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JPMorgan (NYSE:JPM) passed ModernGraham's Defensive and Enterprising Investor requirements, so now I want to know about JPM's non-financial performance when it comes to important or material environmental, social and governance (ESG) issues for the company. The graphic below was designed by the Sustainability Accounting Standards Board (SASB), who is working on industry-by-industry ESG accounting standards to guide corporate ESG disclosures in filings to the Securities and Exchange Commission (SEC). The graphic below provides an overview of the universe of ESG issues that might impact a company or industry.

click to enlarge

A growing number of investors are examining a public company's ESG performance data to make more informed investment and business decisions. This growth complements Ocean Tomo's primary finding in their Intangible Asset Market Value Study: in 1975, the market value of S&P 500 companies represented about 80% tangible assets and 20% intangible assets. In 2005, that flipped. Now, the market value of the S&P 500 is about 20% tangible assets and 80% intangible assets. Ocean Tomo also found that a significant portion of the intangible asset value gap is attributable to patents and innovation.

ESG performance disclosures also serve as proxies to address the "value gap" -- by highlighting risks and opportunities related to material environmental, social and governance issues that present risks and opportunities for specific companies and/or industrial sectors.

Analysis of JPM's 2013 ESG performance

The data in Table 1 represents JPM's 2013 ESG performance, which was disclosed in May 2014 through the company’s annual sustainability report. ESG Disclosure Scores (Column 2) range between 0 (no disclosure) and 100 (full disclosure). JPM has an above-average ESG disclosure score of 47, compared to the group average of 41.


Table 1: A Snapshot of JP Morgan’s 2013 ESG Performance

Name

ESG Disc Score

Engy Intens/Sls

Wtr Intens/Sls

% Women Emp

% Women on Bd

% Women Mgt

Commun Spend

% Indep Directors

Invest in Op Sust

Average (51 securities)

41

20

47

55

18

27

$ 86,416,443.42

65

$ 92,908,025.08

JPMORGAN

47

24

60

56

18

25

$190,000,000.00

91

$ 51,500,000.00

Source: Bloomberg Professional Finance and ESG Platform May 2014

The commercial banking industry group, as a whole, leads other industries in terms of disclosing ESG metrics. This is likely attributable to the banks' desire to rehabilitate their reputation by being more accountable and transparent about important sustainability issues. Take a look at how JPMorgan's ESG disclosure score jumped between 2008 and 2009, but has only slightly improved since then:


Table 2: JPM's Composite ESG Disclosure Score for the Years 2007-2013

2007

2008

2009

2010

2011

2012

2013

24

29

48

50

51

56

57

Source: Bloomberg Professional Finance and ESG Platform May 2014

The environmental footprint of a global commercial bank is of value to capital markets, because it relates to operational costs. Columns 3 and 4 of Table 1 show JPMorgan's energy and water intensity ratios as a percentage of sales. Both are slightly higher than the group average. For me, this raises questions about whether and how well JPMorgan has systematically addressed internal operational efficiencies to reduce energy and water usage, to reduce the costs of operating. Column 9 of Table 1 indicates that JPM invests about ½ of what the industry does when it comes to improving the sustainability performance of internal operations – meaning using less energy and water to run the JPMorgan enterprise.

Columns 5, 6 and 7 show that JPMorgan employs more women (56%) than men in its total workforce, but only 25% of JPM's management positions are filled by women. Only 18% of JPMorgan's board members are women. As you can see, JPM's diversity statistics are average for its industry group. JPMorgan and its top U.S. peers have Equal Opportunity Policies in place. So among the questions raised for me are: (1) why is the industry, as a whole, so far from achieving parity when it comes to women in leadership roles, and (2) what is JPM doing about this issue within its organization? To the best of my knowledge, neither the industry nor the company appears to be leading on this issue, which may be a missed opportunity, especially when it comes to attracting the best and brightest new talent.

When it comes to Community Spending, JPM exceeds the group average by more than double, which indicates the company is actively engaging in the communities where it operates. You can read about JPMorgan's community focus in its 2014 Corporate Responsibility Report. When it comes to internal governance, 91% of JPMorgan's board directors are independent, whereas the industry group average for board independence is only 65%.

Finally, SASB issued a provisional ESG accounting standard for the financial sector in February 2014. Among the material ESG issues identified by the SASB process, commercial banks are being called upon to integrate environmental and social factors into lending services and investment programs. Bloomberg has an ESG data point called SRI Assets under Management, or % SRI AUM, which discloses the percentage of company's assets under management that are invested according to socially responsible (SRI) criteria.

With its 2013 ESG disclosures, JPMorgan disclosed that $117,000,000, or .007% of JPMorgan's Total AUM is invested according to SRI criteria. The industry group average for SRI AUM is much larger than JPMorgan's, at $22,641,358,603, or .08% of Total AUM. Although neither JPM's SRI investment ratio nor the industry's averages are impressive, note that the industry average for SRI investment is 11 times greater than JPMorgan's.

Investors should expect further development of ESG disclosures by commercial banks in the near future because of the SASB provisional standard, which identifies these additional material issues for the commercial banking industry group:

  • Financial inclusion and capacity building

  • Customer privacy and data security

  • The legal and regulatory environment

  • Systemic risk management

  • Integration of ESG issues into credit risk assessment.

Lesson: Public companies (and the private companies who do business with them) need to recognize that best practices for sustainability disclosures include standard ESG aggregate data like what is presented above. When companies in an industrial sector first disclose sustainability performance, aggregate ESG scores reflect the level of disclosure. Once ESG disclosures are mature for an industry sector, intensity and productivity metrics can be calculated as proxies for operational and management efficiency. Companies that do not disclose ESG data at all risk being eliminated in a competitive situation because of the appearance of risk and lack of transparency and accountability. For a more detailed explanation of ESG data as a game-changer, read this white paper.

Where does this data come from? Since 2009, Bloomberg's Professional equity platform has provided corporate financial and ESG performance data to the capital markets. Corporate ESG data is typically released through annual corporate sustainability reports. Bloomberg Finance dashboards now contain public corporate financial and ESG performance data, and this information is available to subscribers via nearly 400,000 Bloomberg terminals installed in investment and financial institutions throughout the world, including Fortune 500 CFO offices, academic settings and public libraries. Anyone with access to these terminals has access to the information.

Disclosure: The author does not currently hold a position in JPM and has no intention of changing that position within the next 72 hours.

Source: JPMorgan: A Focus On Environmental, Social And Governance Metrics