Can an ESG Fund Hold Energy and Tobacco Stocks?

JP Morgan's Joanna Crompton explains her best in class approach to sustainable investing, and why all companies should be ESG compliable

Emma Wall 17 October, 2017 | 11:14AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Joanna Crompton, Co-Manager of the JPMorgan European Sustainable Equity Fund.

Hello, Joanna.

Joanna Crompton: Hi.

Wall: So, what does sustainable investing mean to you?

Crompton: So, for us at JPMorgan, sustainable investing is considering environmental, social and governance factors as a part of your investment process. So, if you think about it, these are things that you should be considering in your analysis already.

You can't sustain your profits into the long run – you can't be a good company to invest in if you are destroying the environment you need to produce your products; if you aren't managing your workforce correctly or if you have a governance system that leaves you open to corruption, for example.

Wall: And what about within the fund? Because I know that you take a slightly more concentrated stance, don't you?

Crompton: So, the Europe Sustainable Equity Fund is slightly different to how we view ESG across the firm. Across the firm, we are looking for ESG integration which is systematic and explicit consideration of ESG throughout your investment process. This fund is kind of the next step beyond that. So, we are actually targeting positive exposure to ESG.

Wall: And does that mean that you find there are sector biases within the fund, because presumably certain types of companies do this better than others.

Crompton: So, we've got a positive best-in-class approach which means that we are looking for the sustainability leaders within each sector. So, for example – so, we are not indiscriminately screening out large sectors or areas of the market. We can invest in tobacco stocks if we think they are sustainable and if we think they are a good investment.

For example, in the mining sector, we'll own those companies that have an eye on the future and are adapting their business to increased regulation, et cetera, in the future and we won't own those that are sort of more old school in their thinking, to put it that way.

Wall: And what about the data? Because this is great from a theoretical point of view. I mean, why wouldn't someone want to invest in those types of companies, but does the data stack up?

Crompton: So, in terms of performance, what we found looking into the numbers is that incorporating ESG into your process doesn't disrupt the alpha generation that we have from our behavioural finance process which is the area in which I work. In fact, if you look at it more from a risk perspective, it's a very good way of managing your risks. So, from a risk perspective, I would say, it's definitely additive to the process.

Wall: And when you are making an investment decision, at what point does the ESG factor come in? Because you can think about a company that may score very highly on ESG but are they incredibly expensive on valuations or another metric which makes them sort of less attractive?

Crompton: So, the point of this fund and the process which we use to invest is it's combining sustainability with our style characteristics that we look at, so value, quality and momentum. And the point of it is it's not just a screen at any stage. It's throughout the stock selection process, throughout our ideas for the fund.

So, what I mean by that is, ESG issues aren't existential for the bottom line of a company. We like, for example, Iberdrola (IBE) because the falling price of renewables means that utilities have to increase their exposure to renewables just to keep their market share or if they want to gain market share. So, Iberdrola is very well placed for that. So, for them sustainability isn't some existential issue; it's fundamental to their bottom line.

So, you have to be aware of that, but at the same time it has to be the right time to invest. Lots of solar companies that we were exposed to these trends went bust. So, you have to be, at the same time, aware of the fundamental factors, be aware of the value, quality, momentum, the style characteristics that we look at, before you invest in the company.

Wall: Joanna, thank you very much.

Crompton: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Iberdrola SA11.19 EUR0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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