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How to approach reviews: the task that defines firms

Connections Magazine Q2 2023

The Merlin approach to ESG

George Fox
Investment Manager, Independent Funds - Jupiter

JupiterGeorge Fox explains the team’s philosophy and process regarding environmental, social and governance (ESG).

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.


Past performance is not a guide to future performance.

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.

"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 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 below 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.

Fig 2

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, previous page, which clearly demonstrates the value added by active managers, as their engagement activity with companies was associated with outperformance even when unsuccessful.2

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.

Fig 3

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 years5. 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.

Find out more about Jupiter Merlin Portfolios here

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Disclaimer: 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: This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. 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 authors 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. For definitions please see the glossary at jupiteram. com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.



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. 

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. 

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. 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