transition”
instruments, where proceeds enable an issuer to its transition plan. Transition
plans can be defined as an entity’s action plan to align its business model andstrategy with the objective of the Paris Agreement (see here).
Growth driven by green bonds and linked instruments
According to data from the CBI, annual issuance of sustainable debt surpassed
US$1tn for the first time in 2021, led by green bonds (which remain by far the mostpopular instrument), and the growth in linked instruments.
Figure 43: Sustainable bond issuance grew by 63% p.a. between
2016 and 2021, led by green bonds and SLBs

Figure 44: Green bonds issued in Europe represents the mostpopular instrument

New sustainable debt issuance, US$bn

New sustainable debt issuance in 2021 by region and instrument, US$bn

1,200
300

1,000
250

800
200

600

150

400

100

200

50

-

<2015

Green

2016

Social2017

Sustainability

2018

2019

2020

Sustainability-Linked

Transition

Source: J.P. Morgan based on the Climate Bond Initiative.

2021

Green Bonds
EuropeSocial Bonds
APAC

North America

Sustainability Bonds
LATAM

Supranational

SLBs
AfricaSource: J.P. Morgan based on the Climate Bond Initiative.

In 2021, 80% of green bonds proceeds financed projects in the energy, buildings, andtransportation sectors, suggesting that climate mitigation remains the environmental
objective most targeted by green bonds. Sustainability-linked instruments seem toattract a more diverse range of sectors, although the utilities and industrials sectors
were overall most active.

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Figure 45: A majority of green proceeds finance projects in theenergy, buildings and transportation sectors

Figure 46: Utilities and Industrials issued the largest share of linkedinstruments in 2021

Allocation of green proceeds by sector, US$bn

New sustainability-linked issuance by industry, %

2021
2020
2019
2018
2017
2016
2015
2014
0%

10%

20%

30%

EnergyBuildings

40%

50%

60%

70%

80%

Transport

Water

Waste

Other

90%

100%

Source: J.P. Morgan based on the Climate Bond Initiative.

Source: J.P. Morgan based on the Climate Bond Initiative.

Where Next?
ESG is not immune to cyclical challenges
Global ESG AUM (measured by Morningstar’s sustainable universe) have declined
by 24% since the start of 2022 as a result of performance factors, many of which arelinked to the ongoing geopolitical events and energy crisis. ESG AUM dropped by
US$166bn in Q1, US$367bn in Q2, and US$171bn in Q3 primarily due to value
depreciation (despite the debates around the future of ESG YTD, net flows remained
positive over the period, when considering the Sustainable fund universe).
Figure 47: Variations in ESG AUMs
Breakdown between net flows & value appreciation/depreciation (US$bn.)

800
600
400
200
(200)
(400)
(600)
2017

2018

2019

2020

Net Flow

1Q21

2Q21

3Q21

4Q21

1Q22

2Q22

3Q22

Value Appreciation/Depreciation

Source: J.P Morgan based on Morningstar.

For equity funds, the negative performance may have been partly driven by themarket shift from Growth to Value since the beginning of 2022, owing to the lower
style exposure of ESG funds to Value. Taking Morningstar’s sustainable universe,
we found a higher proportion of funds included in the Morningstar categories Global
Large-Cap Blend and Growth (32% and 26%, respectively) than in Value (14%).
Looking at a broader universe of ESG funds, J.P. Morgan Quantitative Researchteam highlighted that ESG investment strategies have typically favored underlying
sector tilts Long Technology (a proxy for growth) and Short Energy (a proxy forvalue), and increased their exposure to other Styles, particularly Quality (link).

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Recent Research by ESMA suggests similar results, with the Value exposure of ESG
funds declining over time compared to non-ESG funds (link).
Table 10: L/S ESGQ return correlation to L/S styles – since 2018
ESGQ

Value
-6.90%

Quality
20.40%

Momentum21.20%

Low Volatility
10.60%

Size
0.50%

Source: J.P. Morgan Quantitative and Derivatives Strategies (link). Returns since 2018. Click here to learn more about ESGQ.

Table 11: Exposure of equity funds to value and growth stocks according to ESMA
April 2019
Value
GrowthNon-ESG
29%
38%

ESG
29%
38% [>*]

September 2021
Non-ESGESG
27%
21% [>***]
30%
31% [<<<***]

Source: J.P. Morgan based on Morningstar, ESMA (link). Note: average of EU equity UCITS individual exposure to value and growthstocks as of April 2019 and September 2021. The symbols “<” and “>” indicate whether the exposure is greater for ESG or non-ESG
funds. The stars represent the significance level of the differences which is reported as follows: 0.01 (***), 0.05 (**), 0.1 (*). For
instance, the symbol “<***” indicates that the exposure is greater for ESG funds than for the non-ESG funds and the difference issignificant at the 1 % confidence level.

Regulation will remain a powerful growth driver; further penetration of
integration, transparency, and innovation are key for the future of ESG
YTD ‘22 performance is in stark contrast with the exceptional 40% growth in ESG
AUM observed between 2020 and 2021, which we believe was partly driven by the
implementation of the landmark EU Sustainable Finance Disclosures Regulation (seehere). While we expect this year to accelerate the need for increased clarity on therole of ESG within an investment mandate, we do not expect a widespread reduction
in investor attention to ESG as a whole; rather we continue to foresee more attention
on the less cyclical ESG challenges such as data quality and impact measurement
methodologies.
As we discuss in the following chapters, regulation has been, and will likely remain,
one of the most powerful drivers of ESG flows. In addition, many “non ESG”
investors (depending on valuation) will choose to invest in the multi-year trends thatsolutions to ESG-linked issues provide. Several considerations within E, S, and G
pillars, such as Governance, have also long been of relevance to “non-ESG”
investors. These overlaps in the Venn diagram will likely increase in hand with thefinancial materiality of E, S and G factors, for example sustainability credentials as adriver of consumer preference and hence top line performance or margins.
We expect further penetration of ESG integration, transparency, and innovation(notably on impact investing) to be key to maintain the attractiveness of the market in
the longer term.

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From Integration to Impact: Shades of
ESG Investing
Overview
In this chapter, we define the main types of ESG investment strategies, including
ESG integration, screening, sustainable thematic investing, impact investing,investment stewardship and portfolio tilting. In our view, the recent growth in ESG
integration illustrates the growing popularity of ESG as a complementary tool tofinancial analysis and will more likely serve investors that consider ESG as astandalone alpha source. We also expect further growth in impact-focused strategies,
in line with our view that values and impact will remain major drivers of sustainable
investment. We conclude this chapter by a case study highlighting new approaches to
ESG investing in highly exposed sectors.
Broadly speaking, we identify six categories of strategies, which have been shapedby multiple factors, including demand and expectations from asset owners,
innovations from asset managers, new listing and regulatory requirements, and data
availability, and thus will continue to evolve.
Table 12: Definition of most common ESG investment strategies and application in theinvestment process
Strategy
ESG Integration

Screening
Sustainable
Thematic Investing
Security Selection

Impact Investing

Investment
Stewardship

Portfolio Construction

Portfolio Tilting

Definition
The systematic and explicit inclusion by investment
managers of environmental, social and governancefactors into financial analysis.
Applying filters to lists of potential investments to rulecompanies in or out of contention for investment, basedon an investor’s preferences, values or ethics.
Investing in themes or assets specifically contributing tosustainable solutions - environmental and social.
Investing to achieve positive social and environmental
impacts - requires measuring and reporting against
these impacts demonstrating the intentionality ofinvestor and underlying asset/investee anddemonstrating the investor contribution.
Employing shareholder power to influence corporate
behavior through (i) direct corporate engagement, which
consists in discussing ESG issues with companies toimprove their handling of such issues; and (ii) proxyvoting, which is formally expressing approval ordisapproval through proposing and voting onshareholder resolutions on specific ESG issues.
Targeting specific sustainable metrics at portfolio level
over a certain hurdle via security selection and position
sizingSource: J.P. Morgan based on the GSIA (link) and PRI (link).

It is noteworthy that ESG investment strategies are not exclusive. For example,
integration and screening are often combined with other actions, particularly
engagement and proxy voting, which can be employed once the portfolio is built.
Similarly, impact investing can be considered as a subset of thematic investing.
Assessing which strategy dominates Morningstar’s sustainable universe is difficult
because the classification of ESG funds does not follow the categories described
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above and excludes some funds that solely rely on integration (see here). At a highlevel we found around 85% classified as “General ESG” and 15% as “Thematic”
funds (primarily focused on Climate Action) within their universe, per Figure 49
below. On a broader universe such as that tracked by the GSIA in 2020, ESG
integration and screening dominate, albeit in our view the categories provided will
not always be mutually exclusive (with thematic investing likely overlapping with anumber of ESG integration approaches).
Figure 48: ESG funds in Morningstar’s sustainable universe is dominated by “General ESG”
Funds
Split between General ESG and Thematic funds, and by theme (% of funds)

85%

15%

General ESG Funds

Climate Action

Healthy Ecosystems

Basic Needs

Resource Security

Human Development

Source: J.P. Morgan based on Morningstar as of Sept. 2022. Morningstar’s definition of “General ESG Funds” is available here.

Figure 49: According to the GSIA, integration and screening have historically been the mostcommon ESG strategies
30,00025,000$US bn20,00015,00010,0005,000
ESG Integration

Screening

Investment
Stewardship
2016

2018

Thematic Investing

Impact Investing2020

Source: J.P. Morgan based on the GSIA (link).

Integration
The rise in ESG integration illustrates the growing popularity of ESG as acomplementary tool to financial analysis
The GSIA estimates that AUM under an ESG integration mandate has multiplied by
2.4x between 2016 and 2020. Integration is defined relatively broadly by the GSIA:“The systematic and explicit inclusion by investment managers of environmental,social and governance factors into financial analysis”.

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The US SEC complemented this definition by the idea that ESG factors in integration
funds do not have a greater influence than other factors in investment decisions:“ESG factors are generally no more significant than other factors in the investment
selection process, such that ESG factors may not be determinative in deciding toinclude or exclude any particular investment in the portfolio.”
Should ESG integration be considered as an ESG investment strategy?
ESG integration strategies have been criticized by some market participants for theirlack of emphasis on impact, while others continue to conflate ESG integration
strategies with impact investing. In our view, integration is the natural approach
adopted by investors who use ESG as a complementary tool to financial analysis, andthe first step when building an ESG strategy. In Europe, where ESG approaches (andpossibly financial impacts to corporates) are typically more advanced, many
investors are expanding integration to all traditional investment and risk management
processes (link). This suggests that over time, ESG integration may become“business as usual” for many investment firms and thus, more widespread forinvestors but less of a differentiator and marketing argument for “ESG funds”.

Screening
Screening helps investors to decide if they include (positive screening) or exclude(negative screening) companies based on a set of pre-defined criteria. Negative was
the dominant form of screening between 2016 and 2020, according to the GSIA,
applying to about US$21 trillion of ESG AUM over the period (vs US$1.6 trillion for
positive screening). Having said that, our recent discussions with investors also show
growing appetite for positive screening, particularly momentum-based strategies.
Inclusions and exclusions are powerful tools as they can apply to both single stock
and index derivatives.
Negative screening is widely applied in ESG investment strategies
As of September 2022, c.76% of funds classified as “sustainable” by Morningstar
employed some forms of negative screening. Most common criteria for negative
screening include non-compliance with international norms (including oncontroversial weapons) and tobacco. The fossil fuel divestment campaign launchedby 350.org in 2008 also resulted in the exclusion of companies operating in the coal,oil and gas industries by 1,550 institutions representing US$40.48tn of assets (link),
partly owing to concerns over the risk of stranded assets (see glossary).

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Figure 50: Exclusion criteria employed in global sustainable funds
Controversial Weapons
TobaccoThermal Coal
Norms-based screening
Small Arms
Other
Gambling
Fossil-Fuels*
Adult Entertainment
Alcohol
Military Contracting
Nuclear
GMOs
Animal Testing
Palm Oil
Fur & Specialty Leather
Abortion/Stem Cells
Pesticides
0%

10%

20%
% AUM

30%

40%

50%

60%

70%

80%

90%

% Nbr. of funds

Source: J.P. Morgan based on Morningstar as of Sept. 2022. Note: % AUM (Nbr. of funds) is calculated as the total AUM (number) ofglobal sustainable open-end funds and ETFs employing specific exclusion criteria divided by the total AUM (number) of global
sustainable open-end funds and ETFs employing exclusion criteria. The sum does not add up to 100% as most funds employ several
exclusions. *The category “fossil fuels” may encompass a diverse set of exclusion criteria based on the type of fossil fuel and thedegree of companies’ exposure among others.

In Europe, exclusion criteria have been partly shaped by sustainable financelabelsLabels provide a third-party opinion on the alignment of an ESG fund with a set ofpre-defined criteria. Most exclusion criteria currently apply to the defense, tobacco,
nuclear, and fossil-fuel sectors.

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Table 13: Exclusion criteria in European sustainable labels
LuxFLAG ESG(Luxembourg)
Global Compact & OECD
Guidelines

FNG-Siegel (Germany,
Austria & Switzerland)

Resale & production

Production & components-

Production & components

Production & components

Resale & production

Resale & production

Production

Resale, production &components-

Resale & production

Genetic
Engineering

-

-

-

Resale & production-

Nuclear Energy>5% of revenue fromuranium exploration andextraction, the productionof nuclear-based
electricity, and nuclearrelated equipment andservices (criteria will likely
be revisited following theEU’s decision to include
nuclear in the Taxonomy)>5% of revenue fromuranium exploration andextraction, the productionof nuclear-based
electricity, and nuclearrelated equipment andservices>5% of revenue fromuranium exploration andextraction, and the
production of nuclearbased electricity>5% of revenue fromuranium exploration andextraction, the productionof nuclear-based
electricity, and othernuclear-related equipment
and services>5% of revenue fromuranium exploration andextraction, the productionof nuclear-based
electricity, and nuclearrelated equipment andservices“Encouraged”

5% of revenue from
exploration andextraction, and 10% fromthe production of coalbased electricity

5% of revenue from
exploration, extraction,and the production ofcoal-based electricity

5% of revenue from
exploration, extraction,and the production ofcoal-based electricity

5% of revenue from
exploration, extraction,and the production ofcoal-based electricity

5% of revenue from
exploration, extraction,and equipment andservices tounconventional modes of
production2

Non-expansion of
unconventional
capacities3, and at least
one additional criteria: (i)5% of revenue fromunconventional, (ii) 50%
of CapEx to contributing
activities4, (iii) declining
carbon intensity5

5% of revenue from
exploration, extraction,and production of oil andgas, and production of oilbased electricity

5% of revenue from
exploration, extraction,and production of oil andgas, and production of oil
and gas-based electricity

Exclusion Type
Norms-based
Controversial
Weapons
Conventional
Weapons
TobaccoCoal

Oil & Gas

“Encouraged”

Global Compact

Towards Sustainability(Belgium)
Global Compact + MSS1of the EU Taxonomy
Resale, production &components

Umweltzeichen (Austria)

Nordic Swan Ecolabels(Nordic Countries)“In house” framework“In house” framework

Resale & production

Resale, production &components
Resale, production &components

Source: J.P. Morgan based on Novethic (link), Toward Sustainability Technical Criteria (link). Note: the information on labelling criteria is based on eligibility criteria documents available online on
March 31st, 2022. The French SRI Label was excluded as it only requires disclosure of exclusion criteria applied by the fund manager. 1: Minimum Social Safeguards, see section on the EU
Taxonomy here; 2: Unconventional oil and gas include oil sands and hydraulic fracking technologies. 3: Unconventional oil and gas include extraction of tar/oil sands, shale oil, shale gas and Artic
drilling. 4: Activities included in the EU taxonomy, see details here, 5: In line with 2°C scenario from the IEA.

Table 14: Companies in our European coverage that meet selected exclusion criteria of European sustainable labels (JPMe)
Exclusion Type
Controversial Weapons Exposure
Conventional Weapons Exposure
Tobacco Exposure
Uranium Mining (>5% revenue)
Nuclear Power (>5% revenue)
Coal Mining (>5% revenue)
Coal Power (>5% revenue)
Oil & Gas (>5% of revenue from oil & gas
exploration and production)
Oil & Gas (>5% revenue from oil sands andhydraulic fracking technologies)
Oil & Gas (>5% revenue from tar/oil sands, shaleoil, shale gas and Artic drilling)
Oil & Gas (>1% CAPEX from tar/oil sands, shaleoil, shale gas and Artic drilling)Gas Power
Oil Power

Companies in our European CoverageNone
All our European Defense coverage: BAE Systems, Rolls-Royce, Babcock, Thales, Dassault Aviation, NavalGroup, Safran, Airbus, Rheinmetall, KMW+Nexter, ThyssenKrupp, Hensoldt, MTU Aero, Leonardo, Saab
All our European Tobacco coverage: Imperial Brands, Philip Morris International, Swedish Match, British
American Tobacco
Kazatomprom
Endesa, Enel, Iberdrola, Naturgy, Engie, E.ON, Fortum, RWE, Uniper, Centrica
BHP, Glencore, Anglo American
EDP, ENEL, Engie, E.ON, Fortum, RWE, Uniper
All our European Integrated Oil & Gas coverage (Shell, BP, Total Energies, ENI, Equinor, OMW, Galp)
None
None
Shell, BP, Equinor, Total Energies: likely >1% spend on unconventionals. We note that the definition of“expansion” is not straightforward as shale assets are high decline so most 'growth' activity can often be net
replenishment rather than net addition. OMV and Galp do not have unconventional exposure.
EDP, Endesa, Enel, Iberdrola, Naturgy, Engie, E.ON, Fortum, RWE, Uniper, SSE
Endesa, ENEL

Source: J.P. Morgan estimates based on latest available data.

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Will exclusion criteria evolve? Not all have the flexibility to do soWhile we have seen few significant changes to exclusion criteria historically, resultsfrom a recent investor survey conducted by J.P. Morgan suggest that cyclicalchallenges, such as those linked to Ukraine-Russia and the energy crisis, may impact
some exclusion criteria (link).
About half of respondents indicated that some of their fossil-fuel-related exclusions
could evolve as a result of the current energy crisis, while only 28% expect nochange (albeit with significant divergence between generalists and ESG specialists).
The proportion of respondents who expected their exclusion policies on defense to
evolve was significantly lower (15%), although this could still have a notable impact
on investor perception on the sector according to our European Defense analysts(link).
Having said that, asset managers may have limited flexibility to depart fromestablished exclusions, which are often set by asset owners themselves: According to
the PRI, 64% of asset owner signatories systematically required their actively
managed equity assets to comply with their own exclusion policy in 2021, and 61%
for actively managed fixed-income (link). European funds may have even lessflexibility if they seek to receive one of the ESG labels described in Table 13, as we
do not expect their exclusion criteria to evolve rapidly. Further, some exclusions will
likely remain a pre-requisite for inclusion in ESG funds in our view, such ascompliance with international norms including on controversial weapons, andexposure to coal, which is seen as incompatible with most Paris-aligned climate
scenarios (see here for more details on the Paris Agreement).
Positive screening: the rise in “momentum-based” strategies
Positive screening has historically included best-in-class and best-in-universe
approaches, which consist in investing in the top performers within a sector or
broader investment universe. More recently, positive screening has also focused on
identifying best improvers, which are companies that have experienced, or are likely
to experience a significant positive change in ESG ratings or key ESG metrics (socalled “momentum-based” strategies). From a quantitative perspective, we alreadymentioned that risk-adjusted returns were higher for stocks combining a high andrising ESG score (6%), vs high and falling (3.5%), low and rising (0.1%), and low
and falling (-0.6%), resulting in the inclusion of a momentum component in J.P.
Morgan’s ESGQ (see here). At a fundamental level, positive screening based on
stock picking can enable investors to express constructive stances on companies andindustries highly exposed to ESG risks, especially when combined with investment
stewardship (see our case study here).
How to identify a momentum player? The example of RWE
While RWE derives a relatively small portion of its revenue from renewable
activities (only 18% in 2021), the company has pledged to reach carbon neutrality by
2040 through a complete transition of its business model from coal to renewables. Its
growth strategy ‘Growing Green’ is backed by €50 billion in investments inrenewable energy by 2030, a number that we expect to increase further. The resulting
ratio of green capex over green revenue (88% vs 18%) is a powerful forward-looking
indicator of its alignment with the Paris Agreement, in our view. We are confident
that the company will deliver on its plan given its track-record: RWE no longer
operates any hard coal fueled power plants in Germany and the UK, will gradually

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shut down until 2038, and convert remaining units to biomass plants in the
Netherlands.
Please click here to access the full note: RWE – Green Sparks.
Please click here to access the full analysis on ESG Discovery, our new digitalplatform to centralize forward-looking fundamental ESG analysis from our sector
analysts working in fundamental Equity and Credit Research.
Table 15: RWE earns median-grade ESG Ratings by MSCI, Sustainalytics, and Refinitiv
Better ESG

MSCI
Sustainalytics
Refinitiv

Weaker ESG

AAA

AA

A

BBB

BB

B

CCC

15-

15-20

20-25

25-30

30-35

35-40

40+

90+

90-80

80-70

70-60

60-50

50-40

40-

Source: J.P. Morgan based on Bloomberg, Sustainalytics and Refinitiv as of Sept. 2022. For detail on each of those ratings, please see the section on ESG Ratings here.

