J.P. Morgan and Innovest collaborate on bond index that incorporates financial risks due to greenhouse gas emissions.
As companies warm up to being green, J.P. Morgan and Innovest Strategic Value Advisors are collaborating to create the first corporate bond index to weigh the financial risks of climate change.
Announced Tuesday, the J.P. Morgan Environmental Index – Carbon Beta (JENI-Carbon Beta) is designed to enable credit investors to make return-driven investment decisions that systematically take into account the risks and opportunities created by global warming.
Climate change is an increasing concern for investors. Until now, however, bond investors have had no means of addressing climate-change risk in a systematic way; all they could do was avoid the bonds of companies that emit significant amounts of greenhouse gases. The JENI-Carbon Beta uses a rigorous methodology that enables investors to reduce their risk exposures without sacrificing returns.
The JENI-Carbon Beta is based on the JULI, J.P. Morgan’s U.S. Liquid Index of high grade bonds, which includes 1,126 bonds from more than 200 corporate issuers with a cumulative market value of $1.1 trillion. Innovest, which specializes in providing environmental advice to investors, prepares a “carbon beta” rating for each of those issuers, evaluating the risks and opportunities from climate change in comparison to those of other companies in the same sector. Innovest’s ratings are then used to “tilt” the JULI, overweighting companies that are well positioned to address climate change issues while underweighting those that face greater challenges.
A research report announcing the new index and describing its methodology explained: “Some companies may be able to mitigate emissions at low cost, while others face more expensive burdens. Still others will profit as net sellers of carbon-emission permits, while some will incur costs as buyers. At present, a few firms have planned strategically to address climate change risk, while many have not.”
Even within industry sectors, the climate risk exposures individual companies face will vary widely. “If net climate exposures were factored in, companies’ risk profiles – and the prices of their bonds – would more accurately reflect the tradeoff between risk and return,” the analysis says. “Climate change and regulations will create winners as well as losers, with some issuers having significant opportunities to increase revenues and earnings.”
The index will be particularly relevant to mainstream, investment grade bond investors who systematically want to account for climate change risk; managers of “socially responsible” funds, funds that pursue investment strategies that take into account public policy concerns; managers of public sector pension funds under legal mandates to invest in companies that act responsibly regarding climate change; and investors who anticipate that evolving regulations at the local, state, national and international levels will raise the influence of climate change on companies’ financial performance in the coming years. J.P. Morgan and Innovest may create new products based on the JENI as investor demand develops.
In creating the JENI, the firm “is leading innovation as financial markets and environmental issues converge,” says Nick O'Donohoe, global head of research for J.P. Morgan. Over the next three to five years, “markets and mindsets will evolve” to the point at which people realize that profitability and environmental responsibility are compatible, he adds.
The index concept was developed by Marc Levinson, an economist with the corporate research group, along with Edward B. Marrinan, head of investment grade strategy, and Gloria Kim and Shaku Pithavadian of global bond index research.