Some may suppose that Environmental, Social & Governance (ESG) investing is incompatible with a macro driven approach. However, as macro investors, we believe the integration of ESG has strengthened our process. Thanks to this integration, our strategy is less exposed to mispriced ESG risk and better placed to capture long-term ESG trends. Our philosophy has always favoured highly liquid, rated bonds, and this bias away from high ESG risk has now been formalised.

A key part of our ESG integration is Jupiter’s Sovereign Framework. The framework scores each sovereign from 0 to 10, considering their performance on E, S and G outcomes (G has a 50% weighting as we believe strong governance is key). If a sovereign scores poorly then it is excluded from our investment universe. The aim is not to penalise developing nations or regions, but to avoid investing in nations with unsustainable governance structures, that are falling behind in the low carbon transition or failing to uphold human rights. This overlay is particularly important when adding emerging market (EM) exposure.
Case Study: EM commodity exporters
We looked to add EM exposure in Q1 2022, and the focus was on commodity exporting nations, with Angola, Indonesia and Mexico all considered. On balance, we decided to add exposure to Indonesia due to its more attractive valuations and Angola’s low ESG score. Angola was flagged as the lowest ranked country within the sovereign universe due to critical weaknesses across all three of the E, S and G pillars. Particularly noteworthy were rampant corruption and a lack of progress on the UN’s Sustainable Development Goals. These weaknesses were displayed last year as the drought in southwestern Angola continued without government support, and the general election was mired in corruption.

The sovereign framework is not used in isolation: we also conduct qualitative research on all major sovereign bond holdings, which provides a more holistic and timely perspective. A good example was when Australia last year elected a much more climate friendly administration, one that immediately updated its Nationally Determined Contribution – a significant positive environmental development, that was yet to be reflected within the data. To ensure our research is rigorous and robust, we discuss our findings with Jupiter’s stewardship team at monthly sovereign meetings. Sovereigns may also be excluded following our research, as was the case with Russia.

Case Study: Russia
Russia was excluded at the start of 2022 (pre-Ukraine) given its lack of a credible net zero policy. Climate Action Tracker (CAT) ranked Russia as ‘critically insufficient’ and with good reason. In November 2020, Russia published its emissions reduction target of an at least 30% reduction below 1990 levels by 2030. 1990 was just prior to the collapse of the Soviet Union (when carbon emissions were very high), so in selecting this target Russia was completely failing to commit to its fair share in reducing global emissions.

Following Russia’s invasion of Ukraine, we recognised that we will not always be able to identify mispriced ESG risks through the sovereign framework and our qualitative research alone. So we additionally introduced a human rights and low carbon transition screen, and provided a greater margin of safety for any new holdings.

Sovereign ESG integration is of course more difficult given the greater complexities involved, not least an inability to engage with key stakeholders, which is why we strive to continuously improve our process. Recent improvements include enhanced sovereign ESG data and automating our sovereign templates thanks to Jupiter’s data science team. That said, we expect our process to improve and develop further over time, as more industry guidance and data becomes available.

 

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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.

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