Thematic and Impact Investing
Investors typically differentiate between sustainable thematic investing and impact
investing: The first refers to investing in order to benefit from a particular(sustainable) trend, while the latter, as per the widely accepted definition from the
Global Impact Investing Network (GIIN), puts the emphasis on generating positive,
measurable social and environmental impact alongside a financial return. Impact
investing can thus be thought of as a subset of Sustainable thematic investing withthe measurability feature setting it apart.
As mentioned in the second chapter, impact investing remains one of the primary
drivers of responsible investment and the ultimate objective for many ESG investors.
According to the GIIN’s annual survey, social-related SDGs were most targeted by
impact funds over the recent years, while “Affordable and clean energy” and“Climate action” were the most represented environmental objectives.

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Figure 51: “Decent work and economic growth” and “No poverty” were the top two SDGs themes
targeted by impact investors over the past two years
Decent work and economic growth
No poverty
Good health and well-being
Reduced inequalities
Affordable and clean energy
Gender equality
Sustainable cities and communities
Climate action
Quality education
Industry, innovation, and infrastructure
Responsible consumption and production
Clean water and sanitation
Zero hunger
Partnerships for sustainable development
Life on landLife below water
Peace, justice and strong institutions
Other
0%

20%
2019

40%

60%

80%

2020

Source: J.P. Morgan based on the GIIN Annual Impact Investor Survey (link).

“The current business model focused on short term
financial returns forshareholders – is notconducive to support
business’ contributions to the
SDGs”
United Nations

While impact investing is perceived as the ultimate goal for many ESG
investors, it is also the most difficult to implement, in our view.
Assessing holistically the positive and negative effects of a company or project on
people and the planet is a challenging exercise. Among others, it needs to consider
the multiple sustainability dimensions, which may be measured using different
indicators, and are sometimes contradictory (for example, a desalination plan may beseen as a solution to improve water availability but could have negative impacts on
climate, as this technology is typically highly energy-intensive).
Second, impact investment typically implies a long time horizon and higher level ofrisks, which may deter many investors (see link). In a recent report, the G7 Impact
Taskforce recommended development banks to take more actions to address thisissue, including by scaling up public-private financing (so-called “blended finance”)
and partnerships (link).
Third, impact investing might imply giving up some financial performance toachieve sustainability objectives, as mentioned by the US SEC in their proposed
reporting requirements for impact funds (see link), although further Research would
be needed to demonstrate this, which may also vary significantly according to theselected timeframe.
Despite those challenges, initiatives have emerged to improve and standardize
impact measurement.
 In the EU, the taxonomy of sustainable activities attempts to standardize thedefinition of technologies and activities that can be considered as having a
positive sustainability impact. Its framework considers the compatibility of theactivities with the Paris Agreement, and their potential side-effects on other

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environmental and social objectives. Please see the chapter on ESG Regulations
to learn more (here).
 At a global level, the Impact Measurement Project is working to “build andfurther global consensus on how to measure, assess and report impacts on people
and the environment.” This initiative is supported by the United Nations andincludes leading impact-focused organizations such as the GIIN, International
Finance Corporation (IFC), PRI, and OECD, as well as sustainability standards
setters (link).
 The Stockholm Resilience Centre identified nine planetary boundaries “within
which humanity can continue to develop and thrive for generations to come”(link). It provides a common framework for assessing the positive impact of acompany or activity, based on its compatibility with those planetary boundaries.
 Some investors have invested significantly into models that can provide a holistic
measurement of impact, such as the Net Environmental Contribution (NEC)initiative founded by Sycomore, SWEN Capital Partners, Ofi and Eurinvest,
which aims at measuring contribution of activities and companies to the global
transition toward a sustainable, resilient economy.
Figure 52: The NEC metric calculates the extent to which activities and companies are alignedwith the global transition toward a sustainable, resilient economy

Source: NIC (link).

Investment StewardshipAs part of their investment strategies, many ESG investors seek to influence thecompany’s ESG decisions, practices, and disclosures. Voting at general meetings andengaging directly with companies’ management or policy makers (alone or incollaboration with other investors, so-called “collective engagement”) have become
increasingly popular tools to achieve this goal, according to the GSIA. While voting
is exclusively used by equity investors for obvious reasons, engagement isincreasingly incorporated into responsible investment policies of fixed-income
investors (link).
More ESG proposals, but how many go through?
The number of ESG-related proposal filings has increased materially over the past
three years (+43% for Russell 3000 companies between 2020 and 2022), led byclimate and human capital-related proposals, which more than doubled over theperiod (link). However, debate remains on their efficacy. In 2022, only 9% of ESG
proposals received support from more than half of shareholders, the lowest level
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since 2020 according to Freshfields. The varying quality and relevance of some ofthe shareholder proposals were recently noted by Blackrock:“In the U.S., the Securities and Exchange Commission revised guidance onshareholder proposals resulted in a marked increase in environmental and social
shareholder proposals of varying quality coming to a vote (…). Our early assessment
is that many of the proposals coming to a vote are more prescriptive andconstraining on management than those on which we voted in the past year. (…)
global proxy advisors ISS and Glass Lewis have been recommending thatshareholders not support overly prescriptive or constraining proposals.”
Blackrock, 2022 Investment Stewardship report (link)
Figure 53: ESG-related shareholder proposals has increased by 46%
over the past three years…

Figure 54:...Although debates persist on their efficacy
Number of proposals by level of support and year

Number of proposals by topic and year
180
160

2020

140
120
100
80
60

2021

40
20

GovernanceSocial2020

2021

OthersClimate Change

OthersHuman Rights

Human Capital

OthersCompensation

Lobbying

Board

Shareholder Rights-

Environment

2022

2022

0%

20%

40%

>50% Support

Source: J.P. Morgan based on Freshfields’ Trends and Updates from the 2022 Proxy Season
Report (link) and ISS. Scope: Russell 3000 companies.

60%

80%

100%

<50% Support

Source: J.P. Morgan based on Freshfields’ Trends and Updates from the 2022 Proxy Season
Report (link) and ISS. Scope: Russell 3000 companies.

One feature of many ESG proposals is that they can attempt to be too broad or far
reaching, which even if supported can make them challenging to implement. The
2022 proxy season suggests that climate-related proposals that are “narrowly tailoredand core to a company’s business” are more likely to receive broad support (link).

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Example of a proposal receiving broad support: Chevron’s methane
emissions disclosures

Example of a proposal receiving limited support: Imperial Oil’s capexalignment with a net-zero scenario

Background
The Environmental Protection Agency (EPA) formula used to estimate methane
emissions is not a good foundation for a corporate mitigation strategy. It fails to
capture many major leaks, wasting valuable product (worth $2 billion per year) andsubstantially underestimates potent emissions. Actual emissions have been foundto be between 50 and 90% higher than what is reported using the formula (…)
According to EPA data, Chevron ranks 73d of U.S. top 100 oil and gas producers,
with a methane intensity of 0.08%. However, given the limitations of EPA’s
methodology it is unclear whether this ranking can be trusted.

Background
In its World Energy Outlook 2021, the International Energy Agency (IEA) has
produced a comprehensive Net Zero Emissions by 2050 scenario (NZE) in which“the rapid drop in oil and natural gas demand means that no fossil fuel explorationis required, and no new oil and natural gas fields are required beyond those thathave already been approved for development… Also not needed are many of theliquefied natural gas (LNG) liquefaction facilities currently under construction or at
the planning stage” (link). Imperial Oil could redirect expenditures dedicated to
explore and increase reserves to low carbon opportunities such as using bitumen to
produce non-combustion and high-value products (see Alberta Innovates’ Beyond
Bitumen Combustion strategy, link).

Proposal
Shareholders request that the Board issue an analysis of (…) the reliability of
Chevron’s methane emission disclosures. The report should: Summarize the outcome of any activities to directly measure methane
emissions by the Company;
 Provide investors with insight as to whether there is likely to be a material
difference from the Company’s published estimates of methane emissions; Assess the degree to which the difference may also alter estimates of theCompany’s Scope 1 emissions.
The report should be made public, omit proprietary information and be prepared
expeditiously at reasonable cost.
At management’s discretion, we recommend consideration of the feasibility of thefollowing in the report:
 Provide a narrative explanation of the difference between the Company’s
estimated methane emissions and the Company’s own direct measurements,
or any third party measurements, by site or region;
 Reporting any efforts to validate emissions estimates and disclosure through athird-party audit or evaluation.

Proposal
Shareholders request that Imperial Oil adopt a policy to cease capital expendituresin exploration and developments of new oil and gas fields in order to align its
business strategy to a net zero emissions by 2050 pathway as described in theInternational Energy Agency Net Zero Emissions by 2050 scenario.
Shareholder Support: 1.5%
Source: CERES (link).

Shareholder Support: 98%
Source: CERES (link).

In addition, organizations such as Share Action have pointed to the lack ofdisclosures on proxy voting currently, with only 55% of the world’s 75 largest asset
managers disclosing a record of proxy votes at Annual General Meetings and 17%
disclosing the reasons for their voting decisions in 2020 (link). These suggest that
more transparency and guidance may be needed for voting to become a compellingcomponent of ESG strategies.
Engagement: more transparency may lead to a bright future
While there is limited data on the number of ESG-related engagement initiatives,various investor surveys and alliances suggest that these have become an importantcomponent of investors’ ESG investing strategy. 51% of ESG funds within
Morningstar’s sustainable universe indicate using engagement as part of theirinvestment process (as of Sept. 2022), while the PRI reported a growing proportionof signatories reporting engagement with policy makers in 2021 (link), and a
growing number of collaborative investor engagements on its website:

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Figure 55: Collaborative investor engagements on ESG issues coordinated by the PRI since 2015

Source: J.P. Morgan based on the PRI (link).

Similarly to voting, more transparency is needed on the actual outcomes ofengagement initiatives, with only 17% of the world’s 75 largest asset managers
publishing “a comprehensive record of ESG-related engagement” in 2020 according
to Share Action (link). Our own discussions with investors suggest that engagement
is increasingly seen as a constructive way to support companies in their transition
compared to exclusions (see our case-study below).
J.P. Morgan EMEA Equity Research has developed a library of engagement
questions to help investors in their engagement efforts, which can be accessed on
ESG Discovery (link).

Portfolio Tilting
Investors may seek to construct a sustainable portfolio by targeting one or several
metrics (GHG emissions, Diversity Equity and Inclusion targets, weighted average
ESG score where the individual scores are provided by an external vendor, etc.)
above a predetermined hurdle (this can be the fund’s benchmark or some other predefined goal). This can be achieved by security selection as described above, but also
through a sizing framework where investors choose to consciously allocate larger
positions to ESG winners or improvers.

Case Study: “Managed Phaseout” In Highly Exposed
Sectors
In 2022, 450 financial institutions representing $130 trillion of assets launched the
Glasgow Financial Alliance for Net Zero (GFANZ)3 at the annual international
climate negotiations (COP26). Members committed to accelerate the decarbonizationof high-emitting assets, primarily energy companies producing or consuming fossilfuels, through a combination of screening and proactive engagement rather thandivestment, which imply giving up the ability to drive positive change (link).
According to the alliance, this “managed phaseout” approach enables to:“Mitigate financial marginalization for companies with high-emitting assets but
credible transition plans; Allow financial institutions to stay engaged withcompanies in high-emitting sectors and support them through their transition to netzero; and Draw in broader stakeholders in support of a just transition and continuityof critical services.”

3 Note that the GFANZ resulted in a number of “sub-alliances”, including the Net-Zero Asset Managers initiative, Net-Zero Banking

Alliance, Net-Zero Asset Owner Alliance, Paris Aligned Investment Initiative, Net-Zero Insurance Alliance, Net Zero Financial Service
Providers Alliance and the Net Zero Investment Consultants Initiative. See our dedicated report on the Net Zero Asset Management
Alliance to learn more (link).
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Transition strategies on the hook
The key focus of investors applying a managed phaseout approach is the so-called“climate transition strategy” of companies. While there is no standard definition of atransition strategy, it can be broadly defined as:“A time-bound action plan that clearly outlines how an organization will pivot its
existing assets, operations, and entire business model towards a trajectory thataligns with the latest and most ambitious climate science recommendations. i.e.,
halving GHG emissions by 2030 and reaching net-zero by 2050 at the latest, thereby
limiting global warming to 1.5°C.” (Carbon Disclosure Project4)
A transition strategy typically describes a series of actionable steps to meet a longterm Net Zero (also called climate neutrality) target. A Net Zero target means that thecompany commits to cutting greenhouse gas emissions to as close to zero as possible
and re-absorb any remaining emissions from the atmosphere. Net-zero pledges
covered 91% of global GDP in June 2022, vs 68% in 2021 and only 16% in 2019(link and link).
Credible transition strategies as criteria for positive screening
The main challenge for investors using a managed phaseout approach isdemonstrating that their investees progress towards their long-term climate target andthus, that their investment portfolios will decarbonize over time. As a first step,investors may decide to only invest in companies that have robust and credible
transition strategies. Several frameworks have emerged to help investors in thisassessment, including the Sciences-based Target Initiative (SBTi) and Transition
Pathway Initiative (TPI). While their methodology may slightly differ, thoseorganizations generally use the following criteria to assess the credibility oftransition plans:

Inclusion of interim targets and milestones

Clear timeline for both interim and long-term targets



Clarity on the type of GHG emissions covered (carbon, methane, etc.) andscopes (1, 2, and 3)



Details on how the transition plan will be financedCompany’s reliance on carbon offsets and credits.

4 Carbon Disclosure Project (CDP): please visit the section of the report dedicated to corporate reporting for more details (here).

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Table 16: Main frameworks available to investors to assess the quality of a company’s Net Zero target and transition plan

CDP

Role
Collects and analyses quantitativeand qualitative information oncompanies’ climate strategy,
including their transition plans#. of companies in scope
13,114 (analysis of transition
plans available only ataggregated-level)“Validates” that a company’s Net
Zero target is in line with SBTi’s Net
Zero Standards

Net zero targets of 15
companies validated (as of June2022), and 1,118 submitted net
zero targets awaiting approval

Transition Pathway
Initiative (TPI)

Assesses the alignment ofcompanies’ climate target withclimate scenarios from the IEA

491

Net Zero Tracker

Assesses the quality of Net Zerotargets based on public disclosures(link)

2,001

Climate Action 100+

Assesses companies on emissions
reductions, climate-related
governance and disclosures166 (representing 80% of global
industrial emissions)

SBTi Net Zero
Standard

Business Model
NGO funded by a combination of
government and philanthropic grants andmission-complementary fee for service

Link
Here
(information atcompany-level isavailable here)

Partnership between the UN and three
NGOs: CDP, the World Resources
Institute (WRI) and the World Wide Fundfor Nature (WWF).
Research Centre at the London School of
Economics, supported by 131
investors($US50tn AUM)
Partnership between the University of
Oxford, the Net Climate Institute, theEnergy & climate Intelligence Unit andData-Driven EnviroLab
Coalition of 700 investors ($US68tn AUM)
engaging with largest global emitters on
their climate strategy

Here

Here

Here

Here

Source: J.P. Morgan based on the Net Zero Stocktake Report from Net Zero Tracker of June 2022 (link), CDP, SBTI, NZ Tracker, Climate Action 100+, CCRM and WWF as of Sept. 2022.

Engagement and voting to generate accountability
Investors also use engagement and voting to attempt to hold companies accountablefor delivering on ambitious climate commitments. Climate Action 100+ is the largest
investor alliance engaging with companies on their transition strategy. Engagement
focuses on three key asks: (i) implementing strong governance of climate risks,
including board oversight; (ii) enhancing climate disclosures; and (iii) reducing
absolute GHG emissions. The organization also ‘flags’ shareholder proposals thatalign with those three objectives and in 2022, four of the 37 proposals flagged by the
initiative received majority support (echoing our earlier comment that shareholders
remain cautious about proposed ESG resolutions):
Table 17: Four proposals flagged by Climate Action 100+ have received majority shareholder
supportCompany
Chevron Corp
Caterpillar Inc.
Boeing Co.
ExxonMobil

Shareholder Proposal
Report on Methane Measurement
Report on GHG Emissions Targets
Report on alignment with Climate Action 100+ Benchmark Net
Zero Indicator
Report on Climate Change Financial Risks

Support (%)
98%
96%

Link
Here
Here

91%

Here

51%

Here

Source: J.P. Morgan based on Climate Action 100+ (link), as of May 26, 2022.

The managed phaseout: a framework for combining “E” and “S” investing?
One of the key objectives of the managed phaseout approach is ensuring a “justtransition”, which is minimizing negative repercussions from climate policies andmaximizing positive social impacts for workers and communities (see glossary) – inother words, considering both the “E” and the “S” of ESG.
“The early retirement of high-emitting assets can come with significant justtransition considerations as the assets may be of particular importance in a nationalor local context. For example, affected stakeholders might face loss of employment,
discontinuity of critical services, and other challenges. The potential to incorporate
just transition considerations and partner with broader stakeholders can be key toboth successful financing and delivery of a Managed Phaseout plan.”
GFANZ (link)
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Our Global Energy team highlighted the importance of an effective just transition in
their J.P. Morgan Global Energy Outlook (link), which forecasts that supply growthwould miss demand growth by 20% by 2030 given current spending rates, implying
an energy deficit and structurally higher energy prices, potentially leading to higher
levels of energy poverty. However, we also emphasized that ESG investors typicallyconsider a just transition more holistically and on a longer timeframe, including thesocial costs associated with physical risks (see ESG Meets GEO). In this perspective,
as with any other climate strategies, the success of the managed phaseout approach
will eventually be measured by its ability to reduce investees’ absolute GHG
emissions sufficiently rapidly to align with the Paris Agreement.
Asia: a bright spot of transition opportunities
As investors look to transition their portfolios toward Net Zero by targeting realemissions reductions on a global scale, they cannot ignore Asia. Almost half ofglobal emissions are generated in Asia, making the region the most environmentallymaterial to climate change.
Figure 56: Global emissions by region (2019)% of emissions

4%

3%

3% 1%

1%

7%
47%
16%
18%
Asia
EuropeAfricaSouth America

North America
Middle East
Bunkers
Oceania

Source: J.P. Morgan based on the Global Carbon Project (link).

Figure 57: Five of the top 10 emitters are Asian
countries (2019)
MtC/ySaudi Arabia
Indonesia
South Korea
Iran
GermanyJapan
Russia
India
USA
China
-

1,000

2,000

3,000

Source: J.P. Morgan based on the Global Carbon Project (link).

J.P. Morgan Asia Pacific ESG Analysts have developed a framework to identify
climate alpha opportunities in carbon-intensive sectors (link), which shows thatcompanies that have forward-looking net zero commitments and a track record of
reducing emissions intensity outperform their sector peer group, with Utilities
showing the biggest divergence, with 11% excess returns, followed by Materials with
8% outperformance and Energy at 6% over the past year.

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Alphabet Soup: Data, Ratings & Indices
In line with the broader ESG market, the market of ESG data and Research has
experienced both rapid growth and diversification over the past decade. We start thischapter by reviewing key features and limitations of companies’ sustainability
disclosures, including the persisting lack of standardization and availability
compared to investors’ needs. We then introduce the role of ESG data providers inaddressing some of the challenges discussed throughout this Primer, including thevarious investment objectives of ESG strategies and lack of reported data, although
they themselves facing growing criticisms. Despite progress, the lack of high-quality
and comparable ESG data remains one of the most pressing challenges for investors,
in our view.

Corporate Reporting
The availability of corporate disclosures has improved
Companies have considerably increased the amount of ESG disclosures since theearly 2000s, pushed by growing investor demand, regulations and industry
initiatives.
Figure 58: Sustainability reporting rates have improved dramaticallysince the early 2000s…
100%

Figure 59: …Partly driven by growing regulatory requirements
Cumulated number of corporate disclosure requirements and split between
mandatory and voluntary disclosures

90%

600

80%

500

70%

400

60%

300

50%
40%

200

30%

100

20%

0

0%
1999

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

10%
2004

2009
N100

2014

2019

G250

Mandatory

Voluntary

Source: J.P. Morgan based on the PRI (link). Note: 2022 YTD (as of Aug. 24th).

