JP Morgan, Citi Move Away From ESG Provision

New York – Yesterday, JP Morgan indicated that it had ended its offering of separate ESG research to clients. The news comes on the heels of a similar decision at Citi to disband its in-house SRI research product.  JP Morgan will offer ESG-type research to the clients through its existing network of fundamental analysts (e.g. clean tech, green tech analysts).  The question becomes, what is the future of SRI or ESG products going forward.

First, some definitions: ESG research includes three components including environmental, social and governance analysis, while SRI stands for socially responsible investing.  The ES in ESG is equivalent to SRI, while governance is the distinguishing feature of ESG research. Other names for this research style are extra-financial or sustainable investment. ESG research increases the scope of research to include all of the stakeholders in a company, including shareholders, debt holders, workers and the community.

Environmental refers to the impact of a company’s negative and/or positive externalities on the environment (community).  For example, coal powered electricity generation may be economically favored, but has a high environmental impact. Alternatively, a river could be adversely affected by heat pollution from a steel plant, which uses the water for cooling.

Social analysis includes other factors that may affect workers at the corporation. For example, firms that have low pay rates, or poor working conditions.  On the positive side, firms that provide medical benefits, pension plans and profit sharing plans can have a positive impact on morale and perhaps improve productivity.

Governance is a more technical analysis of the management of a firm. Simple governance analysis might look at the compensation gap between the workers and the upper management, the treatment of options or even assess changes in management as a way to determine the impact of governance on performance of a company.

As one looks to the impact of the current economic environment on ESG research, there are clearly two sides. Given the focus of the incumbent Administration on environmental issues and generally more focus on the environment in general, we expect that the demand from retail and high net worth investors for ESG research will increase. We have no opinion as to whether institutional investors will increase their demand for this type of research.What we do have an opinion on is the sourcing of ESG research.  As we can see, given the JP Morgan and Citi retrenchments, ESG research appears to have a less favorable position with the sell side.  The sell side will provide whatever the client wishes, as long as the economics are there. By economics, we mean trade flow. Because many ESG investors tend to invest over substantial timeframes, there is commensurately less trade flow emanating from these types of investors. As such, it is not a surprise that Citi and JPM decided to curtail the costs of SRI and ESG research products by rolling them into their traditional offerings.

Can we expect more of this divestiture in ESG from other sell side groups?  We know, for example, that Merrill and Goldman have relationships with Asset4 (an ESG provider), but we have no information as to the satisfaction of these relationships. On the flip side, UBS has recently made an investment in Governance Metrics International which points to an increase in ESG research provided by the sell side.Given the vast interest in ESG issues by the investing public, it seems clear that ESG is not going away soon. However, the conduit of ESG research through sell side shops is likely to flow more slowly in the future. Despite the delivery mechanism, however, the demand for ESG research will ensure that ESG research continues to be a healthy research style in the foreseeable future.


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