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environmental-social-governance
Our ESG approach builds on over 90 years of research legacy

7 MIN ARTICLE

Jessica Ground
Global Head of ESG

 


KEY TAKEAWAYS
  • Capital Group’s approach to integrate environmental, social and governance (ESG) emphasizes materiality at the individual issuer level.
  • Our ESG process includes three mutually reinforcing components: research and investment frameworks, a monitoring process, as well as engagement and proxy voting.
  • We believe that ESG integration can help us better understand long-term risks and opportunities as we strive to maximize returns for our clients.

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 investment research 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 approach to ESG integration and aligns with our legacy of deep research in two important ways.


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


Second is our bottom-up investment research approach. Our investment professionals consider material long-term ESG issues that they believe could affect their investment theses on an issuer level. ESG integration is refining and rounding out our understanding of investments.


How we integrate ESG into The Capital System


In partnership with our ESG team, our investment analysts and portfolio managers are responsible for integrating ESG into Capital Group’s investment approach, The Capital System. Our ESG process includes three mutually reinforcing components: Research and Investment Frameworks, a Monitoring Process, as well as Engagement and Proxy Voting.


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 of December 31, 2024, monitoring applies to holdings of corporates (equity and fixed income), sovereign bonds and select municipal bonds.

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, proprietary ESG investment frameworks.  Each framework is intended to help our investment professionals examine material long-term ESG issues that could affect their investment theses.


The frameworks are reviewed periodically to ensure they remain relevant. Our in-house ESG team facilitates this process, partnering with investment professionals to incorporate appropriate updates to the frameworks. We have made significant investments in data and technology to give investment professionals access to a variety of data sources. Our in-house research tool Ethos hosts more than 270 metrics from 50 sources, which bring our research frameworks to life.


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 and help us guard against confirmation bias 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.


We monitor our equity, corporate and sovereign bonds, as well as select municipal 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. For a subset of our municipal bond holdings, we use third-party data to surface external views about potentially material physical climate risks. Issuers that do not meet certain thresholds are flagged for review by our investment professionals. Additionally, our Issuer Oversight Committee (IOC) acts as an extension of our monitoring process for areas of elevated ESG risk that may affect portfolio holdings where these are discussed to get the perspectives of a wider group of investors.


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.

Data as of December 31, 2024. The donut chart shows the number of a fund’s holdings that fall into the three categories in our monitoring process (flagged, non-flagged and other), and the share of each category’s value. The corporate and/or sovereign monitoring process (as applicable) covers 100% of the fund’s holdings, which represent 100% of the fund’s value, excluding cash and cash equivalents. Our corporate monitoring methodology uses two data providers (MSCI and Institutional Shareholder Services Inc.) and five different criteria to monitor and flag holdings. These criteria capture materially lower ESG performance relative to peers and potential violations of international norms via the UNGC and OECD Guidelines. For sovereign holdings, our proprietary ESG score for an issuer is a weighted average of its raw scores from three data sources: Notre Dame Global Adaptation Initiative Climate Vulnerability Index, United Nations Human Development Index and World Bank Worldwide Governance Indicators. For a subset of our municipal bond holdings, we use third-party data to surface external views about potentially material physical climate risks; to the extent applicable, these flagged municipal holdings are reported on separately and are captured under “other” in the donut chart for purposes of this publication.
The “other” category includes holdings that either do not have available third-party data or that are not currently covered in our corporate or sovereign monitoring process. Totals of the percentage figures of the three categories may not sum to 100% due to rounding.

Engagement & Proxy Voting


Our investment professionals lead our engagement process. By engaging with executives and non-executives on important issues, we can better understand potential risks to our investments, and how companies and issuers are managing them.


Proxy voting is another integral part of our investment process. We have an investment professional-led voting process with voting decisions made independently by each of the three separate equity investment units based solely in the financial interests of our clients.


Our proxy voting process is designed to benefit from multiple perspectives from our investment professionals and ESG team members, whose collective experience brings a breadth of knowledge to individual proxy voting issues. First, our governance specialists conduct company-specific research and proxy analysis in accordance with our proxy voting procedures and principles that are driven by our investment professionals.  This research is shared with our investment analysts (who are familiar with the company and industry) to help them make a recommendation. If there is disagreement, a second opinion can be provided by a proxy coordinator (an investment analyst or another investment group associate with experience in corporate governance and proxy voting matters). A proxy committee of senior investors in each equity unit retains final authority for votes taken by their unit.


Building on our legacy of research


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


Through our investments in the people, data and technology that support ESG integration, we have been 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 and engagement activity for our corporate and sovereign holdings (where data is available) to indicate which companies and/or issuers have been flagged for in-depth review.


Capital Group’s focus on material ESG issues plays to our strengths as an organization that has always emphasized the importance of research. No matter how the specifics of our ESG investment process or broader ESG landscape evolves, I believe that insight will continue to hold true.


Your gateway to all things ESG at Capital Group

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Published on June 2, 2025

Jessica Ground is global head of ESG at Capital Group. She has 27 years of industry experience (as of 12/31/2024). She holds a bachelor's degree in history from Bristol University and is a member of the CFA Institute.

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