Source: J.P. Morgan based on KPMG Survey of Sustainability Reporting 2020 (link). Note:
N100 includes the top 100 companies by revenue in 52 jurisdictions selected for the study.
G250 includes the world’s 250 largest companies by revenue as defined in the Fortune 500
ranking of 2019.

Companies have historically based their sustainability reporting on voluntarysustainability reporting standards.
To identify relevant information points, companies have historically relied onorganizations such as SASB and the Global Reporting Initiative (GRI), whichdeveloped voluntary reporting sustainability standards. We summarize below thestandards that have been most widely used to date.

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Table 18: Most-established international sustainability reporting standards include the GHG Protocol, GRI, SASB, TCFD, CDP and the SDGs
Global Reporting
Initiative (GRI)

Greenhouse Gas
ProtocolClimate Disclosure
Project

Cross-sector
sustainability
reporting standards,
founded in the US in
1997 (first version of
the standards
published in 2000).

GHG accounting
standards launched in2001 by the WRI and
the World BusinessCouncil for Sustainable
Development(WBCSD).

Questionnaire oncompanies’ exposure
to, and management ofclimate, water andforests. First
disclosures date backto 2002.

Value Reporting
Foundation(previously SASB)

Task Force on ClimateRelated Financial
Disclosures

UN SDGs

Sector-specificsustainability reporting
standards founded in
the US and launchedin 2011.

Framework forreporting positive
impact published by
the UN in 2015

Guidance on climaterelated disclosures
published by the G20
Financial Stability
Board in 2017

Source: J.P. Morgan.

Figure 60: Most companies use a combination of standards to report their ESG data
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Multiple

SDG

GRI
2019

TCFD

SASB

2020

Source: J.P. Morgan based on the International Federation of Accountants (link). Note: “The percentage of ESG reporting
framework/standard is calculated as the number of reports that disclose the use of a specific framework/standard vs. the total numberof reports that include ESG information (1,283). The sum of the percentages indicated exceeds 100% because most companies use
more than one framework/standard for reporting purposes.”“Voluntary reporting
frameworks and guidance
have prompted innovation
and action, althoughfragmentation has also
increased cost and complexity
for investors, companies andregulators.”

Current sustainability reporting practices have delivered mixed results so far.
While these standards have undoubtedly helped to scale sustainability disclosures,
they have failed to address the needs of investors for comparable, high-quality andconsistent data, as shown in a recent survey conducted by the EU Commission.
Figure 61: There is a consensus that the availability, comparability and reliability of ESG dataneed to improve
Companies do not disclose all relevant information

IFRS
Limited comparability of information is a problem

Limited reliability of reported information is a problem
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
AgreePartially disagree and partially agree

Disagree

Do not know

Source: J.P. Morgan based on the EU Commission’s Summary Report of the Public Consultation on the Review of the Non-Financial
Reporting Directive, 2020 (link).

We identify four main limitations to existing sustainability reporting practices.
 Comparability: Because sustainability reporting standards are voluntary,companies are able to “pick and choose” the metrics they report on, resulting in
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companies disclosing different information points. Even when companies
seemingly report similar metrics, they often use different methodologies or scope
to report their performance.
We illustrate this challenge with the example of reporting on accident frequency
rate from five companies in the construction sector, which are not comparable
because (i) there isn’t a standardized definition of “accident”, (ii) some only
provide this information at Group-level while some do not, (iii) some exclude
contractors from this metric.
Table 19: Reported ESG metrics such as occupational health and safety can be difficult tocompareComparison of reporting on accident frequency rate for selected companies in the construction sector
2021
Calculation
Scope
Treatment of Contractors
Value
Number of accidents
Provided separately foroccurring during theemployees and contractors
ACS
13.64
Group
working day / Million(we indicate the rate forhours worked
employees).
Number of accidents
Bouygues
4.9
involving time off work *Group
Not disclosed
1,000,000/Hours worked
France, provided other
Provided separately for
Number of lost-timelarge markets but not
employees and contractors
Eiffage
5.87
workplace accidents *aggregated at Group(we indicate the rate for
1,000,000/Hours worked
level (we indicate theemployees).
rate for France)
Frequency rate provided
Number of accidents withseparately for employees, andFerrovial
6.7
sick leave *Groupemployees and contractors
1,000,000/Hours worked
together (we indicate the rate
covering both categories).
Number of recognized
Vinci
0.95
occupational illnesses *Group
Not disclosed
1,000,000/Hours worked
Source: J.P. Morgan; Company Reports.

 Consistency: Companies can and frequently do change the methodology used tomeasure metrics and report information. This is particularly problematic given
meaningful changes in a company’s environmental and social practices often taketime to materialize in reported metrics. For example, climate-related investments
such as changing the whole vehicle fleet, purchasing new energy-efficientequipment, and engaging with suppliers can take several years to translate into
tangible reduction in GHG emissions.
 Reliability: Data suggests that assurance of sustainability data has improved,
particularly among large firms listed in developed markets. However, external
assurance often covers selected metrics only, primarily GHG emissions, as
opposed to the company’s whole sustainability reporting. More importantly,
reasonable assurance remains rare, which implies that most companies have room
to improve the credibility of their sustainability information.

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Figure 62: The % of companies seeking external assurance improved between 2017 and 2020

Source: J.P. Morgan based on KPMG Survey of Sustainability Reporting 2020 (link). 2020 figures are estimates of the underlying
trend, based on the analysis of the same group of countries and jurisdictions in both 2017 and 2020. The actual N100 rate ofassurance based on the new 2020 group of jurisdictions was 49%.

Table 20:…But external assurance rarely covers all sustainability information
Sustainability Information
GHG Emissions
Other Environmental
SocialGovernance
All Sustainability Information

Companies receiving external assurance (%)
95%
78%
68%
43%
43%

Source: J.P. Morgan based on the International Federation of Accountants (IFAC) (link).

Figure 63:…And remains primarily limited
All firms providing external assurance
Audit Firms
Affiliated Firms
Other Service Providers
0%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

LimitedReasonable or Moderate

Source: J.P. Morgan based on the IFAC (link). Note: An affiliated firm is defined by the IFAC as “an independent entity that is
associated with a separate audit firm (typically the audit firm member of a global network.” Other issues: Sustainability information is often scattered across multiple
documents (website, sustainability report, CDP questionnaires, proxy voting etc.),
overly qualitative, and inconsistent with financial reporting.
Toward global sustainability reporting standards?
In 2021, the IFRS foundation announced its intention to develop global sustainability
reporting standards by consolidating existing frameworks, primarily GRI, SASB andTCFD. The initiative, led by its newly formed International Sustainability Standards
Board (ISSB), will start by developing climate reporting standards before expanding
to other areas of sustainability, with the objective of delivering a “global baseline” of“machine-readable” sustainability-related disclosure standards. Importantly, thisinitiative is backed by the International Organization of Securities Commission(IOSCO), suggesting a relative broad adoption of the standards by local regulators.
While we welcome this initiative, our initial analysis shows that their approach islikely to remain “light-touch” and focused on financial materiality, which may not
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suit the needs of all ESG investors (link). As a result, regulators have stepped in,particularly in the EU and Asia, to develop additional reporting requirements (seehere).

Third-Party Vendors
The market for third-party ESG data is rapidly growing
The expansion and diversification of the type of ESG data needed by investors,
combined with weaknesses in ESG reporting, have led to the growth in the market
for third-party. New, specialized vendors have emerged, while existing providers offinancial data have also invested the market. MSCI, ISS and Sustainalytics are
estimated to dominate the market.
Figure 64: The market for ESG data surpassed $1bn for the first timein 2021…

Figure 65: …And remains dominated by three players (MSCI, ISS,
Sustainalytics)

Estimated size of the ESG data market (US$mn)

Estimated market share by vendor (%)

1,400

MSCI
ISS ESG

1,200

Sustainalytics

1,000

31%

S&P Global
LSEG

800

Bloomberg

600

Moody's

400

10%

200

17%
10%

2016 2017 2018 2019 2020 2021 2022(f)
Source: Opimas (link).

EcoVadis
RepRisk
CDP
Other

Source: Opimas (link) Note: those results were corroborated by the 2021 ESG Manager Surveyof Russel Investments, which shows MSCI, Sustainalytics and ISS as the most used providers(link).

ESG vendors have different business models, definition of ESG andsustainability, and product mix
 Business model: The ESG data market comprises (i) generalist vendors, which
offer both sustainability and non-sustainability products, and (ii) specialized
vendors that only provide sustainability products. Generalists typically include
existing large providers of financial data and research such as the three largest
credit rating agencies (CRAs). Many generalists have gained their ESG expertiseby acquiring some of the specialized vendors, resulting in a consolidation of theindustry over the past decade.

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Figure 66: The acquisition of specialized ESG data providers by larger vendors has led to the consolidation of the ESG data industry.

Source: European Commission’s Study on Sustainability-Related Ratings, Data & Research, 2020 (link). Based on ERM Research.

 Definition of ESG and sustainability: The lack of consensus on the definition of
ESG led many vendors to develop their own definition of ESG and categorizationof factors within each of the E, S and G pillars. Interestingly, some vendors suchas Sustainalytics have chosen to not classify ESG issues within a specific pillar,
which we see as an interesting approach to address the overlap between some ofthe sustainability topics.
Table 21: ESG data vendors have developed their own definition of ESG
Examples of factors from selected ESG rating providers

Vendor
MSCI

ISS

S&P

Refinitiv (part ofLSEG)

Sustainalytics (partof Morningstar)

Environmental factors
Climate Change
Natural Capital
Pollution & Waste
Environmental Opportunities
Energy Management
Climate Change Strategy
Water Risk & Impact
Environmental Impact of Products
Waste & Pollution
Greenhouse Gas Emissions
Water
Land Use & Biodiversity

Social factors
Governance factors
Human Capital
Product Liability
Corporate Governance
Stakeholder Opposition
Corporate Behavior
Social Opportunities
Equal Opportunities
Board Independence
Health & Safety
Shareholder Democracy
Human Rights
Business Ethics
Suppliers
Payments to Governments
Customer Engagement
Structure & Oversight
Safety Management
Code & Values
Communities
Transparency & Reporting
Workforce & Diversity
Financial & Operational Risks
Workforce
Resource Use
Management
Human Rights
EmissionsShareholders
Communities
Innovation
CSR Strategy
Product Responsibility
ESG Factors
The Environmental and Social Impact of Products and Services
Human Rights – Supply Chain
Human Rights
Human Capital
Data Privacy and Security
Land Use and Biodiversity
Business Ethics
Land Use and Biodiversity – Supply Chain
Bribery & Corruption
Occupational Health and Safety
Access to Basic Services
ESG Integration – Financials
Community Relations
Product Governance
Emissions, Effluents and Waste
Resilience
Carbon – Own Operations
Resource Use
Carbon – Products and Services
Resource Use – Supply Chain

Source: J.P. Morgan based on MSCI, Vigeo Eiris, S&P, Refinitiv and Sustainalytics.
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 Product mix: ESG vendors offer different types of products and solutions, which
can be classified in five broad categories:(1) Raw data: Data that undergoes limited review and changes by the vendor.
The value of those products typically lies in the vendors’ capabilities to
identify new, relevant datasets and collect data on a large scale. Some
vendors have also developed methodologies to estimate data when it’s
missing, and standardize it to ensure comparability.
(2) Ratings, rankings and scores: A vendor’s opinion on the relative ESG
profile of an instrument or issuer compared to peers. We explore thiscategory in more detail below.
(3) Screening: Products that flag a company’s involvement in specific activities
or products to inform investors’ own screening policies. As discussed in the
fourth chapter, screening is a key building block in a majority of ESG
investment processes.
(4) Controversies and alerts: Services to monitor ESG-related news flow oncompanies, including potential breaches in international norms.
(5) Audit & advisory services: Services that allow a company to demonstrate
the reliability of its ESG information or improve its ESG profile.
As the ESG market continues to evolve, vendors have refined and adapted theiroffering, such as developing bespoke solutions to investors, providing products on
emerging themes such as biodiversity and DEI rather than the full spectrum of ESG
factors, and giving opinion on companies’ alignment with new and increasingly
complex ESG regulations, which we discuss in the last chapter. In our view, climate
data remains the most developed segment of the ESG data market, owing partly to a
combination of adequate reporting from companies and the existence of a global
carbon accounting standard, the GHG Protocol. We conducted a comprehensive
review of GHG emissions and fossil fuel data in a separate report (link).

Ratings
Providers of ESG ratings have become prominent players in this new ecosystem.
They indeed offer in theory a simple solution to a complex problem, which isexpressing in a single data point the environmental, social and governance practicesof a company relative to peers. While increasingly challenged and scrutinized byinvestors and regulators, third-party ESG ratings often remain a key component of
ESG investment strategies and indices. Providers have been able to adapt to the fastevolving ESG market, including by providing specialized products and leveraging
artificial intelligence (AI).
What is an ESG rating?
ESG ratings can be defined as the broad spectrum of ESG ratings, rankings andscorings that serve the assessment of an entity, an instrument or an issuer exposure to
ESG risks and/or opportunities (IOSCO). Importantly, a company’s ESG ratings may
determine its eligibility to ESG indices, which have attracted a growing proportion of
global ESG AUM (see here).
How do ESG ratings differ?
While seemingly serving the same purpose (i.e. assessing “exposure to ESG risks
and or opportunities”), ESG ratings differ significantly in terms of objective, scope,
coverage, inputs, methodology, peer group, outputs, and remuneration model.

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Objective: Unlike credit ratings, which measure the likelihood and severity ofdefault, ESG ratings have different objectives, often defined broadly andqualitatively based on the provider’s own definition of materiality (for example
MSCI’s stated objective implies a financial materiality perspective, while
Moody’s V.E. score explicitly refers to double materiality).

Table 22: Comparing definition and objective of selected ESG ratings
ProviderMSCI
ISS
Sustainalytics

S&P CSA

Refinitiv

Stated definition & objective“MSCI ESG Ratings aim to measure a company’s management of financiallyrelevant ESG risks and opportunities.”“A company’s management of ESG issues is analyzed on the basis of up to
100 rating criteria, most of them are sector-specific.”“The ESG Risk Ratings measure the degree to which a company’s economic
value is at risk driven by ESG factors or, more technically speaking, themagnitude of a company’s unmanaged ESG risks.”“The S&P Global Corporate Sustainability Assessment (CSA) enables you tobenchmark your industry specific economic, environmental and social criteriathat are relevant to the growing number of sustainability focused investors andfinancially relevant to your corporate success.”“Measure a company's relative ESG performance, commitment andeffectiveness across 10 main themes (emissions, environmental productinnovation, human rights, shareholders, etc.) based on publicly-reported data.”

Link
Here
Here
Here

Here

Here

Bloomberg“Measures the amount of ESG data a company reports publicly.”

N.A

Moody’s V.E.

“Powered by a double materiality lens, measure the extent to which
companies are managing material ESG factors.”

Here

Source: J.P. Morgan (as of Aug. 26th). ISS refers to ISS’ ESG score. Bloomberg refers to Bloomberg’s ESG Disclosure Score.

 Scope: While most providers consider the full spectrum of ESG factors, someprovide a rating specific to a particular theme, such as climate and governance(e.g., ISS Governance Quality Score and CDP Climate score).
 Coverage: We indicate the coverage of main ESG rating providers below,
although we note that this information is not reported in a consistent manner.
Table 23: Comparing coverage of selected ESG rating providers
ProviderMSCI
ISS
Sustainalytics
S&P CSA
Refinitiv
Bloomberg
Moody’s V.E.

Coverage
680,000+ equity and fixed income securities, including 8,500 companies
11,400+ issuers, including 7,300 companies
22,000+ equity and fixed income securities, including 12,000 companies
10,000+ companies
12,000+ companies
11,800+ companies
ESG scores: 140 million+ companies; ESG Assessments: 5,000 companies

Source: J.P. Morgan based on providers’ public disclosures (as of Sept. 2022). Bloomberg refers to Bloomberg’s ESG Disclosure
Score.

 Inputs: While all providers rely on public disclosures, others (mostly S&P
Global) actively request information through questionnaires or more rarely, directinteractions with the company. Actively requesting information may help toavoid size-bias, which occurs when larger companies receive higher scoresbecause of their stronger reporting capabilities (link), but can also lead to “survey
fatigue” from companies (link). Rating providers can also use third-party datasuch as regulatory, media and NGO sources, as well as specialized data providers(e.g. RepRisk, which is specialized in flagging and monitoring material ESG
news flow and controversies, including violations of international standards).

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Another important difference between providers is the way they treat missing
data, with some penalizing companies that do not report information (e.g.
Bloomberg), while others estimate this data. According to the European
Commission in its study on sustainability-related ratings, data and research (link),
57% vendors indicated using some form of data estimation, although none
marked estimation as a significant data input for research/analysis. Our own
Research found limited disclosures on the treatment of missing data by providers.
 Methodology: Rating providers differ significantly in terms of how they process,review and transform data into a final score. At a high level, ESG ratings can be
split between those that are purely quantitatively driven and those thatincorporate analytical judgment from analysts. Interestingly, some providers suchas S&P Global and Moody’s have also developed two separate ratings, one that issolely derived from a quantitative model (S&P CSA, Moody’s ESG Score), andone that includes a qualitative overlay from analysts (S&P ESG Evaluation,
Moody’s ESG Scores & Assessments). Second, key drivers and their influence inthe final ratings vary between providers, and include the company’s region ofoperations, industry, level of sustainability disclosures, size, involvement incertain products and controversies, among others.
 Outputs: The final scores are provided at a different level of granularity, andexpressed differently, with some ratings based on a numerical scale and others
using an alphabetical scale.
 Peer group: ESG rankings may only be comparable against industry peers, whileothers may be comparable across sectors. The former is particularly useful for
sector-specific investment strategies such as best-in-class, which aims to pick up
the best companies within a sector. In practice, this means that a company in the
Oil and Gas and one in the Financial sector with vastly different credentials could
both get 100 (assuming a rating expressed on a scale from 1 to 100, with 100
being the highest). On the other hand, ESG ratings that are comparable acrosssectors typically take into account the level of exposure to ESG risks of anindustry and cap the score of companies in highly exposed industries. Their main
advantage is that the scores are comparable across the investment universe. We
illustrate the impact that the choice of the peer group can have on a company’s
ESG rating by taking the example of Shell Plc, which scores relatively highly
across providers using an industry ranking (suggesting their view of thecompany’s stronger sustainability strategy than many industry peers), but less soon Sustainalytics, which uses a cross-industry ranking.
Table 24: The impact of the peer group on ESG ratings: The example of Shell Plc
Provider
MSCI
Sustainalytics
S&P CSA
Refinitiv

Shell’s ESG Rating
AA
35
65
93

Peer Group
Industry peers
Cross-industry
Industry peers
Industry peers

Source: J.P. Morgan based on Bloomberg, Refinitiv, S&P and Sustainalytics. We excluded ISS and Moody’s VE as data is not publicly
available. We excluded Bloomberg’s ESG Disclosure Score, which primarily reflect a company’s level of ESG disclosures.

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Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

Table 25: Comparing main inputs and outputs of selected ESG ratings
InputsProviderMSCIESG Staff

350+

Company
DisclosuresCompany
Questionnaire-

Third-Party DataMedia, NGO,
academic,
regulatory andgovernmental
sources, CDP
Media, NGO,
academic,
regulatory andgovernmental
sources
Media and NGO
sources, CDP,
among others

Ranking Scale
Feedback fromcompanies

Treatment of missing
disclosuresNo information found; EC
study suggests that
estimates are used

Peer
Group

Better
ESG

Lower
ESG

Industry
peers

AAA

CCC



Estimated data represents
5-10% of all their data
inputs (link). Rating
penalized if noassumptions can be made.

Industry
peers

A+

D-



Ratings penalized

Crossindustry

10

40

Industry
peers

100

0

Industry
peers

0

100

ISS

500+



-

Sustainalytics

500+



-

S&P CSA

500+





RepRiskRefinitiv

350



-

Media and NGO
sources-Bloomberg

Information
not found



-

-

-

Rating penalized (Score
reflects disclosures)

Crossindustry

100

0

Moody’s V.E.

400+



-

Media sources,
CDP, among
others

No information found; EC
study suggests that
estimates are used

Industry
peers

100

0

We understand that ratingis penalized for nondisclosure to the CSA
questionnaire
Rating penalized (link), EC
study suggests that
estimates could also beused.

