The JPMorgan Funds – Climate Change Solutions Fund seeks to invest in companies providing the products and services that will enable emissions reduction across the economy. The strategy combines expertise in artificial intelligence and big data with human insight to identify climate change solutions providers across sectors and regions, and from large and mega cap to small – investing in a compelling opportunity from both a sustainability and an investment perspective.
Combining AI and human insight
Our Themebot natural language processing tool enables us to cover almost 13,000 companies globally, at speed, generating a manageable list of potential companies that are contributing to climate change solutions from which to start our fundamental research. Companies are rated for their exposure to the climate change solutions theme by both textual relevance and revenue.
Our analysts then conduct fundamental research into the companies identified by Themebot, meeting with management to gain a fuller picture, and only investing in our highest conviction investment ideas. All companies are vetted by the J.P. Morgan Asset Management Sustainable Investment Inclusion Criteria framework, which has been designed to ensure that securities included in our sustainable outcome-driven products sufficiently contribute to an individual investment strategy’s sustainable objective.
The companies the fund invests in broadly sit within five categories that we think are the key drivers of climate change mitigation:
• Renewables and electrification: Companies in this category include those sourcing all of their revenue from the generation of wind power or solar electricity, or incumbent utilities converting their business models to renewables. The category also includes companies that provide the equipment needed for the production of renewable energy, such as wind turbine and solar equipment suppliers. Electrification enablers provide equipment including software used in power management; inverters and other hardware needed in the electrification process; and batteries for energy storage. The breadth of equipment required and the technological innovation in this space mean it is currently the area in which we find the most opportunities.
• Sustainable construction: Buildings, both residential and commercial, are a major source of greenhouse gas emissions. Governments across the globe are embracing the idea of net zero buildings and are introducing laws to encourage companies and consumers to move in that direction. Continual innovation in this area is providing us with many investment opportunities.
• Sustainable food and water: The global agriculture system contributes about 19% of global greenhouse gas emissions – through fertiliser use, soil erosion and deforestation, as well as through methane produced by cattle, among other factors. It is also a leading contributor to water stress. But companies are innovating in this area to address the sustainability challenge while still providing the food and resources we need to support the planet.
• Sustainable transport: The technology behind electric cars has improved meaningfully, with battery life growing, the cost of production coming down and charging stations becoming more widely available. We are identifying opportunities across the investment chain – including both pure-play companies and larger automotive companies committing meaningful resources to build electric vehicle capabilities, as well as companies providing valuable inputs, such as batteries.
• Recycling and re-use: The final piece of the climate change solutions puzzle is a focus on recycling and re-use, which can help to limit the use of resources in the development of new goods by re-using existing materials. This is an area with enormous potential, but depends heavily on regulation. An area in which regulation is driving change in many countries is deposit schemes for glass and plastic bottles, while we also see companies encouraging a shift towards a more circular economy.
Investing across the product lifecycle
While we tend to focus our investments in companies providing solutions that have a meaningful impact on the climate challenge today – in line with our sustainable objective – we are also increasingly identifying companies at the early-stage of development. There are many concepts in their infancy that deserve funding and exploration, most notably carbon capture technologies and hydrogen as an energy carrier.
Carbon capture technology aims to trap greenhouse gases emitted as part of production processes. It will undoubtedly play a key role in addressing climate change, since it’s impossible to eliminate greenhouse gas emissions from production entirely. This is a technology that is likely to become more prominent and realistic over the next decade, and we see a handful of compelling opportunities. We currently allocate to this sector, but with a very small portion of the portfolio to balance the risk compared with other opportunities.
Hydrogen fuel technology is another area of huge potential. Hydrogen can deliver and store a large amount of energy to provide power or heat, and is very clean – the only output is water. However, hydrogen as an energy carrier is currently around five to seven times the cost of fossil fuel; the number of listed companies is small; and the companies are very early stage. We do not yet have an allocation, but see this as a potential area of opportunity in the medium term.
Building a climate change solutions portfolio
The end result of our research and investment process is a high-conviction portfolio of companies weighted depending on their impact and alignment to the climate change solutions theme. We are careful to balance potential portfolio risks, such as liquidity and volatility. The aim is to select quality, growth-oriented companies that we expect to perform well over a cycle, and thus we also anticipate a lower level of turnover at a company level.
Find out more about climate change investing at J.P. Morgan Asset Management