Over the past 9 months the Jupiter Fixed Income team has held one-on-one engagements with over 40 companies within our portfolios with a specific focus on Environmental, Social, and Governance questions. Whilst the key themes that we discuss with companies will naturally vary between company, industry, and geography, we have had three main areas of focus over the past months: transition to a low carbon economy; improved ESG disclosures; and human rights.

Transition to a low carbon economy

The risks associated with climate change has been viciously demonstrated this summer – including shipping problems and capacity reductions among energy generators in Europe as a result of drought; floods in Pakistan submerging a third of the country under water; and the first climate change-induced famine in Somalia – reiterating the importance of reducing emissions. Whilst we are supportive of and invest in several companies that are leaders in the green transition, the journey to net zero cannot be achieved by exclusively investing in those, progress has to be made across all industries and geographies.

Because of our exposure to high yield issuers (many of whom are private) and our focus on transitioning companies, a key benefit of the Dynamic Bond ESG fund is that we have access to influencing companies which traditional sustainability-focused equity funds do not. Indeed, we are often told by investee companies that we are the first investors to have properly engaged with them. Reassuringly, we have noticed that the companies in the portfolio we have engaged with over the past months on Net Zero are very keen improve and seek our suggestions on what their competitors are doing, what investors are expecting, and what we see as priorities for them.
We have assessed all companies in the portfolio against their Net Zero alignment across six criteria:

  1. Net Zero by 2050 target across scope 1, 2, and 3
  2. Short- and mid-term carbon reduction targets in line with Net Zero
  3. Emission intensity targets
  4. Disclosure of scope 1, 2, and 3
  5. A viable decarbonisation strategy
  6. Capital allocation to support the decarbonisation strategy
The assessment will categorise each company on their progress against Net Zero as either Not Aligned; Committed to Align; Aligning; Aligned; or Reaching Net Zero and will enable us to track the companies’ progress to transition to a low carbon economy. As of today, approximately 30% of the companies in Dynamic Bond ESG has begun their journey to transition to Net Zero, and we are seeking to influence more companies to join the transition over time.
Improved ESG Disclosures
A key concern we are facing in our universe is a lack of disclosure on ESG metrics. We are supportive of the upcoming Sustainability Finance Disclosure Regulation (SFDR) and its focus on improving transparency around key sustainability data points, so-called Principal Adverse Impacts (PAIs), which we have assessed the companies in the Dynamic Bond ESG portfolio against.

The 14 mandatory PAIs (+2 for sovereigns and +2 for real estate) cover a broad range of information, including emissions across the supply chain, gender pay gap, and impact on biodiversity. We are experiencing enormous disclosure gaps for these, both from the companies themselves as well as from data providers. As a result, we have contacted the companies in the portfolio and urged them to improve disclosure across these points over the past months. We do not expect immediate improvement as it will take time for companies to adjust their resources to expand their auditing, but it has been reassuring to already see disclosure improvement from companies we have engaged with, including Maxeda DIY and Newday.
Human Rights
40 million people are estimated to be trapped in slavery globally, children representing one in four. Slavery is not only limited to emerging markets. In the UK alone, over 10,000 people were identified as potential victims by authorities1. We are highly concerned about this issue and are fully aware of its presence across global supply chains, and as such it has been a key engagement topic for us over the past months and will continue to be going forward.

In our engagement on human rights, we have been targeting companies with highly complex supply chains exposed to industries and raw materials that are known to use exploitative labour practices, such as the retail industry, the automobile industry, and the solar energy industry.

There is a large discrepancy of how exposed different industries are to these themes, and we have prioritised our engagement on industries we believe will have the most impact, including:
The food industry
The food industry refers to companies that are exposed to the production, processing, or sale of food. The industry is highly exposed to both climate change and human rights. For example, the food industry is responsible for approximately 29% of global emissions2, 80% of deforestation, and uses 70% of the world’s freshwater. Companies in this sector which we have engaged with in 2022 includes Tesco, Ocado, Simmons, and Casino.

Tesco has committed to Net Zero emissions by 2050 across their value chain, which is impressive considering the magnitude of their supplier base across the globe. Their target has been approved by the SBTi and is supported by mid- and short-term targets. To reduce their scope 3 emissions, representing more than 90% of their total emissions, they are collaborating with suppliers to establish their own net zero goals. They also have a partnership with WWF in which they are trialling emission reduction technologies for their supply chains, for example feed additives to cows to reduce methane emissions and alternative animal feed which requires less land use.

The food industry is also at risk of human rights violations from multiple perspectives. It is an industry with widespread use of child labour, particularly for crops where production is highly fragmented, such as cacao and rice. But the industry is also at risk of violating human rights from the perspective of deforestation, land rights, and respecting indigenous populations. Furthermore, certain parts of the agricultural industry, such as forestry, are highly hazardous and often carry high levels of fatalities and serious incidents among the labour force.
Banks and Insurance

Banks and insurance companies are very exposed to ESG risks, but they also have an outsized ability for positive impact.

 

Both the Bank of England and the European Central Bank published their inaugural climate stress tests this summer, highlighting the risks of climate change to the banking and insurance sectors. The report published by the BOE has a stronger focus on the impact of increased cost of carbon and macroeconomic effects of a disorderly transition, including high unemployment and recession risks. It estimates that profits could be reduced by 10%-15% on average per annum for banks and insurers. The ECB pays greater attention to physical risks such as heat waves and floods, as well as exposure to high-emitting industries, and estimates that the short-term, three-year disorderly risk of climate change would result in losses of ~€70 billion. Both the BOE and the ECB recognise that their assessment is limited to a few scenarios and risks and that the actual impact is likely to be much greater, especially when considering the secondary effects of climate change. Perhaps worryingly, the ECB found that 60% of banks in their sample did not have a well-integrated climate stress-testing framework, increasing the risk of poor mitigation integration and preparedness.

 

Scope 3 emissions, that is emissions which the company indirectly contributes to via their supply chain, is the largest source of emissions for companies in this sector due to the activities a company is insuring or financing, often representing over 95% of a company’s total emissions. Despite its high impact, we find that many companies in the sector are not properly disclosing their scope 3 emissions despite it being a material piece of information for investors, and as such it has been an important area of engagement for us.

 

For example, we engaged with Barclays in June. The company only disclose their scope 3 emissions from business travel, bringing their disclosed total emissions to 174,900 tonnes. However, digging deeper to the company’s report we can find more information of their energy loan book which is estimated to result in 58,600,000 tonnes of CO2, 335 times higher than their disclosed total emissions! Using data of emissions from their energy loan book alone; not including data from other highly emission sectors they finance such as mining, construction, and transport; we find that Barclays emissions in 2020 is the equivalent of 18.5% of the UK’s total greenhouse gas footprint. Please see attached note for more information.

 

Over the past months we have also engaged with Banco Sabadell, Caixabank, Beazley, and Credit Suisse within the banking and insurance sectors.

1 What is modern slavery? – Anti-Slavery International (antislavery.org)
2 UN land report: Five key takeaways for climate change, food systems and nature loss – Carbon Brief

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important information

This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.