Source: J.P. Morgan (as of Sept. 2022), based on public disclosures and the EC (link). Bloomberg refers to Bloomberg’s ESG Disclosure Score.

 Remuneration: The ESG rating market is largely dominated by the “subscriberpays” model, whereby investors pay for the ratings, as opposed to the “issuer
pays” model. While the “subscriber pays” model can help to prevent potential
conflicts of interest, it can disadvantage smaller investors that may not have theresources to access the data, and lead providers to prioritize quantity over quality(link).
How to assess a company’s ESG consensus? Not with ESG ratings…
In 2019, the Massachusetts Institute of Technology (MIT) highlighted the disparities
between final ESG ratings in a landmark study entitled “Aggregated Confusion: theDivergence of ESG Ratings” (link). The study found that the correlation between
ESG ratings of some of the largest providers was about 0.54 in average (vs 0.99 fortraditional credit ratings), with the highest correlation observed on the environmental
pillar (0.54) and the lowest on governance (0.3). The research even found several
negative correlations between providers in their assessment of Lobbying,
Responsible Marketing, and Indigenous Rights, highlighting the opposite
conclusions reached by providers on those topics. It is noteworthy that correlation
varies between providers, with correlation increasing to 0.7 between the largest two
agencies (Sustainalytics and MSCI) and the two largest CRAs (S&P and Moody’s).

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Table 26: The MIT found that correlations between ESG ratings was about 0.54 in average
Average

KL
SA

KL
MO

KL
SP

KL
RE

KL
MS

SA
MO

SA
SP

SA
RE

SA
MS

MO MO MO
SP RE MS

SP
RE

SP
MS

RE
MS

ESG

0.54

0.53 0.49 0.44 0.42 0.53 0.71 0.67 0.67 0.46 0.7 0.69 0.42 0.62 0.38 0.38

E

0.53

0.59 0.55 0.54 0.54 0.37 0.68 0.66 0.64 0.37 0.73 0.66 0.35 0.7 0.29 0.23

S

0.42

0.31 0.33 0.21 0.22 0.41 0.58 0.55 0.55 0.27 0.68 0.66 0.28 0.65 0.26 0.27

G

0.3

0.02 0.01 -0.01 -0.05 0.16 0.54 0.51 0.49 0.16 0.76 0.76 0.14 0.79 0.11 0.07

Source: J.P. Morgan based on the MIT, 2022 (link). SA, SP, MO, RE, KL, and MS are short for Sustainalytics, S&P Global, Moody’s
ESG, Refinitiv, KLD, and MSCI, respectively.

These results were confirmed by subsequent studies: Brandon & al. found an average
pairwise correlation of 0.45 between ESG rating from seven different providers forfirms in the S&P 500 between 2010 and 2017, with the correlation dropping to 0.16
on the governance pillar and 0.46 for the environmental pillar (link). J.P. Morgan US
High Grade Strategists found only 17.7% matching across S&P CSA and MSCI ESG
scores in the High Grade universe, albeit with markedly higher consistency for
issuers obtaining top-scores (link).
Table 27: S&P CSA vs. MSCI: Consistency on less than one quarter of the HG universe, albeit
significantly higher at the top of the rating scale
MSCI ESG

S&P CSA

AAA
AA
A
BBB
BB
B
CCC
NR

AAA
78.4%
7.1%
5.4%
8.8%
0.0%
0.0%
0.0%
0.3%

AA
36.0%
23.7%
29.8%
5.8%
3.7%
0.1%
0.0%
0.8%

A
22.2%
25.4%
17.9%
26.4%
5.6%
1.6%
0.2%
0.6%

BBB
26.5%
19.8%
17.7%
14.9%
9.4%
11.0%
0.6%
0.1%

BB
12.5%
41.3%
8.8%
17.5%
8.0%
9.3%
2.2%
0.4%

B
0.0%
0.0%
60.5%
3.8%
1.5%
16.2%
6.9%
11.2%

CCC
0.0%
67.5%
0.0%
0.0%
0.0%
16.9%
15.6%
0.0%

NR
20.7%
12.2%
12.6%
18.2%
6.9%
5.6%
9.4%
14.4%

Source: J.P. Morgan US High Grade Strategy and US Credit Strategy (link). Par-value weighted, Column Totals = 100%. Numericalscores converted to a letter score.

Our own research on companies most represented in global sustainable funds, which
we see as the ultimate measure for their “ESG consensus”. We found that not allcompanies ranked highly according to ESG ratings agencies, with significant
disparities.

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Table 28: Selected ESG ratings of the 15 stocks most held in global ESG funds
Rank

Name

Sector

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Microsoft Corp
Apple Inc
Amazon.com Inc
Mastercard Inc Class A
Alphabet Inc Class A
Tesla Inc
Thermo Fisher Scientific Inc
Alphabet Inc Class C
NVIDIA Corp
Adobe Inc
NextEra Energy Inc
Novo Nordisk A/S Class B
UnitedHealth Group Inc
Linde PLC
Danaher Corp

Technology
Technology
Consumer Cyclical
Financial Services
Communication Services
Consumer Cyclical
Healthcare
Communication Services
Technology
Technology
Utilities
Healthcare
Healthcare
Basic Materials
Healthcare

Portfolio
Weight (%)
2.79
1.90
1.07
0.89
0.83
0.79
0.76
0.76
0.70
0.69
0.64
0.63
0.57
0.56
0.54

MSCI

Sustainalytics

S&P CSA

Refinitiv

AAA
A
BBB
A
BBB
A
BBB
BBB
AAA
AAA
AA
AAA
BBB
A
AA

15
17
30
17
24
29
14
24
14
13
28
24
18
8
12

97
34
68
82
93
42
64
93
91
99
54
80
97
99
77

93
80
87
76
75
65
69
75
79
78
80
85
74
87
81

Source: J.P. Morgan based on Morningstar, Sustainalytics, Refinitiv, and Bloomberg, as of Sept. 4th, 2022. The portfolio weight is the average weight across the 50 largest ESG portfolios with a
global focus, weighted by total AUM as of 2Q22.

Diverse ESG ratings for a diverse ESG market
As highlighted by the European Commission (link), the weak correlation between
ESG ratings is “generally recognized and accepted by asset managers and asset
owners”. It is also our view that current disparities partly reflect the absence ofmarket consensus on (i) how to measure the ESG credentials of a company, which ispartly due to the inherent challenges of defining what ESG encompasses, as
discussed in the first chapters of this report, and (ii) summarize in one data point
various aspects of a company, from its talent strategy to its transition plan, supply
chain management and board effectiveness. While some of these aspects may becorrelated, many are not (in some cases even contradictory), leading ESG ratings to
be an average that may not always be meaningful.
Garbage in, garbage out?
Because sustainability disclosures remain the primary source of information for mostrating providers, ESG ratings will continue to reflect some of the weaknesses incorporate reporting (discussed above) until those are addressed. While regulation andthe emergence of global standards might help, rating providers can already addresssome of those weaknesses through their data standardization and review process.
Whether they have a team of analysts manually reading annual reports, or employ acrawling algorithm, it is critical that providers have robust quality-review process.
Here again, more transparency on the resources and processes to perform the quality
review would contribute to improve trust in the ESG rating market, in our view.
The criticisms of ESG ratings
Discrepancies between ESG ratings have undoubtedly questioned their credibility as
a proxy for a company’s ESG credentials, and fueled criticisms on their overall lackof transparency and subjectivity. The European Securities and Markets Authority(ESMA), the EU’s securities markets regulator, identified “increased risks of“greenwashing, capital misallocation, and products mis-selling” as a result of current
market practices (link). ESG ratings have been also criticized for their highsensitivity to changes in methodology (link) and inability to anticipate high-profile
ESG controversies such as Wirecard’s accounting scandal (link) and the allegations
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of modern slavery against Boohoo in July 2020 – the former had a rating of 19 from
Sustainalytics before the controversy occurred, while the latter was rated AA by
MSCI and above industry average on supply chain labor standards (link) – although
it is noteworthy that there are examples where providers did reflect weaknesses intheir ratings before scandals broke (e.g. Volkswagen’s emissions scandal in 2015,link). We found limited disclosure from vendors on why Boohoo was rated highly on
supply chain management before the controversy arose, although some media
suggested that the company’s exposure to UK suppliers as opposed to suppliers
located in regions with supposedly lower labor standards was considered as apositive differentiator relative to industry peers (link). Further, in our experience,
vendors tend to primarily assess companies based on their supply chain policies anddisclosures rather than on metrics reflecting the actual implementation of thosepolicies, partly because metrics may simply not be disclosed by companies (asdiscussed in our analysis of ESG in supply chain, link). Beyond limitations invendors’ methodologies, the Boohoo case also revealed the stickiness of ESG
ratings: according to CSRHub the company’s aggregated ESG ranking was only
downgraded three months after the controversy.
Figure 67: Boohoo’s aggregated ESG ranking was only significantly impacted three months after
the first press article
Change inauditor

90
80
70
60
50
40
30
20
10
-

Sunday Times
Article revealing
the events

Mar-21

Jan-21

Feb-21

Dec-20

Oct-20Nov-20

Sep-20Jul-20Aug-20Jun-20

Apr-20May-20Mar-20Jan-20Feb-20Dec-19Oct-19

Nov-19Sep-19Jul-19Aug-19Jun-19Apr-19

May-19Results of the
supply chain
review

Source: J.P. Morgan. For a full analysis of the event, please refer to Boohoo’s initiation report from J.P. Morgan European General
Retail (link). CSRHub aggregates multiple ESG ratings (link).

We also found cases of ESG Ratings not reflecting corporate events that would
arguably be perceived positively by ESG investors. For example, despite selling its
South African and Colombian thermal coal assets in the first quarter of 2022, which
represented about a quarter of its overall carbon footprint including scope 3, Anglo
American’s Sustainalytics ESG Ratings has remained at about 24 for the past three
years.
Separately, there are instances where the issuance of sustainable debt is not reflected
into corporate ESG ratings. Italian utility company Enel SpA issued the firstsustainability-linked bond (SLB) in September 2019, which brought upon a new
structure of sustainable debt that exceeded $135 billion in issuance in 2021, seeing
over 900% growth YoY. An SLB refers to a debt structure whereby the financial
characteristics of the vanilla bond may fluctuate depending on whether the issuer
fulfils a set of predetermined ESG targets (link). By issuing a sustainable bond,whether a green bond or SLB, the company indicates a sign of sustainability intent,
which we believe could be accounted for within its ESG rating. However, inreviewing some ESG methodologies we observe that sustainable debt issuances are
not necessarily included.
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Regulation in focus
In November 2021, IOSCO summarized the three main issues of ESG ratings asfollowed (link): Lack of transparency around ratings’ objective, scope, and methodology
 Lack in governance robust and transparent governance processes, and potentiallyleading to conflicts of interest (for instance in the absence of proper separation
between ratings and advisory businesses)
 Lack of interaction between ESG ratings and data products providers and entities.
To address those limitations, the organization representing the world’s securities
regulators called for oversight of ESG ratings and data product providers. Whilemost of those regulations are still in development (see here), we expect regulators tobuild on some of the measures already applied to credit rating agencies (e.g. on
preventing conflicts of interest), while also taking into account the unique nature of
ESG ratings, including their typically longer time horizon, higher level of uncertainty
and inherent diversity.
Vendors and Investors: Ratings as an input, rather than an end point
Despite those criticisms, we expect investors to continue to utilize ESG ratings,
albeit as part of a more detailed proprietary process. As discussed above, theseassessments have the advantage of expressing in a single data point theenvironmental, social and governance practices of a company, often on a large
universe of companies and instruments, which can be helpful when viewed in a
broader context, recognizing the possible limitations or skew from methodology. In
addition, some investors continue to include external ratings in their processes
because they are free of their own internal interference and thus may be regarded as
more impartial by their clients. Recent surveys and studies seem to confirm thatexternal data are increasingly combined with investors’ proprietary analysis ofinvestees’ ESG credentials, including through direct engagement.
Figure 68: Surveys suggest that investors increasingly use acombination of external and in-house data to conduct their ESG
analysis…

Figure 69: …Including direct engagement with companies
Response to the question: Where is your ESG information primarily sourced
from (select all that apply)?

Response to the question: How do you form your ESG insights?

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

2019

2020

2021
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Primarily rely on internally-produced quantitative data but use externally-produced quantitative data to a lesser extent.
Primarily rely on externally-produced quantitative data but use internally-produced quantitative data to a lesser extent
Soley rely on internally-produced quantitative data
Solely rely on externally-produced quantitative data (i.e. Sustainanalytics, MSCI, etc.)

Non-ESG focused Sell-side researchnewspaper,
vendors that don’t
periodicals & blogs specialise in ESG
Research

External ESG
Direct engagement
Company
research vendors
with companies
reports/regulatory
fillings

2019

2020

2021

Source: Russel Investment 2021 Annual ESG Survey (link).

Source: Russel Investment 2021 Annual ESG Survey (link).

Indices
What is an ESG index?
ESG indices provide institutional investors a method to systematically integrate theconsideration of ESG factors within an investment process and/or portfolio. By
incorporating a predefined assembly of ESG data within an index construction
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process, investors benchmarked to the index can passively align their investment
strategies to particular ESG factors and/or sustainability objectives. ESG benchmark
integration often combine multiple investment strategies discussed in the fourth
chapter of this report, including exclusionary screening, tilting/scaling, andoverweighting/rewarding issuers and instruments based on ESG considerations.
Passive ESG investing is gaining momentum.
The proportion of ESG AUM under passive investing increased to 25% from 9%
between 2016 and Q3 2022. Passive ESG investing multiplied by almost 7x inequities and 5x in fixed income over the period, vs ~2x for active management inboth asset classes. In Q3 2022, passive investing represented 33% of sustainable
equity AUM and 22% of fixed income sustainable AUM, with some notabledifferences between regions.
Figure 70: Passively-managed sustainable equity AUM reached 33%
in Q3 2022

Figure 71: Passively-managed sustainable fixed-income AUM
reached 22% in Q3 2022

Breakdown of global sustainable equity AUM between active and passive
management (%)

Breakdown of global sustainable fixed-income AUM between active andpassive management (%)

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

13%

16%

20%

23%

28%

31%

33%

87%

84%

80%

77%

72%

69%

67%

2017

2018

2019

2020

2021

3Q22

2016

Active

10%

9%

12%

15%

15%

19%

22%

90%

91%

88%

85%

85%

81%

78%

2016

2017

2018

2019

2020

2021

3Q22

ActivePassive

Passive

Source: J.P. Morgan based on Morningstar.

Source: J.P. Morgan based on Morningstar.

Figure 72: The US had the highest penetration of passive equity ESG
investing as at Q3 2022…

Figure 73:…While Europe had the highest penetration of passive
fixed-income ESG investing

Breakdown of global sustainable equity AUM between active and passive
management by region (%)

Breakdown of global sustainable fixed-income AUM between active andpassive management by region (%)

US

54%

Asia ex-Japan

Europe

46%

62%

38%

77%

23%

US

85%

15%

Europe

69%

31%

Japan

91%

9%

Australasia

69%

31%

Australasia

93%

7%

Asia Ex Japan

99%

1%

Japan

93%
0%

20%

40%
ActiveSource: J.P. Morgan based on Morningstar.

Passive

7%
60%

80%

100%

0%

20%

40%
Active

60%

80%

100%

Passive

Source: J.P. Morgan based on Morningstar.

ESG indices reflect opportunities and challenges of the broader ESG market
In line with the broader market for ESG data and Research, there is a broad spectrumof ESG indices, in terms of focus and methodology. While most major providers
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have developed an “ESG” version of their flagship indices, others have developed
benchmarks focused on specific sustainability themes such as climate change, water,or diversity, inclusion, and sustainable debt asset classes. The ability to focus on a
specific area of ESG performance was considered as one the main values of ESG
indices according to a recent survey of 300 investment funds conducted by the Index
Industry Association (link). Providers develop their benchmark methodology basedon in-house data and Research, third-party vendors, or a combination of both,although the recent consolidation of the industry suggests that they are increasingly
relying on internal resources (see here). Providers face similar challenges to other
ESG market participants to ensure the quality and reliability of the data, as well as
growing regulations to ensure the transparency of their underlying methodologies(see here).

J.P. Morgan ESG Index Suite
The J.P. Morgan ESG (JESG) Index Suite is designed to provide fixed income
investors with a foundational framework to navigate and incorporate ESG
discipline into the investment process regardless of where they are in their ESG
journey. All JESG indices are derived from their baseline index, with the ESG
criteria applied as an overlay. Through the identification of green bond issuanceswith the help of Climate Bonds Initiative, and with external top-down ESG analysis
from RepRisk and the complementary bottom-up ESG fundamental research from
Sustainalytics, our multidimensional index methodology brings standardization in
fixed income indices by introducing a well-rounded approach to ESG investing.
Please click here to learn more about the JESG Index Suite and here to access J.P.
Morgan’s benchmark disclosures.
Figure 74: JESG methodology

1. ESG Bands

2. ESG
Scaling

4. Exclusions

5. JESG Overlay

3. Rewarding
Green Bonds

JESG
Indices

Source: J.P. Morgan.

Before the introduction of the JESG methodology, ESG investing in fixed income
was disparate, with separate benchmarks available for every ESG investing approach,which prevented the market from converging towards a standard. Amid the plethoraof different ESG investment approaches, the JESG methodology seeks to harmonize
the best ESG investment strategies into one unified methodology to foster
standardization across ESG investing in fixed income.

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Figure 75: 5 Years of J.P. Morgan ESG (JESG) Indices

Source: J.P. Morgan.

The JESG Index Suite was first introduced covering various EM fixed income
asset classes. The initial launch included the first-of-its-kind ESG EM indices: theJESG EMBI (covering EM hard currency sovereign and quasi-sovereign bonds),
JESG GBI-EM (covering EM local currency sovereign bonds) and the JESG CEMBI(covering EM hard currency corporate bonds). The family of baseline emerging
market indices has over 90% market share in the emerging market benchmark space.
Following the JESG EM suite, the J.P. Morgan ESG Global High Yield Corporate
Index (JESG GHYCI) and the J.P. Morgan ESG Asia Credit Index (JESG JACI)
were launched in 2019. Since 2020, we have expanded the JESG suite to include theJ.P. Morgan ESG Green Bond Index (JESG GENIE), the J.P. Morgan ESG Global
Corporate Index (JESG GCI), and most recently the J.P. Morgan ESG Emerging
Market Green Bond Diversified Index (JESG EM GENIE DIV). In the four and halfyears since launch, the JESG Index Suite already has more than $40 billion inbenchmarked assets across active and passively managed funds.
Our proprietary JESG scores are central to the JESG index methodology. JESG
uses a proprietary ESG construction method, which normalizes JESG index scoresfor over 170 countries and more than 6,000 issuers daily, using data from Climate
Bonds Initiative, RepRisk, and Sustainalytics as inputs. Each issuer is bucketed into
one of five bands (quintiles), depending on their final JESG score. The bands
function as a scalar/multiplier that is utilized in the overall ESG integration approach.
For example, issuers in Band 1 will inherit 100% of their baseline index market
value, while issuers in Band 2 will inherit 80% of their baseline index market value,and so on. Issuers in Band 5 will be excluded and will not be eligible for the next 12months. This approach ensures that our methodology rewards those issuers who holdstronger ESG characteristics by assigning different weight scalers.
Figure 76: Green bond weight in JESG indices has been steadily increasing since 2017
10
9
8
7
6
5
4
3
2
1
0

9.31
8.03

1.85

1.62 1.66
0.6

0.53
2017

2.71

2.68
0.84

0.68
2018

1.8

EM Corporates

1.8

0.89

2019

EM Sovereigns

3.98

3.09

0.75

2020
Asia Credit

6.15

5.29

5.16

4.64

2.71
1.09

1.08
2021

Jun 2022 (YTD)

Global Credit (EM+DM)

Source: J.P. Morgan. Data as of CoB June 30th, 2022.

The JESG methodology increases the weight of green bonds to incentivize
sustainable financing aligned with climate change solutions. If an instrument is
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categorized as “green” by the Climate Bonds Initiative, the security will receive a
one notch Band upgrade. For example, any green bond issued by an issuer in Band 3
will be promoted to Band 2, whereas conventional bonds issued by the same issuer
will remain in Band 3. Green bonds by issuers already in Band 1 will not receive any
further upgrade. This approach effectively provides positive screening benefits togreen bond issuance by increasing their weights relative to conventional bonds fromthe same issuer.
The uniqueness of the JESG methodology is brought out by the fact that the
JESG indices are almost perfectly correlated to their respective baselinebenchmarks, while even outperforming the baseline indices in many cases. As
expected from an ESG-aligned approach, the JESG indices have outperformed theirbaseline indices in times of market turmoil, such as the global market sell off seen inrecent years.

