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Categories
ESG
Our ESG framework builds on 90 years of research legacy
Jessica Ground
Global Head of ESG
April 16, 2024
KEY TAKEAWAYS
  • Capital Group’s framework for integrating ESG emphasizes materiality at the individual issuer level.
  • Efforts around ESG support Capital Group’s long-held commitment to responsible stewardship of our clients’ assets.
  • Our commitment to ESG is demonstrated by its integration into our investment approach, The Capital System™.

Capital Group’s founder, Jonathan Bell Lovelace, was a pioneering investor back in the days of the Great Depression and the Dust Bowl. Almost a century later, his innovative emphasis on fundamental research still guides us.


Research is all about building a deep and well-rounded understanding in order to try and make better investment decisions. Weighing developments that could have financial consequences for an issuer of equities or bonds is, therefore, crucial.


This is why, at Capital Group, we believe in the importance of analyzing material ESG issues as a part of our fundamental research as we strive to deliver superior long-term investment results to our clients.


Our ESG philosophy emphasises materiality


Which ESG risks and opportunities do we believe are material to the long-term success of issuers from a particular sector? Asking and answering this question is at the heart of our approach to ESG integration and aligns with our legacy of deep research in two important ways.


First, the consequences of many ESG issues can unfold over several years or decades, a timeframe that naturally aligns with our long-term orientation.


Second is our bottom-up fundamental research approach. ESG integration is refining and rounding out our understanding of investments. "Our research and experience have shown us that the companies that are most thoughtful about their long-term strategy are also working hard to understand how ESG risks and opportunities could impact their business," says Martin Romo, chairman and chief investment officer of Capital Group.


How we integrate ESG into The Capital SystemTM


Capital Group has more than 350 portfolio managers and investment analysts who, within our investment approach, The Capital System, are empowered to pursue their individual investment convictions. Fundamental research is front and center. Rigorous debate is the norm.


Our ESG process includes three mutually reinforcing components. We have intentionally created a process that deepens our understanding over time, but does not come up with a single answer or score.


This image details Capital Group's three-part ESG process. Investment research and frameworks reflect material ESG considerations in 25+ sectors. The monitoring process uses available third-party data to flag a subset of investments in certain asset classes for further research and review. Engagement and proxy voting involves engaging with issuers on material ESG risks and opportunities and voting proxies in the best interest of our clients. As of December 31, 2023, monitoring applies to corporate and sovereign holdings.

* As at 31 December 2023. Monitoring applies to corporate and sovereign holdings

Research & Investment Frameworks


More than 200 of our equity and fixed income investment analysts, in partnership with our ESG team, have created over 25 sector-specific ESG investment frameworks that identify the issues we believe to be material to each sector, including sovereigns.


We refresh our frameworks regularly to capture the dynamic nature of ESG issues and help ensure they are forward-looking.


ESG investment framework example: Key ESG topics in autos

This image shows the Capital Group sector investment framework for autos. This investment framework highlights the material ESG issues for the sector which includes greenhouse gas (GHG) emissions for their products, GHG emissions for operations, clean technology innovation opportunities, waste and hazardous materials management, product quality and safety, privacy and data security, labor relations and supply chain standards and responsible sourcing. Alongside this graphic we have a quote from Fixed Income Investment Analyst, Danny Jacobs, “We have been able to take a more nuanced, holistic view on electric vehicles, as well as incorporating other potentially financial material ESG issues within our fundamental research.”

Source: Capital Group. For illustrative purposes only.
*GHG = greenhouse gas

Monitoring process


We complement our in-house analysis with third-party ESG data, where available, to surface external views of potentially material ESG risks. We believe third-party data can be a useful input as we seek to build a holistic view of a company or issuer. However, our perspectives are built on a long-term view, engagement and detailed analysis − never on monitoring results alone. 


