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Europe Index Research03 January 2022J.P. Morgan ESG Green Social & Sustainability IG EURBond (TR) IndexMethodology and FactsheetHighlightsThe J.P. Morgan ESG (JESG) Green Social & Sustainability (GSS) IG EUR Bond (TR) Index tracks investmentgrade green, social, and sustainability bonds, denominated in EUR, across developed and emerging marketswith an emphasis on green bonds that are aligned in achieving the goals within the Paris Agreement (i.e.Certified Climate Bonds). The index applies an ESG scoring and screening methodology that tilts toward issuerswith greater ESG qualities and, at the instrument level, ‘Certified Climate Bonds’. The index leverages thelabelled green, social, and sustainability bond datasets from the Climate Bonds Initiative, in addition to theirCertified Climate Bonds Standard that identifies those green bonds that are aligned in achieving the goals withinthe Paris Agreement. The returns and statistics are available since December 2014.Index CriteriaEligible currenciesMinimum AmountOutstandingMinimum MaturityIssuerCountryInstrument TypeCollateralRatingSource: JPMorgan Chase & Co.Hard Currency BondsEURLocal Currency Government BondsEUREUR: 500MMLocal currency bonds: 1 billionFor inclusion: Bonds should have minimum 2 years remaining to maturityRemain in the index: A bond remains eligible for the index as long as it has 6 months remaining to maturitySovereign (i.e. external law), Quasi-sovereign (100%government owned or guaranteed), Corporate, orSovereign onlySupranationalEMU countries where EUR denominatedlocal government bonds are liquid,All countries are eligibleaccessible and investible by internationalinvestors. The below table mentions thecurrent list of eligible currencies.Only green, social, and sustainability bonds, as labelled by Climate Bonds Initiative, are eligibleInclude: Bullet, fixed-rate or zero coupon bonds. Perpetuals,callable or putable bonds are permitted.Exclude: Floating rate, hybrid, step-up, PIK, amortizers,Bullet, fixed-rate or zero coupon bondsSukuk bonds, municipal bonds, structured bonds, collateraltrust and equipment trust bonds, bonds with non-transparentcash flows or atypical indices used to reset coupons, etc.Exclude: covered, mortgage backed, asset backed, bankguaranteedOnly investment grade instruments are eligible. An instrument is classified as investment grade when themiddle rating from S&P, Moody’s, and Fitch is investment grade (i.e. BBB- equivalent or above). When arating from only two agencies is available, the lower has to be investment grade; and when only one agencyrates a bond, that single rating has to be investment grade
JESG Overlay CriteriaESG Providers & GSSBond te Bonds InitiativeJESG ScoringmethodologyJESG issuer scores are a 0-100 percentile rank calculated based on normalized raw ESG scores from thirdparty research providers Sustainalytics and RepRisk. An issuer’s finalized JESG score incorporates a 3month rolling average. See Appendix: ESG Methodology for more details.JESG IntegrationmethodologyThe JESG scores are divided into five bands that are used to scale each issuer’s baseline index marketvalue, with the band rebalance occurring with a one-month lag. See Appendix: ESG Methodology for moredetails.Treatment for CertifiedClimate Bonds“Certified Climate bonds”, as per Climate Bonds Initiative’s Climate Bonds Standards V3.0, will receive oneband upgrade (unless they are already in Band 1). See Appendix: ESG Methodology for more details.Ethical exclusions &Negative ScreeningBonds issued by non-sovereign issuers earning revenue from Nuclear Energy, Oil & Gas, Oil Sands,Thermal Coal, Tobacco, or Weapons, or not in adherence with UNGC Principles will not be eligible. Issuerswith JESG scores less than 20 (i.e. in Band 5) will also be ineligible for inclusion.Frequency of JESGRebalanceRebalance actions related to the JESG overlay will be conducted once a quarter at the quarter-end date.Source: JPMorgan Chase & Co.Index Characteristics & MethodologyPricingMid prices are taken from a third party pricing source, PricingDirect.Aggregate ReturnIndex level total return is calculated as a market value-weighted average of bond returns using mid prices.RebalancingRebalances occur on the last weekday of the month.Coupon TreatmentAll coupons received are immediately reinvested into the index.FX RatesAll FX rates used for hedged/unhedged returns are as of 4pm London time provided by WM/Reuters.Hedging StrategyAssume a 1-month currency forward position that begins on rebalance day and ends on next rebalance day.WeightingMarket capitalization based weighting, renormalized based on JESG Band scalar with a 10% issuer cap applied.Source: JPMorgan Chase & Co.Local Currency Government Bonds – Eligible dsPortugalFinlandCurrencyEUREUREUREUREURSource: J.P. Morgan, as of May UREUREUREUREUR
Defining the Index UniverseEligibility for the index will be determined on a continuous basis by monitoring the index criteria. Only thosegreen bonds that meet the criteria for Climate Bonds Initiative’s (CBI) green labelled database will be eligible forinclusion into the index. Similarly, only social and sustainability bonds that meet the criteria for CBI’s Social andSustainability database will be eligible for inclusion.Country of risk for the instruments in the index will be determined based upon the below considerations:1.The country with the largest source of revenue. Guarantees by other entities including subsidiaries orholding companies in other countries will also be considered.2.The headquarters or the location of the issuer’s majority assets will also be considered.New Issue TimingA new issue that meets the index criteria is added at the month-end rebalancing provided it is present in CBI’sdatabase by the 15th of the month. Bonds entering the database after the 15th of the month will enter the indexduring the subsequent month-end rebalance.ESG MethodologyThe index applies J.P. Morgan ESG (JESG) issuer scores to adjust the market value of index constituents fromthe baseline J.P. Morgan Green, Social, & Sustainability Bond Index. JESG issuer scores are a 0-100 percentilerank calculated based on normalized raw ESG scores from third-party research providers Sustainalytics andRepRisk. An issuer’s finalized JESG score incorporates a 3-month rolling average. Corporate issuers with nocoverage by either third-party research provider default to their region-sector JESG score. The JESG scores aredivided into five bands that are used to scale each issue’s baseline index market value, with the band rebalanceoccurring with a one-month lag.JESG Score BandsBand 1: Score 80Band 2: 60 Score 80Band 3: 40 Score 60Band 4 20 Score 40Band 5: Score 20Scalar1.000.800.600.400.00If an instrument is categorized as a ‘Certified Climate Bond’ by the Climate Bonds Initiative, the security willreceive a one-band upgrade. Certified bonds by issuers already in Band 1 will not receive any further upgrades.Non-sovereign issuers considered non-adherent with United Nations Global Compact (UNGC) principles by bothSustainalytics and RepRisk, or with direct revenue exposure to nuclear energy, oil & gas, oil sands, thermalcoal, tobacco, or weapons will be excluded from the index. Issuers with JESG scores less than 20, i.e. in Band5, will be ineligible for inclusion within the JESG index.
