J.P. Morgan’s ESG Discovery digital platform is a response to client demand for clarity on the ESG risks relevant to their investments. The addition of a double materiality framework, which adds to the impact of a business on society, appears to be a departure for a financial services firm.
ESG Discovery will provide thematic and stock specific data, and analysis from JPM’s analysts, to help clients make sustainable investment decisions.
The platform is unique among financial services firms, not just for the access it provides, but for the inclusion of a double materiality framework.
Investor awareness of double materiality, may help drive more funds towards impact investing, and clarify the role of ESG data in investing.
This offering from J.P. Morgan (NYQ:JPM) is not the first from a financial services firm, but is unique in that it goes beyond addressing the environment’s financial impact on a company or sector. Adding a double materiality framework also brings the societal impact of the business activity, which could be especially relevant to impact investors.
The platform is powered by software from Datamaran, which offers an automated risk management solution, including ESG, to corporates and investors. Clients are able to directly choose and integrate from among over 400 external risk factors obtained by scanning the regulatory, media and corporate disclosures.
ESG Discovery is a giant leap for Wall Street
Providing ESG data and analysis to investors in an online, digital format is not new, and has been dominated by data and analytics firms that serve the financial services industry.
Integrating the data from these firms is also not new, yet investors continue to complain about a lack of transparency and insight into sustainable investing.
JPM addresses this need via its ESG Discovery platform, providing investors with direct access to research by its own analysts, and indeed to the analysts themselves.
Despite the advances made by automation and technology, many investment managers continue to value direct access to research analysts, which is especially true of a relatively new area of investment like ESG.
The incorporation of a “double materiality” framework gives investors more of a forward-looking dimension into analysing investments, adding the impacts a company has across its value chain. This goes beyond looking at single materiality, or the financial risks and opportunities facing a company from ESG factors.
The double materiality is addressed via a sector and cross sector research which aims to be forward looking. Company and thematic research is the other component of the platform, which enables company level analysis, including a list of company-specific engagement questions to help investors with their own engagement efforts.
ESG Discovery’s double materiality framework is powered by ESG data and software analytics provider Datamaran. Datamaran worked with J.P. Morgan to create materiality assessment models, which utilise data from corporate disclosure, regulatory, and media sources to anticipate emerging topics positioned to have a financial impact on markets.
Does adding double materiality add to investor confusion?
Adding double materiality data clearly provides investors with more information to help them make choices about the sustainability impact of their investment decisions. However, differing approaches to reporting disclosure best practices by global standards setting bodies may add to the confusion that has garnered ESG a lot of criticism, especially relating to transparency and standards.
The confusion arises from the differences between the approaches of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). The ISSB was created to define sustainability-related disclosure standards for investors’, relating to companies’ sustainability-related risks and opportunities.
The GRI is one of the most widely used reporting standards by businesses and has double materiality as a guiding principle in its standards. A white paper commissioned by it found that financial materiality is incomplete if companies don’t assess their sustainability impacts as well. This stems from a multi-stakeholder approach to developing its standards, which included trade unions and climate action groups.
The ISSB is a creation of the IFRS, by consolidating the Climate Disclosure Standards Board (CDSB – an initiative of CDP) and the Value Reporting Foundation (VRF), the latter a combination of the Integrated Reporting Framework and SASB. GRI was the only significant reporting organisation whose standards were not incorporated into ISSB.
The European Securities and Markets Authority (ESMA) has recognised the perceived weaker stance that the ISSB has on double materiality and called for stronger standards. In a letter to the ISSB, ESMA stated that the collaboration between the ISSB and GRI was vital “to ensure good international convergence between financial materiality and impact materiality”.
The convergence of standards on double materiality is vital to avoid “continued fragmentation of the sustainability reporting landscape”, ESMA argues, which would risk higher costs to the investment community, and “more difficulties to give effect to the much-needed sustainability transition”.
The disclosure and transparency ambitions of JPM’s new platform may spur its peers and competitors to follow suit, and add impetus to regulatory bodies to simplify reporting standards. Adding double materiality disclosure may also provide a boost to impact investing, and highlight ESG’s role as a qualifier and enabler of sustainable investment decision making.