Table 29: Total returns of JESG Indices
GBI-EM GD

JESG GBIEM GD

CEMBI BDJESG CEMBIBDEMBIG Div.

JESG EMBIJACIJESG JACIGCIJESG GCI

2013

-9.0%

-8.0%

-0.6%

-0.2%

-5.3%

-5.0%

-1.4%

-1.0%

2.2%

2.5%

2014

-5.7%

-6.1%

5.0%

4.1%

7.4%

8.8%

8.3%

8.3%

3.2%

2.8%

2015

-14.9%-15.4%

1.3%

1.5%

1.2%

1.1%

2.8%

2.9%

-3.4%

-3.4%

2016

9.9%

9.6%

9.7%

8.8%

10.2%

8.8%

5.8%

5.5%

5.7%

5.5%

2017

15.2%

15.6%

8.0%

7.7%

10.3%

10.7%

5.8%

5.8%

9.3%

9.5%

2018

-6.2%

-5.9%

-1.6%

-1.4%

-4.3%

-3.8%

-0.8%

-0.9%

-3.3%

-3.4%

2019

13.5%

11.9%

13.1%

12.8%

15.0%

15.9%

11.3%

11.2%

11.5%

11.3%

2020

2.7%

4.0%

7.1%

7.1%

5.3%

5.8%

6.3%

6.2%

9.9%

9.8%

2021

-8.7%

-9.5%

0.9%

0.8%

-1.8%

-2.3%

-2.4%

-2.8%

-2.3%

-2.4%

YTD TR 2022

-14.5%-15.1%-13.9%-12.7%-20.3%-21.1%-10.7%-11.6%-15.0%-14.9%

Annualized Return

-2.5%

-2.6%

2.8%

2.8%

1.3%

1.4%

2.4%

2.3%

1.6%

1.5%

Annualized Volatility

11.3%

11.2%

6.1%

5.9%

8.6%

8.3%

4.4%

4.4%

5.7%

5.8%

Sharpe Ratio

-0.29

-0.30

0.32

0.34

0.07

0.08

0.39

0.34

0.14

0.13

JESG CEMBIBDEMBIG Div.

JESG EMBIJESG JACIGCI IG

Source: J.P. Morgan. Data as of CoB June 30th, 2022.

Table 30: Returns correlation of JESG Indices
GBI-EM GD

JESG GBIEM GD

CEMBI BD

JACI

GBI-EM GD

1.00

JESG GBI-EM GD

1.00

1.00

CEMBI BD

0.75

0.75

1.00

JESG CEMBI BD

0.75

0.75

1.00

1.00

EMBIG Div

0.80

0.80

0.94

0.94

1.00

JESG EMBI

0.79

0.79

0.92

0.92

0.99

1.00

JACI

0.67

0.67

0.88

0.88

0.89

0.90

1.00

JESG JACI

0.66

0.66

0.88

0.87

0.89

0.90

1.00

1.00

GCI

0.75

0.76

0.86

0.87

0.88

0.88

0.85

0.85

1.00

JESG GCI

0.75

0.76

0.86

0.86

0.88

0.88

0.84

0.85

1.00

JESG GCI IG

1.00

Source: J.P. Morgan. Data as of CoB June 30th, 2022.

Having said that, we are aware that the ESG landscape is continuously evolving
and so will the JESG Index Suite. As clients’ ESG ambitions evolve alongside
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sustainable finance regulations that are set to bring more order into the ESG
investing landscape, the JESG Index Suite will advance the breadth and depth of its
ESG capabilities across all fixed income asset classes, whether at the sovereign,quasi-sovereign, corporate, or instrument level, as ESG and sustainability-related
data improved.
An annual index governance consultation ensures that the JESG Index Suite
maintains the most up-to-date ESG considerations and fundamental mechanics.
Since 2020, the JESG methodology has enhanced its ethical screening and reduced
turnover due to index rebalancing. Issuers exposed to Oil Sands assets are now
excluded from JESG Indices, and JESG band updates and corresponding index
weight changes are now only reflected on a quarterly basis, compared to previous
monthly rebalancing. In 2023, the JESG Index Suite will incorporate the most recent
ESG methodologies from our vendors, implement sovereign sanctions-based
exclusions, and look to similarly consider rewarding/overweighting social andsustainability bonds in JESG indices.
Future sustainable benchmarks are pivoting towards recent sustainable
investing regulation criteria, particularly in the EU. The EU Benchmark
Regulation introduced two new climate benchmark definitions, first the “ParisAligned Benchmark”, and second the “Climate-Transitions Benchmark”, which both
require minimum carbon reductions in order to be met. Taken together along with theother elements of the EU's sustainable investing regulatory initiatives, there isballooning demand by investors for quality GHG emissions data, which will act as
the ‘building blocks’ in achieving the goals within the 2015 Paris Agreement.
Figure 77: Obtaining quality GHG emissions data is central to J.P. Morgan’s future sustainable benchmark ambitions

Source: J.P. Morgan.

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In order to provide insight to investors, the J.P. Morgan Index Research teamembarked on the journey of analyzing the world of greenhouse gas (GHG)
emissions and fossil fuel data. We critically evaluated 19 third-party data vendors
and publicly available databases, as well as the underlying data itself. J.P. Morgan
Index Research have partnered with Moody’s ESG and the International Energy
Agency (IEA) for GHG emissions and fossil fuel data. Moody’s ESG will be utilized
for corporate level statistics while IEA provides the best figures for sovereigns.
Please see the report “Navigating Greenhouse Gas Emissions Data" for more
information.
Since onboarding corporate and sovereign emissions data from Moody’s ESG
and the IEA, J.P. Morgan Index Research have developed new carbon analytics
capabilities for investors covering our existing JESG indices and theirunderlying flagship benchmarks. Within the inaugural reports, we provide clients
not only with the carbon footprint of our JESG indices, but critically the sector andissuer breakdowns driving the index carbon footprint. In doing so, our carbon
analytics intends to better equip investors in understanding and communicating thesustainability characteristics of their investments and meet their growing regulatory
disclosure requirements. Please see the reports “Introducing J.P. Morgan Corporate
Index Carbon Analytics" and "Introducing J.P. Morgan Sovereign Index Carbon
Analytics” for more information.
Our emissions datasets will provide us with the ability to derive EU BMR
compliant Paris-Aligned (PAB) and Climate Transitions (CTB) benchmarksthat are in line in achieving the goals within the 2015 Paris Agreement.

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ESG in Sovereign Debt: Challenges andOpportunities
While ESG strategies and frameworks are becoming increasingly sophisticated in thecorporate investment world, investors are also looking to integrate ESG in other asset
classes, such as structured finance, real assets, and sovereign debt. The latter hasreceived growing attention given it is the largest asset class within fixed income,reflecting close to $90 trillion (link). While public issuers have long been active inthe sustainable debt market, with Massachusetts issuing the first green muni bond inJune 2013 and Poland the first green sovereign bond in 2016 (link), investors’
demand for more holistic ESG assessments has also increased. New tools haveemerged to address this, including sovereign-specific frameworks, initiatives, anddata vendors (Maplecroft, Beyond Ratings), although challenges persist.
Sovereign ESG investing: The elephant in the room
In December 2021, the CEO of Sweden’s largest pension fund Alecta expressed its
pessimism about the organization’s ability to achieve its climate objectives, given the“substantial amount of government bonds or equivalent’ that must be held in
portfolios. According to Magnus Billing, this is due to “a significant part of theissuing states and entities not being on a pathway towards Net Zero today”,
combined with “extremely limited” room for engagement (link). In our view, his
remark reflects the challenges of applying to public entities the ESG investment tools
developed in the corporate sphere: Engagement with public issuers can be“misinterpreted as lobbying, advocacy or an attempt to interfere in governments’policy choices” (link), while excluding a country/region from an investment universe
based on ESG considerations or simply opining on its sustainability agenda may
prove controversial, as shown by the criticisms faced by the credit rating agency S&P
Global Ratings when it introduced a new ESG Credit Indicator on U.S. States (link).
Further, despite some initiatives, such as the World Bank sovereign ESG data portal,
high-quality data can be far scarcer for sovereigns than for corporates, particularly on
the environmental side (link).
Existing sovereign approaches can suffer from an income bias
An income bias occurs when ESG approaches end up reinforcing, rather thancorrecting gaps in sustainable development by directing investment flows to strong
performers (which, in the sovereign sphere, tend to be wealthier countries).
“About 90 percent of sovereign ESG scores are explained by a country’s national
income, thus richer countries tend to have better ESG scores. Prosperous countries
tend to have better institutions and less inequality, which are linked to better social
conditions and governance.”
World Bank, J.P. Morgan (link)
In a survey of EM investors conducted by J.P. Morgan’s EM Research team andGlobal Index Research Group in 2021, three-quarters of the investors, representing$650 billion in AUM, were adamant that ESG funding should support the sovereigns
facing the greatest sustainable journeys as opposed to sponsoring those with alreadystrong ESG credentials (link).

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Figure 78: Survey Question 5: “To what extent do you agree with the statement ‘sovereign ESG
approaches should support those issuers who have the greatest sustainable development
journey to accomplish rather than those that are best ESG performers’?”
UnsureStrongly disagree
Somewhat disagree
Neither agree nor disagree
Somewhat agree
Strongly agree
0%

10%

20%

30%

40%

50%

60%

Source: J.P. Morgan (link).

Solutions for an impact-based and forward-looking sovereign ESG analysis
In a recent report, the World Bank advocated for a Sovereign ESG 2.0 framework,
based on five guiding principles including improved data sources, the incorporationof forward-looking scenarios and accounting for the ingrained income bias (link).
According to J.P. Morgan’s survey of EM sovereign debt, investors have started
addressing the latter by adjusting ESG scores for countries’ wealth or income orweighing countries’ recent successes or setbacks. In parallel, new frameworks,
initiatives, and data have emerged to address the unique challenges of sovereign ESG
investing.
The PRI has developed a range of resources, including a dedicated guidance onsovereign integration (link), where it identifies fourteen ESG themes relevant to thisasset class.
Table 31: The PRI’s guidance on ESG integration in sovereign identifies 14 relevant themes
GovernanceInstitutional Strength
Political Stability
Government Effectiveness
Regulatory Effectiveness
Rule of Law
Corruption

SocialDemographic Change
Education and Human Capital
Living Standards & Income Inequality
Social Cohesion

Environmental
Natural Resources
Physical Risks
Energy Transition Risks
Energy Security

Source: PRI (link)

The Guide suggests a number of public data sources that investors can monitor to
track the performance of a Sovereign or sub-sovereign entity on each of the E, S and
G pillars. Investors can further refine this approach by (i) identifying themes that will
likely dominate over their investment timeframe and (ii) assigning specific metrics toeach of them, in order to form a forward-looking view on the entity’s direction of
travel on most material themes.
The PRI is also the driving force behind “ASCOR” (Assessing Sovereign Climaterelated Opportunities and Risks), a project which aims to improve the assessment,
monitoring and benchmarking of sovereigns’ climate performance (link). The largest
credit rating agencies have published research on the link between ESG andcreditworthiness, partly owing to regulatory pressure (link), while specialized data
vendors and alternative data sources have emerged (Maplecroft, Freedom House,
PRS Group, among others) to fill disclosure gaps. We also expect multilateral
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institutions to remain important stakeholders in this ecosystem, by supporting
countries’ progress towards the UN SDGs and attracting private capital, particularlyin emerging markets. Given the importance of ESG policies as a long-term driver of
ESG investing (see here), the success of those initiatives may have implications forthe future of the ESG market across asset classes, in our view.

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Policy and Regulation: Navigating the“ESG Mania”
Regulation5 has been one of the main drivers of growth in the ESG market. The
European Union has historically been leading developments in sustainable financerelated regulations to support its ambitious “Green Deal” agenda, pioneering key
approaches on labeling, disclosures, and taxonomy. Over the recent years, theregulatory landscape has become more complex and fragmented, partly owing to new
jurisdictions gradually stepping in within Asia and more recently North America andEmerging markets. Although differences will persist, owing to countries’ various
political agenda and positioning on the “value vs. values” debate, ISSB may succeed
in forming a global baseline for future sustainability reporting requirements, while
forums of global collaboration between financial regulators and central banks(among others) may drive global convergence on key principles.

Global Overview
In our view, there are three overarching objectives of ESG regulations globally,
namely (i) bringing standardization in ESG practices, (ii) improving transparency
from companies, vendors, and investors, and (iii) setting specific environmental,social and governance standards for companies and other entities.
 Bringing standardization: Regulatory initiatives standardize key ESG concepts
and definitions to harmonize market practices. For example, green taxonomies
aim to standardize the definition of “green” technologies and activities. Morerecently, the US SEC proposed to standardize the type and definition of ESG
investment strategies (see here).
 Improving transparency: Regulators also recognize that ESG remains a
dynamic market that will continue to evolve. As a result, their second objective isto improve transparency and disclosures from companies, vendors, and investors
to enable market participants to (i) improve the quality of corporate reporting and
ESG data, (ii) enable clients to assess differences between ESG definitions andapproaches and (iii) prevent “ESG-washing”, which are misleading or inflated
claims about the sustainability credentials of a product, instrument or company.
Figure 79: Regulators aim to bring standardization and transparency to strengthen trust in the
ESG market
Prevent ESG Washing & Protect Clients

Standardize ESG
definitions and practices
where possible

Improve transparency
from ESG investors

Improve reliability of ESG data
Source: J.P. Morgan.

5 We use the term “regulation” to refer to both policies and regulations.

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 Setting specific ESG standards: policy-makers and regulators also set minimumor specific standards on entities’ environmental, social and governance practices
through labor, environmental, and due diligence laws, among others. These
impact the regulatory and competitive environments in which those entities
operate, potentially resulting in externalities being priced in (e.g. a carbon pricethat internalizes the costs of a company’s GHG emissions).
In this chapter, we do not attempt to list all ESG regulations but rather to highlight
those that are most material to investors, both at global and regional levels.
We identify five types of regulatory intervention:
 Companies’ ESG disclosures, which are often the primary source of data forinvestors. Most regulations focus on improving the availability and quality ofreported ESG information, including by standardizing data and metrics.
 Vendors of ESG data and ratings, which typically focus on improving
transparency on methodologies and assumptions, as well as the governancearound processes, resources and conflicts of interest. We expect a gradualalignment with regulations applied to vendors of financial data and ratings,
although with nuances to reflect the unique features of the ESG market.
 ESG disclosures for financial products and firms, most of which seek toensure that the marketing materials of ESG-labeled financial products fairly
reflect the role and influence of ESG factors in the underlying investment
process.
 Taxonomies, which establish a common definition of green, social or sustainable
activities and technologies that contribute to environmental, social andsustainability objectives.
 Banking supervision and monetary policy, which focus on ensuring financial
stability through the supervision of systemic ESG risks, in particular climatechange. The Network for Greening the Financial System (NGFS) is the maingroup of Central Banks and Supervisors that “shares best practices and contributeto the development of environment and climate risk management in the financial
sector” (link). While their work currently focuses on climate-related systemicrisks, the NGFS has announced that it would assess nature-related risks more
broadly (link).
 Policies setting specific environmental, social or governance standards, suchas carbon pricing mechanisms, energy efficiency standards, labor laws, supply
chain due diligence obligations, among others.

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Table 32: Objectives of ESG regulations, by typeObjective
Corporates

Improve quality and availability of sustainability information

Data Vendors

Improve transparency and quality of third-party sustainability
information

Investment products & firms

Standardize the definition of ESG strategies and improvetransparency on underlying investment process

TaxonomyStandardize the definition of sustainable activities andtechnologies

Banking Supervision & Monetary
PolicyManage systemic ESG risks to ensure financial stability

Specific ESG standards

Define a minimum or specific level of environmental, social andgovernance performance that entities must comply with within a
specific jurisdiction.

Source: J.P. Morgan.

Greenwashing: from a reputational to a regulatory risk
Considered as a reputational risk for many years, green-, social- and ESG-washingare posing growing regulatory and legal risks to investors. Since 2019, several
financial regulators, including in the EU, US, UK, Australia, and Singapore,
identified greenwashing as a priority. The DWS case showed that greenwashingallegations by regulators could be financially material, with the stock down 14% (i.e.
loss of €1.1bn in market capitalization) on the day the SEC and BaFin launchedformal investigations over allegations that the asset manager overstated how the firmuses sustainable investing criteria to manage its investments (access our full analysis
on ESG Discovery). Navigating greenwashing risks can be difficult as there is nocommon definition of what qualifies as sustainable. In this context, we identify four
best practices for investors: (i) involving ESG and sustainability experts in theassessment of greenwashing risks, (ii) involving compliance and legal departments
given the growing complexity of ESG regulations, (iii) running a “common sense
check” to mitigate risks of controversies, (iv) applying strong governance practices,with ESG experts materially influencing decision-making.
While the EU has historically led the ESG regulatory agenda, ESG regulation
has become an increasingly global trend
The EU and other European countries are responsible for the majority of ESG
regulations adopted globally, according to the PRI. However, other markets are
stepping in, particularly in Asia, where most countries will have mandatory
sustainability reporting implemented by 2023. Regulations to enhance reporting fromcompanies and investors represent the lion’s share of global regulations.

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Figure 80: The growth in ESG regulations has been led by new
corporate and investor disclosure requirements

Figure 81: About 60% of ESG regulations have been developed inEuropeCumulated number of ESG regulations since 2010, by type

Breakdown of ESG regulations adopted since 2010, by region

1400

5%

1200
1000

3% 1%

1%

5%
6%

800
600

18%

400

62%

200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Corporate ESG Disclosures
Investor ESG Disclosures & Integration
Financial products
Stewardship Code
Taxonomy
OthersNational Sustainable Finance Strategy
Source: J.P. Morgan based on the PRI (link).

EuropeSouth America
Global

Asia
North America
Middle East

AfricaOceania

Source: J.P. Morgan based on the PRI (link).

Table 33: Selected flagship ESG regulations by region and pillar
EU

North America

Other Developed Markets

Corporates

EU CSRD*

SEC’s proposed climate
disclosures*

UK SDR*

Data Vendors

New EU regulation*-

New UK regulation*

Investment
products & firms

SFDR
MIFID
EU Benchmarks

SEC’s proposed ESG
disclosures*

UK SDR*

Taxonomy

Green taxonomy
Social taxonomy*

Canada’s green
taxonomy*

UK and Australia’s green
taxonomy*

Banking
Supervision &Monetary Policy

EBA’s disclosures
ECB’s climate stress
tests

FED’s climate stresstests

BOE’s climate stress tests

Asia & EMs
India’s BRSR
Japan’s disclosures on human capital &climate change
India’s proposed ESG ratings regulations*
HK’s climate disclosures
Singapore’s ESG disclosures for retailfunds
Taiwan’s ESG disclosures for onshore
and offshore funds
ASEAN’s plan for a common taxonomy*
Thailand’s sustainable finance taxonomy*Central American green taxonomy*
MAS’ climate stress test and investment
exclusions

Source: J.P. Morgan, based on Responsible Investor. As of Sept. 2022. Initiatives marked with asterisk are still in development or at proposal stage.

Climate change remains the top priority for most policy-makers
A common feature of ESG regulations is that they either prioritize or focus on
climate change. As a reminder, climate change refers to the increase in global
temperatures resulting from the concentration of GHG emissions into theatmosphere, 74% of which stemmed from the combustion of fossil-fuels in 2019.

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Figure 82: The atmospheric concentration in GHGs has increased
exponentially since the 1970s

Figure 83: Combustion of fossil fuel represented three quarters of
GHG emissions in 2019

Left axis: PPM CO2e; Right Axis:°C

%

500

1.40

450

1.20

3%

400

1.00

3%

350

0.80

300

0.60

250

0.40

200

43%

74%

12%

19%
17%

6%

9%
8%
3%

0.20

150

-

50

-0.20

-

-0.40

1750
1770
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020

100

GHG Atmospheric Concentration

Global Temperature Increase

Source: J.P. Morgan based on the European Environment Agency (link). This chart excludes
methane and nitrous oxide emissions, which are the two other types of GHGs.

Industrial Processes

Agriculture

Land Use & Forestry

Waste

Electricity and Heat

Transportation

Manufacturing and Construction Fugitive Emissions

Buildings

International Bunkers

Source: J.P. Morgan based on the World Resources Institute (link).

