JPMorgan Equity Index I HLEIX Sustainability

JPMorgan Equity Index Fund is likely to concern sustainability-focused investors given certain substandard ESG attributes.

The ESG risk of JPMorgan Equity Index Fund's holdings is comparable to its peers in the US Equity Large Cap Blend category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change and inequalities, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

The fund has an asset-weighted Carbon Risk Score of 7.52, indicating that its current equity and/or bond holdings have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.

One potential issue for a sustainability-focused investor is that JPMorgan Equity Index Fund doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. The fund's current involvement in fossil fuels reaches 9.38%, surpassing 7.77% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund has relatively high exposure (9.80%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that may negatively affect stakeholders, the environment, or the company’s operations.

Rather than impose a broad environmental, social, and governance investing framework over existing investment processes, the firm argues that meaningful ESG integration is a bottom-up proposal that happens at the security level. While this approach theoretically places ESG considerations alongside more traditional valuation inputs, it remains difficult to assess the true depth and intensity of its application.

A UN Principles for Responsible Investment signatory since 2007, the firm has a history of developing proprietary ESG tools. For example, in a 2013 effort to better understand the risks of investing in emerging-markets equities, analysts created a fundamental ESG-focused checklist. By 2021, that project evolved into a 40-question ESG checklist that is applied to corporate entities across the capital structure. Yet the firm invests in plenty of securities that require a more customized approach, such as municipal and securitized debt, illustrating continued challenges to simply broadening the use of existing tools.

More than standardized checklists are in the works, too. 2019 realized the appointment of Jennifer Wu to coordinate the firm’s sustainable investing efforts. She is in charge of the sustainable investment leadership team, a group of around 90 senior leaders who advocate for thoughtful integration of ESG considerations into all investment processes. A subset of that group monitors the firm’s ESG-focused strategies (which account for 3% of assets under advisement). Wu’s dedicated 17-person sustainable-investing cohort, expected to roughly double in size over the coming year, faces a formidable set of tasks. This fresh set of ESG collaborators–responsible for standardizing existing frameworks and employing 22 external ESG-focused data sources into existing quantitative models–have yet to build a record of influence.

Throughout 2020, the firm’s stewardship team undertook 500 engagements across 96 companies and has laid out a prioritization, progress, and escalation process. Historically, JPMorgan Asset Management’s proxy-voting support for ESG issues has been low. However, in 2020, the firm more often than not favored key ESG resolutions, and this record is publicly available on its website. Timely reporting on engagements undertaken in 2020 was provided in the firm’s March 2021 annual stewardship report. The firm joined the Climate Action 100+ Investor Initiative in January 2020, committing to lead at least one engagement with a heavy emitting company on behalf of the Initiative’s investors. This is a positive development, but more commitment is required in light of net-zero commitments made in November 2020 by JPMorgan Asset Management’s parent, JPMorgan Chase. JPMorgan’s banking arm was named the largest fossil-fuel lender in the world in the Rainforest Action Network’s “Banking on Climate Chaos 2021” report- an annual survey of institutional lending to the fossil-fuel industry.