7 MIN ARTICLE
What we believe
Capital Group was founded nearly 90 years ago on the belief that a deep understanding of the organizations in which we seek to invest will result in better outcomes for investors. This belief is part of our DNA and continues to shape the structure and operation of our investment effort. The hallmark of that effort is engagement. We visit companies, forge relationships with their management teams and develop investment perspectives focused on long-term outcomes. Our process rewards investment professionals for their long-term results.
Over time, our research effort has expanded and evolved, always with an eye toward better understanding companies and issuers. We’ve always believed that knowing how organizations interact with and impact their communities, customers, suppliers and employees is important to understanding their potential as investments. We’ve sought to invest in firms well-positioned for the future, those able to sustainably grow their businesses. Our experience and research indicate that, when an organization takes a thoughtful and robust approach to environmental, social and governance (ESG), it can be a positive indicator of sustainability and strategic thinking. We believe that approach will eventually be positively reflected in a company’s share price or an organization's trajectory.
In addition to supporting our stewardship of investor assets, a strong emphasis on ESG principles has underpinned another key organizational priority: our approach to how we manage the firm and our own corporate citizenship. Capital Group has always been guided by a sense of responsibility to our communities and the world around us. Our mission is to improve people’s lives through successful investing. We understand that delivering superior long-term investment results may be the most direct path to fulfilling that objective, but it is not the only path. Investment managers have a role to play as corporate citizens. We have methods for effecting change and want to realize the promise of ESG by integrating it into our process and making its benefits available to all our clients.
We want clients and the organizations we invest in to understand our level of commitment to ESG investing and have visibility into our process and results. Our commitment is strong and we hope our level of transparency is a demonstration of our commitment.
Becoming more systematic
As noted, our research effort has always aimed to create a deep and nuanced understanding of companies and issuers. Evaluating a firm's social and environmental positioning, as well as its approach to governance, has always been an important part of our research process. Now we are focused on the value of codifying and systematizing our ESG philosophy and process.
Our approach to integrating ESG is consistent with the thoughtful approach to major investments in Capital Group’s history. In our most recent long-term strategy review, we confirmed ESG as a top priority for the firm and accelerated a number of initiatives already underway. Defining and codifying our ESG philosophy and integrating it into our investment process enhance our research effort and ultimately, we believe, our investment results. In addition, this stands to benefit our investors by providing the transparency and data they’ve told us are important to them.
Our ESG approach
Systematizing our approach has encompassed multiple initiatives — from establishment of oversight and guidance to material investments in data, processes and technology. We have organized our efforts to integrate ESG into The Capital System™ into three elements: investment frameworks, monitoring process, and proxy voting and engagement.
First and foremost, we have grounded our ESG process in the deep fundamental research that has always been the centrepiece of our investing approach. In 2020, with research as our starting point, each of our more than 200 equity and fixed income investment analysts participated in the creation of more than 30 sector-specific investment frameworks for defining and measuring ESG in each sector. Averaging 14 years of experience covering their respective sectors, these analysts led the effort to identify and calibrate the ESG issues that are material to their sectors, best practices and key metrics. Our investment analysts and 14 dedicated ESG specialists invested more than 4,000 hours in building these proprietary investment frameworks.
We complement our in-house analysis with third-party ESG data. These external ratings and data help round out our assessment of management policies, practices and outlook. This information has value but also limitations, since much of the data is self-reported, generally unaudited and backwards-looking and includes a mix of material and immaterial issues.
Both internal analysis and external data power the proprietary methodology we use to assess every company or issuer we research or hold. Once assessed, each security is assigned one of two designations: flagged or non-flagged. Flagged securities then undergo an elevated level of research and review by analysts and portfolio managers. Importantly, our monitoring and review of securities are ongoing, and insights and information are fed back into the system. This further sharpens our analysis, creating a virtuous circle.
Engagement and proxy voting
Engagement is essential to what we do as active managers and comes naturally to us with respect to ESG. We’ve been calling on companies for decades, and our analysts’ length of coverage often exceeds the CEO’s tenure. Firms recognize our serious commitment and the depth of our knowledge. They typically view engagement as mutually beneficial. We don’t just learn from them, they often gain perspective from us; increasingly, ESG is a particular area of shared interest.
Our belief in the importance of constructive interaction with organizations is behind the engagement frameworks we’ve built to help shape those interactions. By expanding the way we seek information from issuers and their management teams, we aim to maximize the value of our relationships and advance ESG priorities. In 2020, our analysts and portfolio managers held more than 20,000 meetings. In addition, our investment professionals, 17 Governance Analysis & Proxy (GAP) specialists, and 14 ESG specialists engaged with more than 400 companies specifically on ESG topics.
Importantly, our engagement has always focused on effecting meaningful structural and strategic shifts, not just bringing firms into technical compliance with third-party standards.
Transparency and reporting
Robust processes and thoughtful frameworks are crucial, but we know that current and would-be clients want more than pledges and opaque internal processes. They want a clearly articulated and credible ESG approach and a straightforward, intuitive methodology — specifically, an understanding of how portfolios and individual holdings rate relative to some key ESG metrics.
By building an in-house ESG capability, we are supporting these important objectives: We know the methodology well because we created it and can generate reporting meaningful to our clients.
It’s important to acknowledge that there will be cases when our investment decisions will be at odds with conventional ratings. In most cases, the decision to invest in an issuer flagged by third-party agencies will hinge on our view on the materiality of one or more issues. For example, an organization may not rate well on issues that we regard as technically valid but not material. Or we may see meaningful ESG improvements in a firm whose third-party rating does not yet reflect those improvements.
Capital Group is deeply committed to systematically integrating ESG into how we invest and how we run our own firm. It’s a journey we’ve begun that will grow to include associates from virtually every part of our organization. We are backing up our commitment with significant investments. As we learn, we’ll continue to refine and innovate just as we have with our broader, larger investment method, The Capital System. There is much work ahead of us, but we are excited about the future. Importantly, it is our view that an increased focus on ESG plays to our strengths as an organization that has always emphasized responsible stewardship of the money that investors entrust to us. We believe that integrating ESG will lead to better outcomes for clients and our organization.