Several factors can explain this trend in our view, including: A (relative) political consensus: Most countries recognize that climate change
pose a “grave and mounting threat” to societies, partly as a result of Researchfrom the IPCC, an intergovernmental panel of scientists (link). This consensus
led to the adoption of the Paris Agreement by 196 countries in 2015, which is alegally binding treaty committing to limit the increase in global temperature
between 1.5°C and 2°C by the end of the century in order to “preserve a livable
planet” (link).
 A sense of urgency: Meeting the objective of the Paris Agreement “can only beachieved if global CO2 emissions start to decline well before 2030” according to
the IPCC (link), which has called for “immediate and more ambitious action”.
 One single metric: Unlike other ESG themes, entities’ contribution to climatechange can be measured by one single metric, which is the amount of GHG
emissions in tons of CO2-equivalent. As a result, the measurement of climate
risks and impacts have been relatively easier than for other ESG themes, asevidence by the relative higher quality of climate data relative to other ESG data
(discussed here).
 Formalized tools: This combination of factors has led to the rapid developmentof tools and frameworks to drive climate action. For example, the TCFD
published a mapping of climate-related risks and potential internalization
pathways (that are channels through which climate risks can impact a company’s
financials, strategic planning, and risk management), which is now widely usedby companies, financial institutions and regulators alike. It distinguishes between(i) transition risks, which primarily result from companies’ impact on climate aswell as specific local and sectoral market dynamics, and (ii) physical risks, which
result from companies’ dependencies to climate and weather conditions.

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Figure 84: Internalization pathways: the example of climate risks and opportunities

Source: TCFD 2017 Recommendations (link).

EU: Attempting to Pioneer in Unchartered Territories
The EU has been leading ESG and climate-related regulations
The region pioneered key concepts and definitions such as the taxonomy and ESG
disclosures for financial products. While it undoubtedly supported the growth in the
ESG market, it also created a complex regulatory ecosystem that is increasingly
challenging to navigate for investors. Further, it is worth highlighting that the EU has
adopted a more comprehensive and ambitious regulatory agenda than its global
counterparts. While sharing the objectives of harmonizing market practices andimproving transparency, the block also proposed regulations that are moretransformative in nature, such as requiring companies to align their business modeland strategy with a 1.5°C climate scenario (which is the most stringent target set
under the Paris Agreement).
Figure 85: Overview of main EU ESG regulations and their objectives in the EU
SFDR

MIFID

EU Benchmarks• Standardize the definitionof ESG funds (Art. 8 vs 9)• Improve transparency
from ESG investors• Introduce the obligation toconsider “sustainability
preferences” in financial
advisory• Propose an alternative
definition of ESG funds to SFDR

• Standardize the definition of
low-carbon benchmarks(Climate-Transition/Paris
Aligned)EU Taxonomy

ECB & EBA

Articlethe definition of • Improve ESG disclosures from• Standardize
9 technologies andlarge EU bankssustainable
activities• Incentivize banks to green
their portfolios and manage theexposure to climate risks

Improve reliability of ESG data
• CSRD: new sustainability requirements for firms, including on their sustainability due diligence policies and processes• Regulation on data vendors: WIP
Source: J.P. Morgan. As of Sept. 2022.

The Green Deal: The starting point of Europe’s unique ambition
In December 2019, the EU Commission adopted the “EU Green Deal Action Plan”.
This plan includes a comprehensive and disruptive agenda to help all sectors of theeconomy transition toward more sustainable business models and align with the Paris
Agreement. In the financial sector, the Green Deal led to the development of a79

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sustainable finance roadmap to “reorient capital flows towards sustainable
investment, in order to achieve sustainable and inclusive growth”, which in turnresulted in multiple regulations described below.
SFDR: A first of its kind revealing investors’ appetite for funds with stronger
ESG credentials
The Sustainable Finance Disclosure Regulation (SFDR) set new disclosure
requirements for investors marketing ESG and sustainable-labeled products in the
EU. For the first time, it imposed mandatory ESG disclosure obligations for financial
market participants providing investment management and advisory services, both on
the firms’ own ESG policies (“level 1”) and those applied at the fund level (“level2”). Among others, disclosures include the publication of a Principal Adverse Impact(PAI) statement, which explains impacts of investment decisions on sustainability
factors and associated due diligence.
Importantly, SFDR introduces a distinction between articles 6, 8 and 9 funds:

Article 6 funds are funds that do not integrate sustainability in theinvestment process

Article 9 funds have “sustainable investments” or a reduction in carbon
emissions as their objective. This category includes impact funds, which we
described earlier as the most advanced type of ESG investment strategies(see here)Article 8 funds promote, among others, environmental and/or social
characteristics, provided that selected investees follow good governancepractices. These funds can include any forms of strategies, from integration
to engagement and proxy voting. Unsurprisingly, a majority of ESG funds
are classified as Article 8 to date.

Figure 86: Article 8 represents the largest
proportion of SFDR funds…

Figure 87:…And the largest proportion of
SFDR AUM

Split between Article 8 and 9 funds (%)

Split between Article 8 and 9 AUM (%)

9%

11%

89%
Article 8

Article 9

Source: J.P. Morgan based on Morningstar. Note: based on
Morningstar’s SFDR Article 8 and 9 funds universe. As of end of
August.

91%
Article 8

Article 9

Source: J.P. Morgan based on Morningstar. Note: based on
Morningstar’s SFDR Article 8 and 9 funds universe. As of end of
August.

Despite absolute AUM remaining larger for Article 8 funds, as a percentage of
opening AUM, Article 9 funds have been recording much stronger net flow figuresof 35% of opening AUM vs. Article 8 net flows 10% of opening AUM in 2021
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hannah.l.lee@jpmorgan.com
Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com(link). According to the latest analysis of SFDR funds by J.P. Morgan European
General Financials analysts, Article 9 funds saw €29.4bn net inflows YTD to
September, suggesting that investor appetite remains for funds with stronger ESG
credentials (link).
Figure 88: Net flows have historically been stronger for Article 9 vs 8
funds…

Figure 89:…And YTD flows have been consistent with historical
trendsNet flows as % of opening AUM Article 8 vs. 9 (%)

Article 8 (“Light Green”) vs. 9 (“Dark Green”) in € billions

38%

40%
35%
30%
25%

21%

20%
15%
10%
5%

35%

8%

6%

9%

10%

2%

0%
2018

2019
Article 8

2020

2021

Article 9

10
5
0
-5
-10
-15
-20
-25
-30
-35
Jan

Feb

Mar

Apr

of which Article 8

Source: J.P. Morgan based on Morningstar. Note: based on Morningstar’s SFDR Article 8 and 9
funds universe.

May

Jun

July

Augustof which Article 9

Source: J.P. Morgan based on Morningstar. Note: based on Morningstar’s SFDR Article 8 and 9
funds universe.

The implementation of SFDR is ongoing and regulators are still refining theirenforcement approach. Among latest developments, we highlight the publication ofsupervisory guidance by the EU Securities and Markets Authority (ESMA) in June
2022, which suggested that regulators may implement unprecedented regulatory
oversight in order to prevent ESG-washing (link). The guidance also stipulated that
Article 9 funds should solely invest in sustainable assets, although without clearly
defining this term. This uncertainty on the regulator’s definition of sustainable assets(which should in theory be shielded from potential greenwashing allegations), has led
some investors to increase the stringency of their own eligibility criteria to Article 9
funds, resulting in the downgrade of 41 funds to Article 8 in Q3 2022 (vs. only 29
upgrades to Article 9 funds) according to Morningstar (link).
MIFID requires to consider of clients’ sustainability preferences.
In August 2022, the EU reviewed the existing MIFID directive to introduce arequirement for financial advisors to incorporate the sustainability preferences ofcustomers as part of their suitability assessment. A recent “mystery shopper” survey
conducted by the 2-degree initiative (2DII) in 2021 suggests that this practice wasrelatively rare, with only 25% of financial advisors asking their clients about theirenvironmental objectives and 19% about social ones across the seven EU countries
surveyed.

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paul.xu@jpmorgan.com

Figure 90: The 2DII’s survey suggests that the assessment ofsustainability preferences, experience and knowledge was limited in
the EU before the revision of MIFID
When the advisor assessed your profile, what aspects did they cover?

Figure 91: Half of respondents to the 2DII’s survey were satisfied
with the way their advisor addresses their sustainability preferences
After you expressed your preferences, did the advisor propose you adequate
sustainable products?

60%
11%

50%
40%

24%

50%

30%
20%

15%

10%
Yes, and the recommendations were satisfying0%
Germany

Denmark

Ireland

GreeceFranceRomania

Estonia

Yes, but recommendations did not convince you
No, the advisor presented produced unrelated to your request

Environmental non-financial objectives

Social non-financial objectives

Extra-financial experience

Extra-financial knowledge

Source: J.P. Morgan based on 2DII (link).

Others (e.g. you do not know as the product description was
unclear)

Source: J.P. Morgan based on 2DII (link).

We note that MIFID uses an alternative definition of sustainable funds to SFDR.
Under the directive, funds that invest in “Sustainable investments”, in Taxonomyaligned investments and those that consider their Principal Adverse Impacts would
qualify as “sustainable” alongside SFDR funds. In our view, this taxonomy ofsustainable funds might be increasingly adopted by financial market participants as it
could enable more differentiation between funds relative to the broad Article 8 and 9
categories introduced by SFDR.
Figure 92: Definitions of sustainable funds under MIFID
Alignment with the EU
Taxonomy

SFDR Funds

Funds considering
Principle Adverse Impacts

Source: J.P. Morgan.

The EU also amended its Benchmark Regulation (BMR) to incorporate new
climate benchmarks.
The BMR amendments introduced mandatory disclosures for all ESG benchmarks aswell as two new corporate climate benchmark definitions to improve thetransparency and comparability of information across benchmarks and ultimately toaddress the risk of “greenwashing”. The new climate benchmarks are defined as:
Paris Aligned Benchmarks (PAB), where the benchmark's carbon
emissions are aligned with the objectives of the Paris Agreement

Climate Transition Benchmarks (CTB), where the benchmark provides
for a ‘decarbonization trajectory’, defined in the regulation as a“measurable, science-based and time-bound movement towards alignment
with the objectives of the Paris Agreement”.

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Figure 93: Recommended minimum standards for PABs and CTBs

Source: EU Technical Expert Group (TEG) on Sustainable Finance (link).

Conceptually, both climate benchmarks pursue a similar objective, but differentiatethemselves in terms of their level of ambition. PABs are designed for highly
ambitious climate-related investment strategies with stricter minimum requirements,
whilst CTBs allow for greater diversification and serve the needs of institutional
investors in their core allocation. Both PABs and CTBs come with minimum
standards including scope 1+2(+3) carbon intensity reductions relative to theinvestable universe and year-on-year decarbonization targets.
Corporate reporting: all hopes in the CSRD?
The EU Parliament recently adopted its Corporate Sustainability Reporting Directive(CRSD), which will require around 50,000 EU firms (including private entities) todisclose information on eleven sustainability themes (link), with final adoption
expected by the end of 2022. This directive replaces existing sustainability disclosure
requirements that have applied to about 11,700 large, listed companies and financial
institutions since 2014. Importantly, the CSRD will combine both cross-sector andsector-specific disclosures, and be based on a double-materiality approach (link).
First disclosures are expected in 2025.
Table 34: The upcoming EU corporate disclosure standards will likely cover 11
sustainability themes
E
Climate mitigation &adaptation
Pollution
Water & Marine Resources
Biodiversity & Ecosystems
Circular EconomyS
Own Workforce
Workforce in the value chain
Affected Communities
End-users/Consumers

Source: J.P. Morgan based on EFRAG (link).

G
Governance, Risk
Management andInternal Control
Business Conduct

Table 35: Proposed Sustainability Reporting
Framework under the EU CSRD
Cross-cutting standards
Covers sustainability policies, targets, actions and action plans,
and resources
Topical standards
Sector-agnostic

Sector-specificSource: J.P. Morgan based on EFRAG (link).

It is worth noting that corporate-related regulations in the EU are more extensive andtransformative than in other regions. While focusing on sustainability disclosures, theCSRD together with the recently proposed Corporate Sustainability Due Diligence
Directive, also include a requirement for companies to transition their business modeland strategy toward a 1.5°C climate scenario, in line with the Paris Agreement.
The EU Green Taxonomy: an attempt to define sustainable activities
The EU Taxonomy is a classification system, which establishes a list of sustainableeconomic activities. To qualify as “sustainable”, activities need to contribute to one

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of the EU’s sustainability objectives, meet the “do no significant harm” requirement
and comply with minimum social safeguards.
Figure 94: To qualify as “sustainable” under the EU Green Taxonomy, activities need to meet four
criteria.

Source: J.P. Morgan based on BNEF (link).

Table 36: The EU has set six environmental and three social objectives
Environmental Taxonomy
Climate Change Mitigation
Climate Change Adaptation
Pollution Prevention & Control
Protection & Restoration of Biodiversity & Ecosystems
Sustainable Use and Protection of Water and Marine
Resources
Transition to a Circular Economy

Social Taxonomy
Decent Work
Adequate Living Standards & Well-Being for EndUsers
Inclusive and Sustainable Communities and Societies

Source: J.P. Morgan based on the Platform on Sustainable Finance (link).

The taxonomy has only been finalized for activities contributing to climate change
mitigation and adaptation, resulting in an EU-wide definition of climate-friendly
technologies. The Taxonomy is to be extended to the other EU environmental
objectives, such as Circular Economy and Biodiversity. A proposal for a social
taxonomy has also been submitted to the European Commission.
The role of the European Central Bank and Banking Authority in delivering theEU’s ESG Agenda
The European Banking Authority (EBA) published a series of new ESG reporting
requirements for banks operating in the EU, with a focus on climate risks andopportunities arising from financing activities. Meanwhile, the European Central
Bank has conducted a series of climate stress-tests (see takeaways from J.P. Morgan
Banks Analysts here) and launched its Climate Action Plan in 2021, which includes
measures to further take into account climate change in its corporate bond purchases,
collateral framework, disclosure requirements and risk management (link). As part ofthis plan, the bank recently announced that it would accelerate the decarbonization ofits monetary policy portfolios by using a new climate scoring system to guide its
purchase of corporate bonds (link). The new climate scores, which consider thequality of the company’s GHG reporting, historical trend in GHG emissions, andfuture decarbonization targets, will:

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Affect the relative weighting of issuers in the benchmark that guide theEurosystem’s ongoing reinvestment purchases of corporate bonds



Favor issuers with a better climate performance on the primary market

Impose maturity limits on bonds from lower-scoring issuersIncentivize the purchase of green bonds that meet “stringent” requirements

Figure 95: ECB’s approach to decarbonizing its monetary policy portfolios
SECTORAL DATAISSUER DATA

Quality of company’s
GHG reporting (incl.
third-party verification)

Historical trend in
GHG emissions

Ambition of futuredecarbonization
targets

ISSUER CLIMATE SCORE

Primary Market
Bid Adjustments

TiltedBenchmarks

Maturity
Limits

Source: J.P. Morgan based on the ECB (link).

Data vendors
The EU Commission announced its intention to regulate vendors of ESG data andratings. As we write this report, there are limited details on the content and scope of
this regulation.

US: New Regulatory Attempts but Adoption Remains
Uncertain
ESG regulations in the US have accelerated since Biden’s election in 2020 (J.P.
Morgan Global Research, link). The country notably passed the Inflation Reduction
Act, a landmark climate legislation that could result in 30% to 44% reduction of thecountry’s GHG emissions compared to 2005 levels (link).
In line with other financial regulators, the US SEC is particularly focused on
preventing green- and ESG-washing, setting up a specific Task Force in March 2021
to investigate ESG claims and recently proposing to increase investors’ andcompanies’ sustainability reporting requirements, which we describe in more details
below. Having said that, these two ESG regulations are still at proposal-stage andhave proven to be less politically consensual than in other regions, as evidenced by
the growing “ESG backlash” in the region, which has materialized by the passing of“anti-ESG” laws in Texas and some other US States. Overall, we believe that thelack of political consensus on ESG regulations may remain a challenge for the local
ESG market. See our “ESG in the USA” report from J.P. Morgan Strategic Researchteam (link).
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paul.xu@jpmorgan.com

Proposal for new ESG disclosures: toward a US version of SFDR?
In May 2021, the SEC proposed to impose new disclosures to ESG funds. ESG funds
could be labelled as either integration or ESG-focused, depending on the significanceof ESG factors in investment decisions relative to other factors. The SEC identifies
six methods for implementing ESG-focused strategies: (1) tracking of an ESG index,(2) inclusionary screen, (3) exclusionary screen, (4) impact, (5) proxy voting, and (6)engagement with issuers. In our view, this relative precision on what constitutes an
ESG-focused strategy contrasts with the broad definition of Article 8 funds under the
EU Sustainable Finance Disclosure Regulation (SFDR). Unlike SFDR, the text does
not include any requirements at firm-level. Click here to access our full analysis of
the proposal.
Table 37: SEC’s definition of ESG investment strategies, SFDR-equivalent and key disclosures
Strategy

SEC Definition

SFDR-Equivalent

Proposed Disclosures
Requirements

Integration

Strategies where “ESG
factors may be consideredin the investment selection
process but are generally
not dispositive comparedto other factors whenselecting or excluding aparticular investment”.

Article 8 funds that do notuse one of the methods
described below

Description of the ESG
factor(s) considered andtheir integration in
investment decisions – ifany

ESGFocused

Strategies that “focus on
one or more ESG factors
by using them as asignificant or main
consideration in selecting
investments or in engaging
with portfolio companies.”

Article 8 funds that trackan ESG index, apply
inclusionary andexclusionary screening, or
use proxy voting or
engagement with issuers
to encourage ESG
practices or outcomesStandardized ESG Strategy
Overview Table
More detailed disclosuresprovided separately

ImpactESG-focused strategies
that are designed to“achieve a certain ESG
impact”.

Article 9

Impact targeted and how it
is measured

Source: J.P. Morgan based on the SEC and EU SFDR.

Corporate disclosures: A focus on climate change
Unlike the EU, the US is not planning to impose new disclosure requirements on
corporates on all sustainability topics and has so far focused on improving climaterelated disclosures. Its recent proposal builds on recommendations from the TCFD
and emphasizes consistency of climate disclosures with financial reporting. The mostcontroversial aspects of the proposal concern the requirement for companies todisclose climate-related financial metrics in their audited financial statements and the
Scope 3 emissions reporting mandate (as we write this report, recent news flow
suggests that this provision might be dropped from the final text). The SEC estimatesthat 6,220 domestic and 740 foreign companies could be in scope. Click here toaccess our full analysis of the proposal.
The Federal Reserve will conduct its first climate stress tests in 2023.
The Fed will conduct a pilot climate scenario analysis with six of the US’ largest
banks in 2023 to assess their resilience to climate-related risks. It already mentionedthat the results would have no capital or supervisory implications from this pilot
exercise.

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UK, Australia, and Canada
UKThe UK published a Roadmap to Sustainable Investing in October 2021, which
comprises four pillars: (i) Sustainability Disclosure Requirements for companies,
financial institutions, investment firms and products; (ii) Green Taxonomy; (iii)
Investor Stewardship (on which the UK has historically led), and (iv) International
Leadership on green finance, with the country notably at the forefront of efforts toscale up impact investment. As we write this report, we mainly have details on thefirst pillar, in particular labelling and sustainable disclosure rules for investment
products and firms, which are open for feedback until the end of H1 2023 (see ourinitial takeaways here). If adopted, they would introduce three categories of funds,
namely (i) Sustainable Focus, (ii) Sustainable Improvers, and (iii) Sustainable Impact
funds, with associated disclosure requirements at both entity and fund levels. Thoserequirements will likely evolve to incorporate progress on the Taxonomy (still indevelopment) and ISSB, which the UK said will eventually form the ‘backbone’ of
future corporate reporting requirements. The country already requires TCFD
disclosures on a comply or explain basis for the most prominent companies andannounced that that it would likely expand the number of companies in scope.
Australia
We expect ESG regulations to accelerate following the change in federal government
in May 2022. Beside new emissions reduction targets, the country is developing its
own science-based Green Taxonomy and may also introduce new ESG-related
requirements as part of prudential standards for its super funds. While regulation is
not developing at the same pace as other regions, there are signs that this is alreadychanging, in particular within the financial services sector. In August 2022, theFinancial Services Council released its ‘Guidance Note 44: Climate Risk Disclosure
in Investment Management’, setting guidelines on the disclosure of climate-friendly
investment features, net zero commitments and climate change risk reporting.
Application with the Guidance Note is on a voluntary basis. This followed the releaseof an Australian Securities and Investments Commission (ASIC) review of“greenwashing” claims and expectations of how managed funds can avoid it.
CanadaCanada’s federal ESG regulations are still in development. The country recently
launched a sustainability standards board to engage with ISSB on the development ofsustainability disclosure requirements for corporates, and recently proposed a
Climate Aligned Finance Act to adjust banks’ capital requirements based on their
exposure to fossil fuel sectors (we understand that the bill is still being discussed in
Parliament). Canada also set up a working group to develop its own green taxonomy,
although this initiative has been delayed several times because of disagreements on
the inclusion of “transition activities”, among others.

