The J.P. Morgan USD EM IG ESG Diversified Bond Index provides a broadly diversified exposure to emerging market bonds with an ESG overlay.
The J.P. Morgan USD EM IG ESG Diversified Bond Index can provide a broadly diversified exposure to emerging market investment grade corporates, quasi-sovereigns and sovereigns. The ultimate aim of this ESG overlay is to improve the sustainability profile, whilst preserving the risk-return profile of the underlying universe.
The emerging market economies as a proportion of global GDP has increased from 37% in 1990 to 55% in 2018 (Figure 1). Along the way, debt issued by emerging market countries has become an increasingly prominent fixed income segment. The total index eligible EM debt outstanding exceeded USD 20 trillion as of July 2019 according to J.P. Morgan, which represents a 28% share of the total debt outstanding.
Emerging markets are characterized by economic and geographic diversity. For example, EM debt indices of J.P. Morgan provide access to 81 countries with the top five issuers being China, Mexico, Brazil, Russia and Turkey. EM debt can be issued in local currencies or in a hard currency (predominantly USD). The hard currency EM debt does not entail currency risks, while providing risk-diversification benefits when added to a developed markets portfolio.
Investment objective
The aim of the J.P. Morgan USD EM IG ESG Diversified Bond Index is to provide a broadly diversified exposure to emerging market investment grade corporates, quasi-sovereigns and sovereigns, which are filtered according to the J.P. Morgan ESG methodology ('JESG'). The aim of this ESG overlay is to improve the sustainability profile, while preserving the risk- return profile of the underlying universe.
Index construction methodology
The starting bond universe is based on combining two flagship emerging market USD indices covering the sovereign/quasi-sovereign segment (J.P. Morgan EMBI Global Diversified) and the corporate segment (J.P. Morgan CEMBI Broad Diversified).
Firstly, the J.P. Morgan USD EM IG ESG Diversified Bond Index only allows investment grade bonds, while for corporates it additionally requires an amount outstanding of at least USD 500 million. Secondly, the ESG screening is applied. Finally, a 5% capping is applied at the country level. The index rules also include a number of requirements on maturities.
ESG Filtering
An important aspect of index construction is the J.P. Morgan ESG filtering (JESG), which follows a three-step process.
The first step are the exclusions applied to corporate and semi-sovereign entities based on the United Nation Global Compact violations and involvement in certain activities. The second JESG step introduces a positive ESG screening and reweighting to all index constituents. The bonds are classified into five bands based on ESG scores. The bottom quintile is removed from the index. The remaining bands are allocated different multipliers with the aim of overweighting the better-ESG rated companies. The final weight is determined by the market cap of the company multiplied by the ESG multiplier. The third JESG step is to increase the weight of green bonds by allocating them a one-band upgrade.
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