7 MIN ARTICLE
Capital Group was founded nearly 90 years ago on the belief that a deep understanding of companies we seek to invest in will result in better outcomes for investors. This belief is part of our organizational 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. We’ve always believed that knowing how a company interacts with and impacts its community, customers, suppliers and employees is important to understanding its potential as an investment. 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 a company taking a thoughtful and robust approach to Environmental, Social and Governance (ESG) dimensions is actually a positive indicator of sustainability and strategic thinking and that those factors will eventually be positively reflected in a company’s share price.
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 companies 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. Evaluating a company’s social and environmental positioning, as well as its approach to corporate governance, has always been an important part of our research process. More recently, we’ve 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 enhances 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 is 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: research, monitoring and active engagement.
It begins with research
First and foremost, we have grounded our ESG process in the deep fundamental research that has always been the centerpiece of our investing approach. With research as our starting point, we asked each of our 200 equity and fixed income investment analysts to participate in the creation of more than 30 sector-specific frameworks for defining and measuring ESG in each sector. Averaging 14 years1 of experience covering their respective sectors, these analysts led the effort to identify and calibrate the ESG factors that are material to their sectors, best practices and key metrics. Our investment analysts have invested more than 2,000 hours in building these proprietary research frameworks and were supported in this work by 13 dedicated ESG specialists.
We complement our in-house analysis with third-party ESG data. These external ratings and data help round out our assessment of company policies, practices and outlook. This information has value but also limitations, since much of the data is self-reported by companies, generally unaudited, 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 three designations: passed, watchlist or flagged. Flagged securities then undergo an elevated level of research and review by analysts and portfolio managers. Importantly, our monitoring and review of securities is ongoing, and insights and information are fed back into the system. This further sharpens our analysis, creating a virtuous circle.
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 companies is behind the engagement frameworks we’ve built to help shape those interactions. By expanding the way we seek information from companies and their management teams, we aim to maximize the value of our relationships and advance ESG priorities. In 2019, our analysts and PMs held more than 14,000 meetings. In addition, our Governance and Proxy specialists, who now number 19 associates, engaged on ESG-specific issues with nearly 20% of the companies that we hold shares in.
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 & 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 a company flagged by third-party agencies will hinge on our view on the materiality of one or more issues. For example, a company may not rate well on issues that we regard as technically valid but not material. Or we may see meaningful ESG improvements in a company 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 SystemSM. 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.
1. As at 30 June 2020
All data as at September 2020 unless otherwise specified.
The Capital Group companies manage equities through three investment divisions that make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organisation; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.