Two global financial services heavyweights have collaborated to launch a suite of environmental, social and governance (ESG) indices for institutional investors.
J.P. Morgan and BlackRock have joined forces to create the J.P. Morgan ESG Index (JESG), which aims to meet bond investors' growing demand for a benchmark that targets emerging market issuers with strong ESG practices.
The index, which is independently managed by J.P. Morgan, caters to investors looking to gradually incorporate ESG and responsible investing in their overall fixed income investment strategies.
JESG anchors its methodology on J.P. Morgan indices: the Emerging Market Bond Index (EMBI), the Government Bond Index-Emerging Markets (GBI-EM) and the Corporate Emerging Markets Bond Index (CEMBI).
Its methodology comprises five components once the baseline index is selected: data input definitions; JESG index scores; integration mechanics; ethical factors and new ESG weights calculations.
Newly calculated JESG index scores will then be systematically applied to determine new ESG weightings in the index; issuers with better ESG scores will have weightings increased relative to their baseline index weights.
The initial JESG will be available for the EMBI Global Diversified, GBI-EM Global Diversified and CEMBI Broad Diversified indices.
Joyce Chang, global head of research for J.P. Morgan said: "We are launching the J.P. Morgan ESG index, the first of its kind in emerging markets fixed income, to promote responsible investing. BlackRock played a critical role in its inception and we are excited to see this idea come to fruition."
J.P. Morgan head of sales and marketing for Australia Robert Bedwell told Financial Standard investors tend to approach ESG through the lens of an equity portfolio. The partnership identified the need for ESG considerations within fixed income, he said.
Bedwell said Australia's demand for socially responsible investing has grown rapidly in last three years as recent estimates show the size of the local market is about $600 billion.
Establishing these global benchmarks with an ESG component will help the market grow even faster, he added.
While the indices are still in the thought leadership phase, they are however gaining traction with institutional clients. "We are also seeing the ESG themes coming through the different areas of the business [such as] our custody business and what we're doing with big data."
Among the initiatives with big data, clients want know exactly what's in their portfolio, he said.
BlackRock head of emerging market debt Sergio Trigo Paz said 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 EMD more broadly accessible to all investor types. This is a big step forward for emerging market investment," he said.