To inform our ESG evaluation process, we monitor our equity holdings and corporate and sovereign (government) bond holdings, where data is available. The monitoring process involves reviewing our corporate (equity and fixed income) and sovereign holdings against third-party data from a range of providers to surface external views of potentially material ESG risks, as well as issuers in violation of international norms. Issuers that do not meet our thresholds are flagged for review by our investment professionals. Additionally, our Issuer Oversight Committee (IOC) reviews a subset of issuers presenting elevated ESG-related risks that may affect portfolio holdings.

 


This image shows Capital Group's ESG monitoring in action using an equity fund as an example. Portfolio holdings are subject to ESG monitoring using multiple data sources including the UNGC assessment, OECD guidelines and MSCI ratings. Eight of the 266 holdings, or about 3%, were flagged. These holdings are monitored by analysts, meaning they require a heightened level of research and engagement. The donut chart shows the breakdown of 97% non-flagged (257 holdings), 3% flagged (8 holdings) and 0% other (1 holding).

For illustrative purposes only.

As of February 2024, for corporate holdings, our monitoring methodology has been updated. We now use two data providers (MSCI and Institutional Shareholder Services Inc. (ISS)) and five different indicators to monitor and flag holdings. These indicators capture materially lower ESG performance relative to peers and potential violations of international norms via the UNGC and OECD Guidelines. This may impact the number of flagged holdings per fund.

Data as of 31 March 2024. UNGC is United Nations Global Compact. OECD is Organisation for Economic Co-operation and Development.

Donut chart: Reflects all of the fund’s holdings at the issuer level. The monitoring process covers 99.6% of the fund’s holdings, which represent 99.9% of the fund’s assets, excluding cash and cash equivalents. “Other” holdings are those that either do not have available third-party data or that are not currently covered in the monitoring process. The data used in the monitoring process currently applies only to equity securities and corporate and sovereign bonds. The percentage figures may not total 100 due to rounding.

Engagement & Proxy Voting

Our investment professionals and ESG team partner to lead ESG-specific engagements that help us to better understand how ESG risks and opportunities are being managed, and this feeds into our fundamental research process.


In 2023, we held 1,115 ESG-specific engagements on topics that are informed by our research, investment frameworks, voting and monitoring process. We document engagements and track the outcomes of our discussions with management.


Proxy voting is another integral part of our investment process. We have an investor-led voting process focused on voting in the best interest of our investors and clients.


Our Global Stewardship & Engagement (GSE) team conducts an assessment of each proxy proposal. Importantly, this is done in accordance with voting guidelines authored by our investment professionals and refreshed annually. This research is shared with our investment analysts (who are familiar with the company and industry) to help them make a recommendation. The final decision, including on high-profile or contentious proxies, or proxies where there is a difference of opinion, is made by the appropriate proxy committee, made up of senior investment professionals.


In 2023, our three equity investment divisions separately voted in over 2,100 general and special shareholder meetings across more than 55 markets.


Building on our legacy of research


By considering material ESG risks and opportunities, I firmly believe we’re building on the 90-plus-year legacy of fundamental research pioneered by Capital Group’s founder, Jonathan Bell Lovelace.


Through our investments in the people, data and technology that support ESG integration, we are building global capabilities that can evolve and adapt over time.


Because this is so important to us, we want to be transparent with our clients and stakeholders. We publish our investment stewardship report annually. And, on a quarterly basis, we disclose fund-level monitoring outcomes for our corporate and sovereign holdings (where data is available) to indicate which companies and/or issuers have been flagged for in-depth review. 


As Rob Lovelace has put it, our increased focus on material ESG issues plays to Capital Group’s strengths as an organization that has always emphasized the responsible stewardship of our clients’ assets. No matter how the specifics of our ESG investment frameworks or broader ESG process evolve, I believe that insight will continue to hold true.


Jessica Ground is global head of ESG at Capital Group. She has 25 years of industry experience (as of 31 December 2022). She holds a bachelor's degree in history from Bristol University and is a member of the CFA Institute.

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