Asia: The Disclosure Push
In line with the EU and US, Asia-based asset managers face more stringent
disclosure requirements on ESG products. Among notable developments, we notethat India and Singapore will require ESG funds to invest at least 80% and 67% of
AUM, respectively, in securities that are “ESG-aligned”, while Taiwan announced
disclosure and labeling rules for both onshore and offshore funds. Further, mostcountries in the region will apply mandatory ESG disclosures by 2023, including incountries that traditionally applied a “comply or explain” approach. We note87This document is being provided for the exclusive use of LEE BINGLE at JPMorgan Chase & Co. and clients of J.P. Morgan.

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paul.xu@jpmorgan.com

positively initiatives by the ASEAN to harmonize regulations among its 10 members,
including its attempt to define a common green taxonomy.
Figure 96: Effective years of (proposed) mandatory ESG disclosure rules in Asia
Malaysia
ThailandHong Kong SAR*
Indonesia
Singapore*Japan
Philippines
Taiwan*India*
China*South Korea*
2010

2016
2017
2016 (comply or explain)

2020
2020

2016 (comply or explain)

2023
2023
2023
2023
2023
2023
2025

2012

2014

2016

2018

2020

2022

2024

2026

Source: J.P. Morgan based on regulations from selected markets:* Hong Kong SAR: ESG Reporting Guide was revised to mandate all public companies to disclose their environmental issues on a“comply-or-explain” basis in 2016; effective June 2020, certain ESG disclosure became mandatory;
Singapore: Sustainability reporting was introduced on a "comply-or-explain" basis in 2016; effective 2023 climate-related disclosure
will be mandatory for companies in financials, agriculture and energy industries;
Taiwan: effective 2023 for steel and cement companies, as well as listed companies whose paid-in capital is higher than NT$10 billion;
India: effective FY22-23 for the top 1,000 listed companies based on market cap;
Mainland China: In May 2022, the State-owned Assets Supervision and Administration Commission of the State Council announced
that by 2023, the ESG report disclosure of central SOEs will be fully covered;South Korea: effective 2025 for companies with at least W2 trillion in total assets.

ASEAN
In February 2022, the ASEAN Capital Markets Forum (ACMF), which comprises
securities regulators from the ten-member Association of Southeast Asian Nations,
proposed standards to regulate sustainable and responsible funds in the region, withthe objective to provide disclosure and reporting requirements that can beconsistently applied by fund managers in the ASEAN jurisdiction. This notably
includes the development of a common green taxonomy. As a reminder, ASEAN
member states include Brunei Darussalam, Cambodia, Indonesia, Lao PDR,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Mainland China
Mainland China has historically developed non-binding guidance and guidelines tohelp the development of its ESG and sustainable debt markets, including on green
issuance and sustainability reporting. More recently, the China Securities Regulatory
Commission (CSRC) introduced mandatory disclosures on environmental penalties
for all listed companies, as well as other environmental information for mostpolluting entities such as pollution discharge and status of pollution control facilities.
In parallel, the State-owned Assets Supervision and Administration Commission of
the State Council announced mandatory ESG reporting for central SOEs by 2023.
In 2020 the EU and China initiated a working group under the EU’s International
Platform on Sustainable Finance (IPSF) on taxonomies. This resulted in a Common
Ground Taxonomy (CGT) which is a comparison highlighting areas of commonalityand differences between the EU and China’s green taxonomies. The latest version of
the CGT (June 2022) does not create a common standard, but jointly recognizes
certain climate mitigation activities, and is aimed at smoothing international
economic activities. The work draws on the green bond catalogue issued in 2015 by
the People’s Bank of China (PBOC), usually referred to as “a taxonomy”.

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Hong Kong SAR
The Hong Kong stock exchange (HKEX) has led the development of ESG reportingin the region, with requirements for listed companies to provide ESG disclosures on
a comply or explain basis in place since 2017. HKEX gradually moved towardmandatory disclosures since then, including on the board’s consideration of ESG
matters, and TCFD-aligned climate reporting.
With respect to ESG disclosures on investment products, the Securities and Futures
Commission (SFC) is following a climate first approach and issued amendments to
the Fund Manager Code of Conduct, which mandate fund managers to take into
consideration climate-related risks of their investments and make appropriate
disclosure (such has Scope 1 and 2 GHG emissions at fund level). Large fundmanagers (AUM HKD4bn to HKD8bn) are expected to meet the requirements by 20
August 2022. The SFC also aims to adopt the Common Ground Taxonomy being led
by China and the EU, and supports the IFRS proposal for the ISSB.
India
While still nascent, the size of the Indian ESG market has multiplied by five between
2019 and 2021 (source: Times of India), showing growing interest in the country. In
2021, the Securities and Exchange Board of India (SEBI) announced new
requirements for the top 1,000 listed by market capitalization to report sustainability
information from FY2022/23 onwards in newly created ‘Business Responsibility andSustainability Reports’ (BRSR). It has also proposed more stringent rules for ESG
mutual funds, including to invest at least 80% of total AUM in securities that
disclose sustainability information and follow the ESG theme of the fund. In 2022,
India proposed new regulations on ESG rating providers, including the obligation to
identify ESG ratings as either risk or impact-based.
Indonesia
The country’s Financial Services Authority has mandated sustainability reporting for
all banking corporations starting from 2019 and other listed companies from 2020.
Japan
In line with its European and US counterparts, Japan’s Financial Services Agency
announced the establishment of a framework to prevent “greenwashing” in themarketing of ESG products and hinted toward the development of an organization
dedicated to the certification of ESG products. More recently, the Japanese
government announced that companies will be required to provide non-financial
disclosures on human capital and diversity, and climate change by 2023.
Singapore
Singapore has considerably accelerated its sustainable finance initiatives. In 2021,
the Singapore Exchange (SGX) announced that all listed companies will be required
to provide TCFD-aligned climate disclosures from 2022 onwards on a comply or
explain basis. Reporting will gradually become mandatory, first for companies in the(i) financial, (ii) agriculture, food and forest products, and (iii) energy industries (by2023), followed by (iv) materials and buildings, and (v) transportation industries by2024. Since 2022, companies are also required to provide detailed disclosures onboard diversity.
The Monetary Authority of Singapore’s (MAS) has also been active to regulate ESG
investing and accelerate climate finance, as shown by (i) the introduction of new
disclosure requirements for ESG-labeled retail funds from 2023 onwards, including89

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details on the investment strategy and the allocation of at least two-third of the fund’s
net asset value to sustainable investments; (ii) the exclusion of new coal and oil sands
and tilt to low-carbon activities in its own investments; and (iii) and the deploymentof new climate scenarios and stress-tests.
TaiwanSince late 2021, Taiwan regulators has released a number of rules to strengthen ESG
disclosure from public companies. In December 2021, the Taiwan Stock Exchange(TWSE) announced mandatory ESG reporting rules for companies in selectedindustries including food and beverage, chemical, and financial & insurance. In
January 2022, Taiwan's Financial Supervisory Commission (FSC) announced thatsteel and cement companies, as well as listed companies whose paid-in capital ishigher than NT$10 billion (US$330 million) must from 2023 reveal their greenhousegas emissions in annual reports. Onshore ESG funds also have to comply withprocess and disclosure requirements, including setting at least one sustainability
objective, describe how the investment strategy will help to achieve that objective,and ensuring that at least 60% of their assets under management (AUM) are invested
in companies whose operations are in line with the goal(s). Further disclosures wereannounced in 2022 for offshore ESG funds, including the sustainability objectives,
measurement standards, and exclusions, among others.
ThailandThailand’s SEC mandates sustainability reporting for listed companies, using aframework that is “proportionate to the company’s size and complexity and meets
domestic and international standards”. In 2021, the SEC proposed disclosure
additional requirements for sustainable and responsible investment funds. Meanwhile,
the Bank of Thailand announced the development of a “sustainable financetaxonomy”, which would consider social and environmental impacts holistically.
Malaysia
The country adopted mandatory sustainability reporting for all listed companies in
2016, which is earlier than most Asian and emerging markets as part. In March 2022,
Bursa Malaysia launched a public consultation paper on its proposal to require alllisted issuers to provide climate change related disclosures that are aligned with
TCFD, and recently announced new reporting on banks’ exposures to green andpolluting activities.
Philippines
Bangko Sentral ng Pilipinas (BSP) requires banks to adopt sustainability principles inrisk management, strategic objectives, and corporate governance framework since2020. Broader sustainability reporting will be required for all listed companies from2023 onwards (with potential financial penalties in case of non-compliance), andultimately for all companies, although first on a comply-or-explain basis.
South Korea
Sustainability disclosures will become mandatory for companies with at least W2
trillion in total assets by 2025 and will be extended to all KOSPI-listed companies by2030. Disclosures will cover response plans to environmental and health crises suchas the Covid-19 pandemic, labor management, and governance, among others.

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Perspectives from Emerging Markets (ex. ASIA)
ESG regulations in EM are still in their infancy, and the focus has historically beenon governance rather than environmental and social themes. Among EM ex. Asia,
Colombia seems to be leading on new sustainable finance regulations. Noteworthy is
the role of stock exchanges in the promotion and implementation of responsible
investing practices in those regions.
BrazilThe B3 stock exchange played an important role in the creation of ESG standards inthe country. In 2000, it created a new listing type in 2000 named “New Market”,
which aims to only include companies with the best governance standards, beyond
local regulations. In 2010, it officially committed to the PRI (Principles for
Responsible Investment), becoming the first emerging-market exchange to do so, andhas been a member of the PRI Brazil ESG Practices Working Group since then. In
2016, Brazil had around sixty institutional investors signing the PRI with some
R$804mn AUM. Still, indexes and exchange traded funds that track intrinsic socioenvironmental features (such as ICO2, ISEE, IGCX) and broader adoption of ESG
practices by Brazilian companies is still a relatively recent phenomenon.
Chile
Chile has pursued efforts to promote adoption of good ESG practices, which arebecoming increasingly common within large companies and in public policies,
although the pace is still slow. A study by the Center for Corporate Governance andSociety of the Chilean University of Los Andes – released in March 2022 – finds that
51% of local business leaders estimate that ESG initiatives will have a positive effecton their companies’ profitability over the next three years. Among the country’s
sustainability policies, we particularly note the country’s ambitious Green Hydrogen
Strategy as part of its Carbon Neutrality ambition, and the reduction in the number of
mandatory working hours.
Colombia
Colombia´s new government under the new President Gustavo Petro has announced
upcoming reforms in decarbonization, climate adaptation, reforestation and energy
transition, including new hydrogen developments and the end of fracking, as well aslabor reforms to improve working conditions. On sustainable finance more
specifically, the country’s financial regulator, Superintendencia Financiera de
Colombia (SFC), launched a new sustainable finance roadmap, which prioritizes thedevelopment of a Central American taxonomy, new ESG disclosures for investment
products, and the supervision of the impact of climate and biodiversity risks on thestability of the financial system.
MexicoSustainable debt has so far been the most dynamic segment of the ESG market.
Mexico was the first issuer of green bonds in the Pacific Alliance according to the
Mexican Stock Exchange, with Mx$32.5bn of green bonds issued by both private
and public entities and launched the first SDG-linked sovereign bond in 2020. Other
financial instruments have been issued such as social and sustainable bonds. Interest
from equity investors is still nascent but rising, including with the launch in 2020 of
the first S&P/BMV Total Mexico ESG Index.

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South Africa
While asset managers started offering ESG-focused products only recently, theimplementation of important regulations could further accelerate the growth in ESG
investing, including the Section 54 of the Mine Health and Safety Act (that forcescompanies to think more about health and safety) and the Regulation 28 of thePensions Fund Act (outlining a fund’s fiduciary duty to give appropriate
consideration to factors that may materially impact the sustainable long-term
performance of a fund’s assets). In parallel, the Institute of Directors in Southern
Africa released the Code for Responsible Investing in South Africa (CRISA), which
directs institutional investors to incorporate sustainability considerations into theirinvestment analysis. The country has recently accelerated its transition to renewableenergy as part of its broader overhaul of the energy sector, with financial support
from the US and EU. On the other hand, South Africa is also facing heightened
scrutiny on its money laundering policies (link).

Conclusion: Will There Ever Be Convergence of ESG
Regulations?
Over the recent years, the regulatory landscape has become more complex andfragmented, partly owing to new jurisdictions stepping in. In this context, could
investors expect ESG regulations to gradually converge? To some extent – yes. ISSB
may succeed in forming a future global baseline (i.e. minimum standards) for
sustainability reporting, while forums of global collaboration between financial
regulators and central banks (IOSCO, TCFD, NGFS) may drive global convergenceon key principles, in particular (i) ensuring that funds’ marketing materials fairly
reflect the role of ESG in the investment process, and (ii) requiring more informationfrom ESG rating providers on their methodology. In the sphere of taxonomies, we
expect higher convergence of environmental vs. social taxonomies, which should (intheory) be informed by the same global science-based planetary boundaries (seehere).
Having said that, differences will persist, owing to countries’ various political
agendas and positioning on the “value vs. values” debate. Jurisdictions such as theEU will likely complement ISSB by additional sustainability disclosures in order toalign with their double materiality approach to corporate reporting. Despite room forconvergence on green taxonomies, we expect that countries will continue to takedifferent stances on technologies such as nuclear and gas power depending on theirown energy policies, while we expect that specific environmental, social or
governance standards will remain fragmented as influenced by a combination ofmultiple regional and global political, economic, and geopolitical dynamics.

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Glossary
Article 8 funds: Category of ESG funds created by the EU SFDR. It includes funds
which promote, among other characteristics, environmental or social characteristics,
or a combination of those characteristics, provided that the companies in which theinvestments are made follow good governance practices.
Article 9 funds: Category of ESG funds created by the EU SFDR. It includes thathave sustainable investment as their objective or a reduction in carbon emissions as
their objective.
Carbon dioxide (CO2): Primary type of GHG emitted through human activities. The
main activity that emits CO2 is the combustion of fossil fuels (coal, natural gas andoil) for energy and transportation, although certain industrial processes and land-use
changes also emit CO2.
Carbon credits: A carbon credit is a generic name for a certificate that represent theequivalent of 1 ton of CO2 equivalent from GHG. Carbon credits are instruments
issued by a specific scheme, such as an Emission Trading Scheme (ETS), a baselineand offset scheme, or a Carbon Offset scheme, under specific rules that guarantee
their quality (so-called Monitoring, reporting, & Verification).
Carbon offsets: A carbon offset is a specific type of carbon credit, which is issued
on the back of a GHG reduction, avoidance, or removal project. A carbon offset canbe issued under compliance mechanisms such as the Clean Development mechanism,
Joint Implementation mechanism, and the carbon offsets pocket of an ETS, or byvoluntary mechanisms such as Gold Standard and Verra.
CCRM: Climate Corporate Responsibility Monitor – Assessment of the climate
strategy of 25 major global companies conducted by NewClimate Institute incollaboration with Carbon Market Watch (CCRM).
CDP: Carbon Disclosure Project – A global disclosure platform for investors,
companies, cities and regions to monitor, manage and disclose their environment
impact.
CDSB: Climate Disclosure Standards Board – International consortium of businessand environmental NGOs, committed to advancing and aligning global corporate
reporting to equate natural capital with financial capital.
Climate scenarios: Plausible representation of future climate and associated rise intemperature that has been constructed to investigate the potential impacts of climatechange. Climate scenarios are typically based on a set of assumptions regarding thefuture evolution of climate policies and technologies, among other variables. Climate
scenarios projecting an increase in global temperature “well below 2°C” areconsidered as aligned with the Paris Agreement.
Controversial weapons: Weapons banned under international conventions such as
the Treaty on the Non-Proliferation of Nuclear Weapons (1968), Biological andToxin Weapons Convention (1972), Chemicals Weapons Convention (1997), MineBan Treaty (1999) on anti-personnel mines, Convention on Certain Conventional
Weapons (2001) including non-detectable fragments, incendiary weapons, booby
traps, and blinding laser weapons, and the Convention on Cluster Munitions (2008).
The type of weapons included may slightly differ between investors and vendors.
COP: Conference of the Parties – Main decision-making body of a convention
signed under the United Nations, which usually includes all countries of the United
Nations that have signed and ratified the convention. An international convention
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Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com(also called treaty) is an agreement between different countries that is legally binding
to the contracting States (UN). Conventions most relevant to ESG investors include
the United Nations Framework Convention on Climate Change (UNFCCC) and theConvention on Biological Diversity (CBD).
COP 21: 21st Convention of the Parties to the United Nations Framework
Convention on Climate Change (UNFCCC). This conference occurred in 2015 andresulted in the Paris Agreement.
CSRD: Corporate Sustainability Reporting Directive – Currently a legislative
proposal of the EU Commission, aiming at expanding the scope and strengthen thecontent of mandatory ESG reporting for EU corporates. It will replace the NFRD.
CSDDD: Corporate Sustainability Due Diligence Directive – Directive proposes
new requirements on the management of sustainability risks and impacts forcompanies and financial institutions in the EU. The CSDDD does not include
disclosure requirements
CTB: Climate Transition Benchmark – A benchmark that is labelled as an EU
Climate Transition Benchmark where the underlying assets are selected, weighted or
excluded in such a manner that the resulting benchmark portfolio is on adecarbonization trajectory and is also constructed in accordance with the minimum
standards laid down in the EU delegated acts of the EU Sustainable Benchmark
Regulation.
Double Materiality: Assessment of the importance of an ESG issue for an entity,
based both on the sustainability impacts of the entity and its value chain on
stakeholders (including the environment) as well as the financial risks andopportunities posed by the ESG issues to the entity.
EFRAG: European Financial Reporting Advisory Group – Private association
established in 2001 by the European Commission. Its Member Organizations are
European stakeholders and National Organizations having knowledge and interest in
the development of IFRS Standards and how they contribute to the efficiency of
capital markets. EFRAG is the main body advising the European Commission on the
new sustainability standards under CSRD.
Environmental factors: Environmental factors stem from a firm’s impacts on, anddependencies to natural capital. Examples of impacts include GHG emissions, waste,discharges to soil and groundwater, among others. Example of dependencies include
the use of materials, energy and water, a balanced climate and pollination.
Eurosif: European Sustainable Investment Forum – Eurosif is the leading panEuropean sustainable and responsible investment (SRI) membership organization
whose mission is to promote sustainability through European financial markets.
Externalities: Situations when the effect of production or consumption of goods andservices imposes costs or benefits on others which are not reflected in the prices
charged for the goods and services being provided. (OCED).
Global Warming Potential: Factor describing the radiating forcing impact (degreeof harm to the atmosphere) of one unit of a given GHG relative to one unit of CO2.
The following table indicates the 100-year time horizon GWP relative to CO2.

