With the world facing challenges on multiple fronts, investors are increasingly looking for robust solutions and strategies that can help them make a positive impact through their investing activities. In particular, many are keen to incorporate Environmental, Social and Governance (ESG) factors into their investment processes.
Sustainable investing can come in many forms, but generally involves four main approaches. These include integrating ESG factors with traditional considerations to assess the risk/reward profile of an investment; screening out controversial companies that do not meet sustainability criteria; identifying those that are ranked highly in their sector based on sustainability factors; and investing in companies that deliver a measurable social or environmental impact.
To help their clients navigate this increasingly complex space, J.P. Morgan is enhancing its sustainable investing capabilities, and zooming in on key areas of sustainability that it believes will generate the most meaningful impact.
One such area is carbon sequestration in forests worldwide, which will play an important role in the burgeoning carbon offset market. Forests sequester carbon by capturing carbon dioxide from the atmosphere and transforming it into biomass through photosynthesis. Sequestered carbon is then accumulated in the form of biomass, deadwood, litter and in forest soils. As such, forests can help to mitigate carbon emission by acting as a carbon reservoir.
Aiming to become an active participant in carbon offsets, J.P. Morgan recently acquired Campbell Global, a leading player in forest management and timberland investing. Through this investment, the bank is able to strengthen and diversify its sustainability focus through carbon sequestration, and provide investment opportunities related to climate, conservation and biodiversity.
Campbell Global is a recognized leader in global timberland investment and natural resource management. The U.S.-based firm has more than three decades of experience, US$5.3 billion in assets under management, and manages over 1.7 million acres worldwide with over 150 employees.
Seeing the Whole Picture
Another key aspect of an effective sustainable investing strategy involves having full visibility of one’s investment portfolio, especially in terms of being able to monitor ESG risks. J.P. Morgan is helping its clients do this more effectively through its recently acquired subsidiary OpenInvest, a leading financial technology company that helps investors better understand the non-financial impact of their portfolios. The firm’s proprietary platform scrapes all manner of data so that it will eventually be able to create portfolios that are more in line with investors’ values.
This will help satisfy the growing ranks of investors who demand a clearer and more holistic understanding of the ESG impact of their portfolios, and use those insights to make more informed investment decisions that better align with their goals.
One key obstacle to higher-quality sustainability-related data and transparency, however, is the lack of a standardized regulatory framework. Creating a globally aligned taxonomy will be critical to improving the reliability of ESG data for investors.
Some progress has been made in this regard. In November last year, for instance, ASEAN released the “ASEAN Taxonomy for Sustainable Finance – Version 1”. This initiative provides a framework for discussions with official and private sector stakeholders to work together on the development of the ASEAN Taxonomy. However, a truly cohesive regulatory framework for ESG reporting and disclosure globally appears to be some way off.
In the meantime, J.P. Morgan is helping clients navigate the inconsistent regulatory landscape through specialist teams that are dedicated to selecting specific sustainability strategies through meticulous due diligence.
Onboarding Specialist Talent
With growing interest in sustainable investing, J.P. Morgan is investing in new talent to provide the necessary expertise to guide clients on their journey. For example, it recently made two key hires from Calvert Research and Management to help grow the private bank’s sustainable investment options and enhance ESG integration.
Significantly, J.P. Morgan is one of the few financial institutions to feature a climate scientist on its sustainability team. Dr. Sarah Kapnick, Senior Climate Scientist and Sustainability Strategist for J.P. Morgan, joined the bank in 2021 to support sustainability and climate action efforts, and advise on new business and investment opportunities and risks.
“Our approach has been to start bringing in subject matter experts; climate experts like me who do climate modeling and understand physical risk, but also people with experience with integrated assessment modeling. So we’re bringing experts in across the bank with the idea that climate sits within every line of business,” says Dr. Kapnick.
Dr. Kapnick’s team not only produces thought leadership on climate, which continues to be the primary focus of sustainability strategy, but also speaks directly to clients on how climate risks can impact their portfolios, as well as identify potential opportunities in this space.
Investing in the Fight Against Climate Change
J.P. Morgan has developed a “Three Rs” approach to climate investing that investors can adopt to play a role in helping achieve a “net zero” world, where emissions from a range of sources are brought to zero or balanced out by carbon removal.
Investors can participate in these three approaches—greenhouse gas reduction, removal and retrofitting—through investment opportunities in traditional and emerging technologies.
“The main way to deal with climate change is to reduce emissions as much as possible, and get to net zero as fast as possible, through traditional methods such as clean energy. But there is also energy efficiency, a focus in Europe right now, and process transformation, which includes reducing emissions from concrete or reducing emissions from agriculture,” Dr. Kapnick explains.
“Then you also have carbon removal, either through nature-based or mechanical solutions. And then the last part is retrofit. It’s the adaptation part of climate change, where we need to adapt to the new climate that we will have now and in the future because society was built on a climate that no longer exists.”
By employing targeted strategies such as the Three Rs developed by leading sustainability experts, and combining them with cutting-edge technology, J.P. Morgan is helping investors capture opportunities in sustainability and playing a role in the urgent transition to a low-carbon world.
Says Dr. Kapnick: “With estimates of what the capital needs are for the low-carbon transition, all of that money can’t come from governments. For capital expenditures and also for new technologies that are being developed, funding has to come from the private sector as well. As a result, helping our clients understand what those problems are, and how to efficiently deploy capital, is a critical piece of the puzzle.”
Dr. Sarah Kapnick, Managing Director, Senior Climate Scientist and Sustainability Strategist at J.P. Morgan explains:
“The main way to deal with climate change is to reduce emissions as much as possible, and get to net zero as fast as possible, through traditional methods such as clean energy. But there is also energy efficiency, a focus in Europe right now, and process transformation, which includes reducing emissions from concrete or reducing emissions from agriculture.”
Where’s the Snow?
Dr. Sarah Kapnick, Sustainability Strategist and Senior Climate Scientist at J.P. Morgan, discusses the economic implications of lower snowfall on winter sports.
Climate change is currently making snow scarcer in regions where snow sports have traditionally thrived. Recent Olympics have increasingly depended on snow-making machines as insurance when holding events in previously snowy regions that no longer have reliable snowfall due to warming (Sochi) or in cold regions that support snow-making but do not typically have snowfall (Beijing).
Snow on the ground requires two conditions: below-freezing temperatures and water in the atmosphere to form snowstorms. As global warming continues, the total number of snowy days around the world can be expected to decrease. For example, in the U.S. the snow sports season could be one week to several months shorter by 2050, depending on the location and emissions scenario.
Warming and changes in storminess have also increased variability in snowy days and snowy years, with higher likelihoods for “snow droughts,” months to years in which snow does not fall at all.
Snow sports enthusiasts may thus be forced to chase snowfall around the globe. They may only visit their favorite locations when snowfall has been confirmed, or prioritize visiting locations with the most snow in the world, like Japan. An extreme response may see them forgo snow sports altogether.
Declining lift ticket sales and equipment rentals would not be the only potential sources of lost revenue. Transportation, hotels, shopping and entertainment would also likely suffer losses. This would affect resort profitability, the local economies and real estate prices unless tourism from snow sports was replaced. The snow resort industry is forming partnerships or consolidating into entities large enough to diversify snow risk by offering all-access passes to far-flung properties in numerous countries and continents.
The impact of climate change on winter sports—disappearing snow and its follow-on effects—has mobilized several groups to work on solutions, research and communications to raise awareness.
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