Environmental, social, governance (ESG) are fiendishly complex areas and have been the source of constant debate. 2022 proved to be the year that shone a strong spotlight on the different approaches taken by fund managers to navigate ESG and exposed some of the shortcomings, presenting challenges to financial advisers in how to manage their ESG-focussed clients. However, Jupiter Merlin clients will be glad to know that despite the confusion, our approach remained consistent throughout whilst also generating strong engagement outcomes.
The ESG spectrum
Definitions differ for the ESG investment spectrum, but it could be thought of as extending from no ESG considerations at one end to philanthropy at the other. Given our mandates are very much financial return-focussed, we naturally shy away from the philanthropy end of this spectrum. This leaves us with the choice between taking no ESG considerations into account, excluding companies on an ESG basis or integrating ESG into our process. We have always believed that ESG is a set of risks and opportunities to be managed and therefore must be integrated by fund managers into their company models.
Financial Chart
Past performance is not a guide to future performance.
Why not take the easy route and just exclude companies with low ESG scores?
The answer to this question for us is twofold: there are both performance and real-world outcome benefits from avoiding exclusion. Increasingly, evidence from academic studies suggests that the best performance opportunity lies firmly with stocks that enjoy improving ESG ratings. The left-hand chart above displays the relative performance of a collection of highly-rated ESG stocks versus the relative performance of a collection of stocks with the most rapidly improving ESG scores. Whilst both groups outperformed, it was the improvers that outperformed by more. On the right-hand side, we can see that the lower the starting ESG score, the larger the outperformance associated with the rising ESG score. 1

By excluding companies with low but improving ESG scores, investors are missing out on one of the most fertile hunting grounds for performance that the market has to offer.

Why not therefore own a passive fund that systematically invests in companies with improving ESG? We firmly believe, as we always have done, that we can identify active managers through our fund selection process who are able potentially to add further value through their analysis, stock selection, portfolio construction and active stewardship (company engagement and voting). This latter point is illustrated by a separate study, below, which clearly demonstrates the value added by active managers, as their engagement activity with companies was associated with outperformance even when unsuccessful.2
ESG Chart
Past performance is not a guide to future performance.
Yet many investors are just as concerned with the real-world impact of their savings as they are with the performance element. Even with regard to this argument, we would suggest that exclusions are not the way to go as a far greater impact can be attained through active engagement with companies with poorer ESG records. For example, the energy sector (including the use of energy in transport, buildings and industry) generates CO₂ emissions that almost equate to the sum of the emissions of all the other sectors combined; is this not exactly where an ESG investor could deliver the greatest impact to the benefit of the environment, via engagement?,3  In fact, to match the halving of Microsoft’s CO₂ emissions, investors would only have to reduce Shell’s CO₂ emissions (including emissions generated by use of its products) by only about 0.5%.4 We find it ironic, therefore, that many investors exclude precisely the sectors where engagement has the potential to add the greatest real world impact.
Jupiter Merlin’s stewardship process
As ever with Jupiter Merlin, our process is simple. We combine two proprietary data tools as the foundation for our analysis, which reveal the development of ESG at both the fund and company level. These tools then form the basis for Jupiter Merlin’s own engagements with fund managers.

Firstly, the Jupiter ESG Hub incorporates Sustainalytics and RepRisk data to assess the ESG rating of each of the companies held in the underlying funds on a range of metrics. This provides us with a clear insight into the stronger and weaker holdings in the portfolio and provides us with important intelligence with which to challenge our managers. The other tool, the Jupiter Merlin ESG Matrix, documents how each of the underlying fund managers assesses their companies on nine separate ESG topics and looks for them to evidence their engagements on each of these areas and detail the outcomes of these engagements.

These two systems combined provide a snapshot of current ESG positioning but also a forward-looking window into active stewardship conducted by our fund managers on our investors’ behalf to improve the underlying companies’ stewardship profiles. Before each of our six-monthly manager meetings we review the data from these sources and can then challenge the manager on the ESG ratings of the individual stocks held or discuss the outcomes from their work. We then evaluate each fund to assess to what extent each manager mitigates ESG risks and exploits ESG opportunities for our clients and the pace of their individual ESG evolution.
Jupiter ESG Hub
Our investment process naturally leads us to active managers for whom identifying material ESG opportunities and risks is a core ingredient in their quest to enhance their clients’ capital values, whilst also benefiting all stakeholders by empowering and accelerating the transition of each company towards a lower carbon and more nature positive trajectory. Understanding the web of ESG issues around a company and engaging for improvement takes both time and effort. It is therefore not surprising that our underlying managers tend to prefer concentrated positions, running funds with on average 45 stocks, and long holding periods, on average over five years. They focus only on the best opportunities in order to build strong relationships with company executives.
Jupiter’s approach to stewardship
Jupiter employs over 100 active investment professionals which includes Stewardship team members led by Ashish Ray, who are embedded within the investment management department, as well as our Sustainability and Ecology investment managers and data analysts, who are all engaged in stewardship. The ratio of ‘experts’ to assets under management is extremely high when compared to most active and passive competitors, even those who are ESG- or Sustainability-branded.

Jupiter’s Sustainability team is led by Sandra Carlisle who is responsible for further developing and implementing an integrated and cohesive sustainability strategy for Jupiter, across our dual corporate and investment footprint. This includes partnering with all business areas to integrate sustainability, driving external engagement with clients, collaborating with external bodies, supporting best practice outcomes at an industry level, as well as developing additional targets and reporting to support the company strategy. Sandra also chairs the Sustainability Committee containing members of Jupiter’s Executive Committee. The Sustainability Committee monitors progress linked to operational net zero. To support this work, we also recruited a new Corporate Sustainability Manager, Jayesh Shah, who joined in March 2022. Ashish Ray and his team of governance professionals also support Sandra, working with Investment Managers by linking relevant engagements across the equity and fixed interest teams, providing topical and salient insights, and leading collaborative initiatives and proxy voting.
1 Left hand bar chart: Source: ‘Can ESG add alpha? An Analysis of ESG Tilt and Momentum Strategies’, Zoltán Nagy, Altaf Kassam, Linda-Eling Lee, Journal of Investing, Vol. 25, No. 2, June 2015. Available at https://www.msci.com/documents/10199/4a05d4d3-b424-40e5-ab01-adf68e99a169 MSCI ESG Ratings. Performance is against MSCI World index. Period: February 2007-March 2015.

Right hand bar chart:Source: Alliance Bernstein, ‘Responsible Investors Should Focus on ESG “Offenders”’, 20 Sept 2018. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977219 As of December 31, 2016. Percentages are excess forward returns for the next 12 months following a two-notch ESG upgrade v equal-weighted S&P 500. US stocks. Period: 1 January 2007-31 December 2016.

2 Shareholder Engagement on Environmental, Social, and Governance Performance, Barko et al, July 2021. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977219 The study’s source data was a database of a large European asset manager’s completed engagement cases over the period starting in the third quarter of 2005 and ending at the end of 2014. Companies engaged with were based worldwide.

3 MSCI ESG Research LLC, 10.07.20
4 Sustainalytics, 31.08.22
5 Data as at 31.12.22; equity, long-only funds

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.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information