5 MIN ARTICLE
- 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 both its integration into The Capital System™ and how it is reflected in our own business operations.
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 environmental, social and governance (ESG) issues as we strive to deliver superior long-term investment results to our clients.
Our ESG philosophy emphasizes 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 ESG philosophy, 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, our bottom-up fundamental research approach. ESG integration is refining and rounding out our understanding of investments. "We’ve long believed that knowing how organizations interact with and impact their communities, customers, suppliers and employees is important in understanding their potential as investments," says Rob Lovelace, vice chair and president of Capital Group.
How we integrate ESG into The Capital System
Capital Group has more than 350 investment professionals who, within our investment approach, The Capital System, are empowered to pursue their individual investment convictions. Fundamental research is front and centre. 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.
ESG investment framework example: Key ESG topics in autos
Research & Investment Frameworks
More than 200 of our equity and fixed income investment analysts, in partnership with our ESG team, have created over 30 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.
Source: Capital Group. For illustrative purposes only.
*GHG = greenhouse gas
We complement our in-house analysis with third-party ESG data, where available, to surface external views of 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 corporate ESG evaluation process, we leverage data from widely used third-party providers including MSCI and Sustainalytics (where data is available). Flagged holdings then undergo an elevated level of research and review by analysts. If there are outstanding concerns, the Issuer Oversight Committee, comprised of investment professionals, ESG specialists, and senior leaders, provides an additional layer of review.
As of the date of this article, corporate and sovereign holdings are within the scope of our monitoring process.
Data as of December 31, 2022. Third-party data used in the monitoring process is generally available for equity securities and corporate and sovereign bonds held by the fund. Flagged and non-flagged holdings collectively represent 99.3% of the fund’s holdings, and 99.8% of total assets, in each case, excluding cash and cash equivalents. “Other holdings” are holdings that either do not have available third-party data or that are not covered in the monitoring process. The data used in the monitoring process currently applies only to equity securities and corporate and sovereign bonds. Figures may not total 100 due to rounding. Donut chart reflects the total of all equity covered holdings at the issuer level, corporate debt covered holdings at the ultimate parent issuer level, and sovereign bonds at the obligor level. In other words, multiple issues by a company may have been rolled up into that single entity and are aggregated at the asset level. Example fund is not available in Canada.
Engagement & Proxy Voting
Our investment professionals and ESG team partner to lead ESG-specific engagements that help to enhance our understanding and encourage better disclosure and management of material ESG risks and opportunities.
In 2022, we held more than 830 ESG-specific engagements on topics that are informed by our investment frameworks and monitoring outcomes. 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 2022, 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 expanding our capabilities and will, where necessary, evolve and adapt our process 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.