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Common Name
Carbon Dioxide (CO2)Methane (CH4)
Nitrous Oxide (N2O)
Hydrofluorocarbons (HFCs)
Perfluorocarbons (PFCs)
Sulfur hexafluoride (SF6)GWP Values
1
28
265
4 – 12,400
6,630 – 11,100
23,500Source: J.P. Morgan based on IPCC Fifth Assessment Report

Governance factors: People, policies and processes that direct and control thecompany, which are partly defined by the firm’s own practices, and by local
regulation and business environment.
Greenhouse gases (GHG): Gases that trap heat in the atmosphere. These include
Carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons(HFCs), Perfluorocarbons (PFCs), and Sulfur hexafluoride (SF6). A company's GHG
emissions are reported in tonnes of carbon dioxide equivalent (CO2e). CO2e is theuniversal unit of measurement to indicate the Global Warming Potential (GWP) of
each of the six GHGs, expressed in terms of the GWP of one unit of CO2. It is used
to evaluate releasing (or avoiding releasing) different GHG against a common basis.
Greenwashing: Behavior or activities aiming to give the impression that an entity is
doing more to support or protect the environment than it really is.
GRI: Global Reporting Initiative – Independent, international organization thatdevelops the most widely used standards for sustainability reporting (the GRI
standards).
IASB: International Accounting Standard Board – The International AccountingStandards Board (IASB) is an independent, private-sector body that develops andapproves International Financial Reporting Standards (IFRSs). The IASB operates
under the oversight of the IFRS Foundation.
IFRS Foundation: International Financial Reporting Standard – The IFRSFoundation is a not-for-profit, public interest organization established to develop asingle set of high-quality, understandable, enforceable and globally accepted
accounting and sustainability disclosure standards—IFRS Standards—and topromote and facilitate adoption of the standards.
IPCC: International Panel on Climate Change – The Intergovernmental Panel on
Climate Change (IPCC) is the United Nations body for assessing the science related
to climate change.
IRF: Integrated Reporting Framework - The International Integrated Reporting
Framework is used to accelerate the adoption of integrated reporting across theworld. An integrated report is a concise communication about how an organization's
strategy, governance, performance and prospects lead to the creation of value overthe short, medium and long term.
IOSCO: International Organization of Securities Commissions; It is theinternational body that brings together the world's securities regulators and isrecognized as the global standard setter for the securities sector. IOSCO develops,
implements and promotes adherence to internationally recognized standards forsecurities regulation. It works intensively with the G20 and the Financial Stability
Board (FSB) on the global regulatory reform agenda.
ISSB: International Sustainability Standards Board – Announced in November 2021
by the IFRS foundation trustees, its mission is to develop a comprehensive global
baseline of sustainability-related disclosure standards.

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Just Transition: The notion of a ‘just transition’ was incorporated in the 2015 Paris
Agreement as a way of signaling the importance of minimizing negative
repercussions from climate policies and maximizing positive social impacts forworkers and communities (Robins & Rydge, 2019).
Materiality: Measure of how important an information is when making a decision.
Methane (CH4): Second largest type of GHG after carbon emissions. It is mostly
emitted during the production and transportation of coal, natural gas and oil. Methane
emissions also result from livestock and other agricultural practices and by the decayof organic waste in landfills.
Net Zero: Net zero means cutting greenhouse gas emissions to as close to zero as
possible, with any remaining emissions re-absorbed from the atmosphere, by oceans
and forests for instance, in order to meet the objective of the Paris Agreement (UN).
NFRD: Non-Financial-Reporting Directive – An EU directive which entered into
force in 2014 and impose to large companies to publish information on
environmental matters, social matters and treatment of employees, respect of humanrights, anti-corruption and bribery as well as diversity on company boards. It applies
to large public companies with more than 500 employees. This covers approximately
11 700 large companies and groups across the EU.
NGFS: Network of Central Banks and Supervisors for Greening the Financial
System – A group of Central Banks and Supervisors created in December 2017 to“help strengthening the global response required to meet the goals of the Paris
agreement and to enhance the role of the financial system to manage risks and tomobilize capital for green and low-carbon investments in the broader context ofenvironmentally sustainable development” (NGFS). Importantly, the NGFS develops
climate scenarios that are used by regional Central Banks and Supervisors to design
their own climate regulations (link).
PAB: Paris Aligned Benchmark – EU Paris-aligned Benchmark' means a 'benchmarkthat is labelled as an EU Paris-aligned Benchmark where the underlying assets are
selected in such a manner that the resulting benchmark portfolio's GHG emissions
are aligned with the long-term global warming target of the Paris Climate Agreement
and is also constructed in accordance with the minimum standards laid down in the
EU delegated acts' of the EU Sustainable Benchmark Regulation.
Planetary boundaries: This concept presents a set of nine planetary boundaries
within which humanity can continue to develop and thrive for generations to come.
Crossing these boundaries increases the risk of generating large-scale abrupt or
irreversible environmental changes (Stockholm Resilience Centre).
PRI: Principles for Responsible Investment – The UN-supported PRI is the world’s
leading proponent of responsible investment. It works to understand the investment
implications of ESG factors and to support its international network of investor
signatories in incorporating these factors into their investment and ownershipdecisions.
SASB: Sustainability Accounting Standard Board – SASB was founded as anonprofit organization in 2011 to help businesses and investors develop a common
language about the financial impacts of sustainability prospects.
SBTI: Sciences-Based Target Initiative – SBTI is a partnership between the UN andthree non-governmental organizations – the Carbon Disclosure Project (CDP), theWorld Resources Institute (WRI) and the World Wide Fund for Nature (WWF). Thispartnership “verifies” the alignment of an entity’s climate target with sectoral
decarbonization pathways, taking into account latest climate science.
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Scope 1: Direct GHG emissions – Direct GHG emissions occur from sources that are
owned or controlled by the entity, for example, emissions from combustion in owned
or controlled boilers, furnaces, vehicles, etc.; emissions from chemical production in
owned or controlled process equipment.
Scope 2: Electricity indirect GHG emissions – Scope 2 accounts for GHG emissions
from the generation of purchased electricity consumed by the entity. Purchased
electricity is defined as electricity that is purchased or otherwise bought into theorganizational boundary of the entity. Scope 2 emissions physically occur at thefacility where electricity is generated.
Scope 3: Other Indirect GHG emissions – Scope 3, otherwise known as the holy grailof emissions data, is currently an optional reporting category in the GHG Protocol.
Scope 3 emissions are a consequence of the activities of the entity, but occur fromsources not owned or controlled by the entity. Some examples of scope 3 activities
are the extraction and production of purchased materials; transportation of purchased
fuels; and use of sold products and services (e.g. vehicles).
SDR: Sustainability Disclosure Requirements – UK regulation currently indevelopment, which will include new disclosure requirements for corporates andinvestors, as well as a taxonomy.
SFDR: Sustainable Finance Disclosure Regulation – EU regulation which came into
force in March 2021. It is lays down ESG disclosure obligations for manufacturers offinancial products and financial advisor toward end-investors. It distinguishes
between Article 8 and 9 funds.
Social factors: Social factors stem from a firm’s impacts on, and dependencies tohuman capital. Examples of impacts include occupational accidents, women’s
empowerment, workers’ rights and community volunteering, among others. Example
of dependencies include the reliance on an engaged, diverse and healthy workforce,skilled talent pipeline, and consumer trust.
Stakeholders: Person or group of people who are involved with an organization andtherefore has responsibility towards it and an interest in its success. Stakeholders
typically include shareholders, creditors, employees, customers, suppliers, local
communities and the broader society (J.P. Morgan based on the Cambridge
Dictionary and the WEF).
Stranded assets: assets that suffer from unanticipated or premature write-downs,
devaluation or conversion to liabilities due to the unexpected acceleration ofsustainability megatrends. The term is typically used in the context of the energy
transition to designate the stranding of fossil-fuel resources that could occur if thetransition to a 1.5°C scenario accelerated (J.P. Morgan based on Lloyd’s). Researchfound that 56 to 60% of oil and gas reserves and 90% of coal reserves must remain
unextracted to align with a 1.5°C scenario (Nature).
TCFD: Taskforce on Climate Finance-Related Disclosures – Formed by the G20
Financial Stability Board, its goal is to develop recommendations for more effective
climate-related disclosures that could promote more informed investment, credit, andinsurance underwriting decisions and, in turn, enable stakeholders to understandbetter the concentrations of carbon-related assets in the financial sector and thefinancial system’s exposures to climate-related risks.
TNFD: Taskforce on Nature-related Financial Disclosures – The TNFD aims todevelop and deliver a risk management and disclosure framework for organizations
to report and act on evolving nature-related risks, with the ultimate aim of supporting

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a shift in global financial flows away from nature-negative outcomes and toward
nature-positive outcomes.
Tragedy of the horizon: Expression first employed by Mr. Mark Carney, Governorof the Bank of England and Chairman of the Financial Stability Board, in a speech at
Lloyd’s of London in 2015. It designates the mismatch between the typical time
horizon of decision-makers (including business leaders, policy-makers, and“technocratic authorities”) and that that would be needed to mitigate climate change(J.P. Morgan based on BIS).
TPI: Transition Pathway Initiative – Global initiative led by asset owners andsupported by asset managers. Aimed at investors and free to use, it assesses
companies’ preparedness for the transition to a low-carbon economy, supporting
efforts to address climate change (TPI).
TPT: Transition Plan Taskforce – Taskforce mandated by the UK Government todevelop a gold standard for transition plans. The TPT’s work will help to drive
decarbonization by ensuring that financial institutions and companies prepare
rigorous plans to achieve net zero and support efforts to tackle greenwashing (TPT).
Value chain: Refers to the various business activities and processes involved increating a product or performing a service. A value chain can consist of multiple
stages of a product or service’s lifecycle, including research and development, sales,and everything in between (Harvard Business School).
VRF: Value Reporting Foundation – A global nonprofit organization that offers acomprehensive suite of resources designed to help businesses and investors develop ashared understanding of enterprise value – how it is created, preserved, or eroded.
WEF: World Economic Forum – The World Economic Forum is the International
Organization for Public-Private Cooperation.
WRI: World Resources Institute – Research center on food, forests, water, ocean,cities, energy and climate. The WRI is a key stakeholder in multiple sustainability
initiatives, including the development of the GHG Protocol and SBTI.
WBCSD: World Business Council For Sustainable Development – Coalition of 200+
CEOs working to “accelerate the system transformations needed for a net zero,nature positive, and more equitable future” (WBCSD).

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J.P. Morgan Global ESG Research

Meet our Teams
Leadership

Gloria Kim
Co Head of Global ESG Research & Global Head of
Index Research
gloria.m.kim@jpmorgan.com

Sophie Warrick
Co Head of Global ESG Research & Head of EMEA
Equity Researchsophie.l.warrick@jpmorgan.com

Methodology & Integration

Virginia Martin Heriz
Head of ESG Research Methodology & Integration
virginia.martinheriz@jpmorgan.com

Fundamental

Jean-Xavier Hecker
Head of EMEA Equity ESG &Sustainability ResearchJean-xavier.hecker@jpmorgan.com

Hannah Lee
Head of Asia Pacific ESG Equity
Researchhannah.l.lee@jpmorgan.com

Tomohiko Sano
Co-Head of ESG & Sustainability
and Machinery Research, Japan
tomohiko.sano@jpmorgan.com

Jason SteedHead of Equity Research forAustralia
jason.h.steed@jpmorgan.com

Danielle Ward
Co Head of ESG Credit Integration
danielle.ward@jpmorgan.com

Mark S. Streeter, CFA
Co Head of ESG Credit Integration
mark.streeter@jpmorgan.com

Noemie de la Gorce, CFA
Senior ESG & Sustainability
Research Analyst EMEA
noemie.delagorce@jpmorgan.com

Hugo Dubourg
Senior ESG & Sustainability
Research Analyst EMEA
Hugo.dubourg@jpmorgan.com

Paul Xu, CFA, CPA
ESG Research Analyst
Asia Pacificpaul.xu@jpmorgan.com

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paul.xu@jpmorgan.com

Emily Macpherson
Strategy and ESG Equity Research
Analyst for Australia
emily.c.macpherson@jpmorgan.com

Quantitative

Khuram Chaudhry
Head of European Quantitative Strategy
khuram.chaudhry@jpmorgan.com

Ayub Hanif, PhD
Global Quantitative & Derivatives Strategy
ayub.hanif@jpmorgan.com

Index

Lydia Harvey
Head of ESG Index Strategy &Integration
Lydia.harvey@jpmorgan.com

Rupert Rink
Senior ESG Index Specialist
Rupert.rink@jpmorgan.com

Ethan Ross
ESG Specialist
Ethan.ross@jpmorgan.com

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paul.xu@jpmorgan.com

Our Content
Table 38: Overview of J.P. Morgan’s ESG Research Publications & Products
Fundamental

Quantitative

Index

Macro &
Economics

ESG WireLong View
Materiality Matters
ESG in Credit
ESG Flash Notes
ESG Discovery Portal

ESGQ
ESGQ Quarterly
ESG Research
Through a Quantitative
Lens

JESG Indices
JESG Monitors
Product Guides
Thematic Research

Thematic Research

Source: J.P. Morgan

Fundamental
The Wire
As a rapidly evolving area with news flow from regulators, governments, investors
and corporates, filtering what is important, and identifying how it fits into thebigger picture, is critical. ESG Wire is our weekly newsletter which allows ourclients to stay updated on the most important ESG news, content and upcoming
investor access from Equity Research they may have missed, and on what’s next, in
one pass. Read the latest edition here.
The Long View
Many themes or regulatory shifts that are shaping the future landscape of ESG &Sustainability are long-term in nature, several of which are in their infancy
today. The Long View provides detailed insights from our ESG analysts on key
regulatory developments and thematics in ESG from a long-term perspective,
combined with sector and stock-level impacts, leveraging the expertise of ourSector analysts.
Net Zero in Asset Management

Here

Asia ESG: Labor Practices & Norms-based Strategies

Here

Does ESG need a reboot? Survey results

Here

Direct Air Capture: Could it save the world? Will it cost the earth?

Here

ESG & Earth Day: What's Green, what's Brown, what's in between? - and why we love the
EU Taxonomy

Here

Materiality Matters: A crucial debate for the future of ESG

HereWhat does an ESG fund look like?

Here

Stakeholder Capitalism: Corporate Purpose and Implementation

Here

Materiality Matters
We believe combining in-depth ESG and regulatory knowledge with industry andsingle-stock context and expertise is increasingly critical when integrating ESG and
Sustainability factors into the investment process. Our Materiality Matterspublications are created jointly by our ESG Specialists and Sector teams,
generating forward-looking and investable ESG insights utilizing a double
materiality framework - in order to capture both what is financially material today,
as well as what is relevant from a sustainability perspective, which may also be
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financially relevant tomorrow.
Green Sporting Goods: Just Do It?

HereEuropean Steel: The Butterfly Effect Trilogy: Decarbonisation, Demand & Defence and theread-across to European SteelHere

RWE Green Sparks

Here

Building Materials: Innovating Towards More Sustainable Products

Here

Fashion Retail: Caring not (Cost) Sharing

Here

The Conscious Consumer: Deforestation and Biodiversity
Saint Gobain: R&D and Product sustainability sector deep dives reinforces
underappreciated ESG status
EMEA Hydrogen: A Revolution in need of realism; separating the opportunity from theoptimism

Here

European Tobacco: a deep-dive on Tobacco in the context of ESG

Here

Here
Here

ESG Flash Notes
With ESG news flow increasingly impacting markets in real time, our Flash Notes
provide first reactions from our ESG analysts to regulatory or company
developments.
Initial Takeaways From The UK’s Sustainability Disclosure Requirements

Here

Takeaways from the Inflation Reduction Act

HereAssessing the risks from charges against humanity from the group's legacy Syrian
operations

Here

ESG in Credit
Credit Factor funds, J.P. Morgan's credit smart beta ESG index and 3Q performance update

Here

Oceans Apart: Assessing the ESG Cost of Debt in Global Credit

Here

ESG alpha in DM credit and growing momentum in EM

Here

ESG Ratings Not Ready for Prime TimeHere

ESG Discovery Portal
ESG Discovery is a digital platform, developed to centralize ESG inputs fromsector analysts working in fundamental Equity and Credit Research. Discovery has
been developed to answer client demand for a more structured, systematic andfundamental ESG view from the Sell Side which looks beyond ratings to underlying
drivers and forward-looking analysis, and to make our work in this context
searchable in one place through time. Click here to access.

Quantitative
Quarterly ESGQ Updates
Talking the language of the general investor these research notes highlight thevaluations, earnings profile, style impact, and country/ sector allocation of ESGQ.
ESGQ: Returns continue to struggle, catalysts supportive of a better H2

Here

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paul.xu@jpmorgan.com

ESGQ: Short term vulnerabilities, long term opportunities

Here

Solid and consistent returns for ESGQ, concerns about the high correlation to Momentum &Technology

Here

Launching JPM's ESGQ - A Quantitative ESG Metric for stock selection models

Here

ESG Research Through a Quantitative Lens
Creating an ‘Innovation Culture Score’ using Human Capital Factor data

Here

Using Newsflow Sentiment Data to understand SDGs by country & Sector

Here

Assessing the impact of inflation & carbon intensity on ESG stock selection

Here

What's the best way to invest in ESG?

Here

A Quantitative Perspective of how ESG can Enhance your Portfolio

Here

Index
JESG Monitors
Key regulatory developments and performance metrics for the JESG index suite.
Click here to access our latest JESG Quarter in Review – Q3 2022.
Product Guides
Introduction and primers to our JESG index products.
Introducing the J.P. Morgan EM Green Bond Diversified Indices - The first diversified
benchmark focused on Emerging Markets green bonds

HereIntroducing the J.P. Morgan ESG Global Corporate Index | The JESG GCI is acomprehensive ESG benchmark encompassing global investment grade and high yieldcorporate debt

HereIntroducing the JESG JACI – A first of its kind ESG benchmark aligned to Asia Credit

Here

Thematic
Thematic research reports covering key topics such as climate change andsovereign ESG.
Climate-related investment in EM sovereign debt is modest and has significant growthpotential

Here

Carbon Footprints of Flagship Corporate Debt Benchmarks

Here

Carbon Footprints of Flagship Sovereign Debt Benchmarks

Here

A New Dawn: Rethinking Sovereign ESG

HereNavigating Greenhouse Gas Emissions Data: Investing within our planetary boundaries

Here

Hurdles for EM Sovereign ESG Strategies: Concepts and misconceptions in an uncharted
world

Here

Macro & Economics
Insights from our Rates, Commodities and Emerging Markets teams on a variety of103

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17 January 2023

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paul.xu@jpmorgan.com

ESG topics.
EM Strategy: Stocks Ideas for Sustainable Agriculture

Here

ESG in the USA: Realpolitik and Climate Realism

Here

Australian Elections: For Whom the Bell ‘Teals’

Here

ESG in the Cycle: Why facing an identity crisis could make ESG stronger

Here

Advancing Climate Innovation – The Road to 2050

Here

ESG Investing and Development Finance in Emerging Markets: ESG and SDG frameworks
increasingly overlap in EM

HereRisky Business: the climate and the macroeconomy

Here

EM Strategies: The 2.0 case for growing ESG investing

Here

Takeaways from the Inflation Reduction Act

HereAssessing the risks from charges against humanity from the group's legacy Syrian
operations

Here

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17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

We would like to thank the analysts from J.P. Morgan Global Research who
contributed to this report, including: Christyan Malek, Global Head of Energy Strategy & and Head of European Oil& Gas Equity Research Matthew Lofting, CFA, Executive Director, European Oil & Gas Equity
Research
 Javier Garrido, Head of the European Utilities Equity Research Vincent Ayral, Executive Director, European Utilities Equity Research Patrick Jones, European Hydrogen, Mining & Steel Equity Analyst
 David H Perry, CFA, Head of European, Aerospace & Defense Equity Research Jainik Mody, CFA, Research Analyst, Emerging Markets Equity Strategy
 Jared Dinges, European Tobacco Equity Analyst

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paul.xu@jpmorgan.com

Disclosures
Analyst Certification: The Research Analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple Research
Analysts are primarily responsible for this report, the Research Analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the Research Analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect the Research Analyst’s personal views about any and all of the subject securities or issuers; and(2) no part of any of the Research Analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations
or views expressed by the Research Analyst(s) in this report. For all Korea-based Research Analysts listed on the front cover, if
applicable, they also certify, as per KOFIA requirements, that the Research Analyst’s analysis was made in good faith and that the views
reflect the Research Analyst’s own opinion, without undue influence or intervention.
All authors named within this report are Research Analysts who produce independent research unless otherwise specified. In Europe,
Sector Specialists (Sales and Trading) may be shown on this report as contacts but are not authors of the report or part of the Research
Department.

Important Disclosures
This report is a product of the research department's Global Quantitative and Derivatives Strategy group. Views expressed may differ
from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures andother derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticatedinvestors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many
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J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
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J.P. Morgan Equity Research Ratings Distribution, as of January 01, 2023

J.P. Morgan Global Equity Research Coverage*
IB clients**
JPMS Equity Research Coverage*
IB clients**

Overweight
(buy)
48%
47%
47%
65%

Neutral(hold)
37%
45%
40%
66%

Underweight(sell)
14%
35%
13%
55%

*Please note that the percentages might not add to 100% because of rounding.
**Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking
services within the previous 12 months.
For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating
category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
This information is current as of the end of the most recent calendar quarter.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
paul.xu@jpmorgan.com

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Hannah L Lee(852) 2800-8886
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Asia Pacific ESG Research
17 January 2023

Paul Xu, CFA, CPA(86-21) 6106 6152
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Disseminated17 Jan 2023 11:38 AM HKTThis document is being provided for the exclusive use of LEE BINGLE at JPMorgan Chase & Co. and clients of J.P. Morgan.