JPMorgan says this US$720b space is only getting started

[SINGAPORE] Emerging markets are catching up with developed ones in the growing arena of environmental, social and governance investing, according to JPMorgan Chase & Co.

The active and systemic asset management universe for ESG has grown about 10 per cent from the end of last year to US$720 billion as of the first quarter, JPMorgan estimated in a report Thursday led by global research chair Joyce Chang. The firm said it's now favoring emerging-market stocks tied to the sector versus developed-country counterparts because the two sides should converge.

The report also said ESG factors can affect markets more strongly than previous analysis had suggested, citing far-reaching consequences from Volkswagen AG's 2015 emissions scandal and depressed water levels on the Rhine river in Germany that hurt industrial and tourism sectors in later 2018.

"Recent anecdotal evidence suggests ESG factors can potentially impact markets somewhat more than our previous research has shown," JPMorgan strategist John Normand wrote. Only the environmental measure "appears to have a positive influence on market performance, while equities seem to exhibit the strongest and more consistent sensitivity to ESG factors."

The latest results show some effect on currencies as well, though not enough to justify preference over equities to express an ESG view, the report said.

"Our work suggests trading ESG factors through national equity indices and based on discretionary calls on the course of the environmental factor," Mr Normand wrote.

Current applications of JPMorgan's ESG approach could include:

Overweight China equities either outright or versus resource-intensive countries with declining environmental scores, like Brazil or Saudi Arabia.

Overweight emerging-market equities versus developed-market ones in a bet on environmental and broad ESG convergence between the two.

Other conclusions from the report include:

Rio Tinto is a standout in the mining sector because of actions like recycling its coal divestments into cash returns for shareholders.

Nickel and aluminum both are carbon dioxide-intensive metals, but also stand to benefit significantly from "green demand".

Base metals will be beneficiaries of emerging green demand, while thermal coal will be a loser'.

Repsol is well-placed on ESG amid low-carbon initiatives and competitive flaring metrics.

BLOOMBERG