JP Morgan has unveiled three fixed income indices targeting the emerging markets universe, integrating environmental, social, and corporate governance (ESG) factors within their construction methodology. The launches mark the beginning of a wider venture, conceived in partnership with BlackRock, to introduce a suite of global bond indices revolving around sustainability.
The three new JP Morgan indices provide exposure to emerging market bond issuers with strong ESG profiles.
Gloria Kim, head of the global index research group at JP Morgan, commented, “Responsible investing is becoming the cornerstone of many of our clients’ strategies and having access to a proper global fixed income benchmark that integrates ESG is essential.
“We are pleased to help investors access ESG investments on a global scale through our new index line-up.”
Sergio Trigo Paz, head of BlackRock emerging market debt, added, “Sustainable investing is about investing in progress and pioneering better ways of doing business. Strong ESG practices positively impact creditworthiness in the long-term, and up until now ESG in emerging market debt has been more bespoke and project-based, as opposed to providing solutions at scale.
“Establishing these benchmarks will be instrumental in redefining the investment universe and setting an industry standard to help make ESG investment within emerging market debt more broadly accessible to all investor types. This is a big step forward for emerging market investment.”
The three indices that are part of the initial roll-out anchor the firm’s ESG methodology around existing JP Morgan indices: the JPMorgan Emerging Market Bond Index, the JPMorgan Emerging Markets Government Bond Index, and the JP Morgan Corporate Emerging Markets Bond Index.
The ESG methodology begins by screening out companies operating in the thermal coal, tobacco, and weapons sectors, as well as any company deemed to have violated the United Nations Global Compact principles, an initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies.
The remaining firms are then assigned a JP Morgan ESG score (JESG score) powered by data from two leading ESG analytics firms, Sustainalytics and RepRisk, as well as the environmentally focused not-for-profit Climate Bonds Initiative. JESG index scores are provided for over 650 issuers across more than 170 countries.
Whereas the parent indices are weighted by market value of debt outstanding, the ESG indices are weighted so that issuers with superior JESG scores have their weights increased relative to their baseline index weights. The methodology also overweights green bonds.
JP Morgan and BlackRock are both major players in the ETF space, with the latter already offering a range of ESG funds. While sustainable ETFs are currently more likely to be found on the equity side rather than fixed income, several ETF analysts predict this to be a significant area of growth for the industry in the future.