AppendixThe following is a description of our methodology for calculating aggregate returns at the index level. Thereturns calculated are total return, price (clean) return, interest (coupon) return, treasury return, spread (excess)return, and FX (spot) return.Total return is a means of representing the economic benefit of holding a security or portfolio position. In itssimplest form, it is based on the “cash in/cash out” notion – i.e., what is paid for the security at the initialpurchase versus what is received at its sale. The means of calculating the total return on a basket containingvarious instruments is an extension of the single-instrument total return framework.Index Total ReturnThe total return is a representative measure of the performance of the underlying instruments between day t – 1and day t. At its most basic, the index total return of a multi-currency portfolio can be explained by fivecomponents: price return, interest return, treasury return, spread return, and spot return.Assume that the portfolio of securities is composed of bonds and markets in proportion to their respective totalmarket value. Market value in this case is calculated using the amount outstanding, as well as the total priceinclusive of accrued interest and principal payments. The rate of return for any day can be attributed in one oftwo ways:1. Using the clean and coupon returns: (1 )(1 2. Or, alternatively, using the treasury and excess returns: (1 )(1 )(1 )(1 ) 1) 1
AnalyticReturnAnalyticsTotal ReturnPrice ReturnInterest ReturnSpread ReturnTreasuryReturnESGAnalyticsESG JPMRankESG BandTo WorstAnalyticsField Name atsIntRetStatExcessReturnMid(see above)(see above)(see above)(see above)DailyTsyReturnMid(see above)ESGScoreProprietary J.P. Morgan computed ESG scoreESGBandESG band designationYield (to worst)StatYldWrstRateMidSpread (toworst)StatStpSprRateMidModifiedDuration (toworst)YTMModDurToWrstMidSpreadDuration (toworst)EffSpreadDuration WrstSpreadConvexity (toworst)EffSpreadConvexity WrstAverage Life(to worst)Avg Life WrstBaseAnalyticsIndex DirtyPrice (mid)Market Value(ESG adj.)Face alStlOrgAmtMidMktCapThe lowest potential Yield on a callable security or the highestpotential yield on a puttable security. The corresponding date atwhich this Yield is realized is referred to as the Worst Date, and isthe driver for all other To Worst analytics.The Spread Over the Treasury Zero Curve corresponding to theWorst Date. This is the basis point spread over the Treasury ZeroCurve that will discount cash flows such that the Present Valuewill equal the Settlement Price, reflective of the Worst Date.A measure of the change in settlement price for a 100 bps shift inthe underlying government bond Cash Coupon Curve andreflective of all cash flows to the Worst Date. It is calculated byshifting the government bond Cash Coupon Curve by 100bps upand down and calculating settlement price under each scenario.A measure of the change in settlement price for a 100 bps shift inthe underlying government bond Zero Coupon Curve andreflective of all cash flows to the Worst Date. It is calculated byshifting the government bond Zero Curves by 100bps up anddown and calculating settlement price under each scenario.A measure of the sensitivity of Spread Duration to a 100 bps shiftin the underlying government bond Zero Coupon Curve andreflective of all cash flows to the Worst Date. It is calculated byshifting the government bond Zero Curves by 100 bps up anddown and calculating settlement price under each scenario.Average length of remaining time before the bond's principal isrepaid (or when optionality is executed) as measured at the ToWorst Date.Dirty mid price including adjustments for amortization andcapitalizationMarket Value (ESG methodology adjusted)FaceAmtOSAM ACT PAYAmount outstandingCurrent coupon rateAM INT PRDAccumulated interest since last payoutAM AMORTAggregated amortized principal amount
RemainingMaturity (days)Current YieldNumber ofbondsStatsDaysToMatStatClnRtnRateMidNum BondsNumber of business days from trade date to maturity dateCurrent yieldNumber of bonds in the indexSource: J.P. MorganFor any questions or for additional information, please contact [email protected] Index Researchwww.jpmorganmarkets.com
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Certified Climate Bonds). The index applies an ESG scoring and screening methodology that tilts toward issuers with greater ESG qualities and, at the instrument level, 'Certified Climate Bonds'. The index leverages the labelled green, social, and sustainability bond datasets from the Climate Bonds Initiative, in addition to their
