Portfolio Construction
Our distinctive approach to sustainable investing
Aaron Petersen
Capital Group Private Client Services Wealth Specialist

Two of the more common questions I get from clients these days go something like this: What’s your take on socially responsible investing, and do you offer this service at Capital Group? It’s not surprising that this subject has started to come up, given the widespread interest it is receiving in the media and elsewhere. Though socially conscious investing has existed in various forms for years, growing awareness of the topic has both increased attention and bred a bit of confusion, because people often mean different things when they use the term.

Broadly speaking, “socially conscious investing” is an umbrella phrase encompassing an array of concepts, including ethical investing, impact investing and mission-based investing. Recently, these strategies have been grouped under the broad banner of ESG, which stands for “environmental, social and governance.” ESG refers to a set of measures intended to assess and monitor long-term sustainability. These include quantifiable financial and nonfinancial barometers, such as carbon emissions and executive compensation, as well as qualitative indicators such as perceived ethics.

Though the heightened public focus is fairly new, at Capital Group we’ve always considered these factors as part of our overall in-depth analytical process. Now, let me be clear, we don’t base investment decisions solely on ESG factors. But clients are often surprised when we tell them that social responsibility has long been an important aspect we take into account. In fact, we view ESG as essential to long-term value creation, and we use it as a fundamental element of our research and decision-making process.

Our core mission as an asset manager is to improve clients’ lives through successful investing. That involves analyzing a variety of long-term dynamics, including regulations, societal shifts, use of natural resources and other prominent ESG factors. Simply put, we believe that companies working ethically, sustainably and responsibly tend to be appealing long-term investments. By contrast, those that cut corners can subject themselves to value-destroying risks.

For that reason, we don’t separate ESG from the rest of our investment process, as some asset managers do. On the contrary, we assess ESG alongside a host of financial data and other metrics. For companies in which we invest, we emphasize engagement rather than exclusion, believing that the optimal way to bring about change is to have a proverbial seat at the table, where we are able to encourage corporate managements to adopt best practices for their businesses, employees and the greater good. In other words, we discuss a variety of topics with management teams, including ethical business practices and the impact of a company’s products and operations on society and the environment. We had more than 250 ESG-specific engagements with management teams in 2018.

ESG is integrated throughout our investment process.

Our equity and fixed-income portfolio managers and analysts travel extensively to meet not only with CEOs and their management teams but also with suppliers, regulators and customers to gain insight into the unique factors affecting businesses.

Our analysts develop investment convictions through an elaborate in-house assessment of long-term risks and opportunities that naturally reflects ESG considerations. Our team then distills key factors that become the focus of subsequent assessment.

Finally, we engage with management teams and regularly broach key issues with them. Capital Group analysts had more than 12,000 face-to-face meetings with companies and key decision makers last year. When ESG-related concerns arise, we believe we can affect a company’s behavior simply by the questions we ask in these meetings. Companies that are not sufficiently attuned to these issues raise a red flag with us. In some cases, we may vote against management policies during proxy season, detailing our reasoning to the company.

Capital Group overall has 21 in-house governance and proxy associates worldwide. We exercised our proxy vote 2,500 times in fiscal year 2018.

Capital Group is a member of several industry organizations, including the International Corporate Governance Network (ICGN) and the Council of Institutional Investors. We have been a signatory to the Principles for Responsible Investment since 2010. Capital’s vice chairman, Robert W. Lovelace, is a member of the Sustainability Accounting Standards Board’s Investor Advisory Group, which comprises leading asset owners and asset managers. Portfolio Manager Steve Watson is vice chairman of the Asian Corporate Governance Association (ACGA).

We can tailor client portfolios to specific ESG standards.

Though corporate governance and the sustainability of business models are among the factors we inherently consider to be key drivers of investment returns, certain clients ask that we go further by applying specific restrictions on investing in the types of securities they find to be inconsistent with their values. Given our ability to highly customize portfolios within Capital Group Private Client Services, we are often able to do this.

By applying certain ESG screens to separately managed accounts, we allow clients to incorporate their specific ethical objectives into our global investment process. This allows them to avoid holding companies in certain industries or sectors, such as tobacco or gambling, based on their personal preferences.

Capital Group will continue to integrate ESG throughout its research and decision-making process. Given the rising importance of these issues, ESG will likely become more widespread throughout the investment world. To us, ESG is not a separate process but an important ingredient in the long-term success of our investments on behalf of clients. Should you have further questions about our investment process or ability to customize the ESG parameters of your specific portfolio, don’t hesitate to get in touch with your Private Wealth Advisor.


The above article originally appeared in the Fall 2018 issue of Quarterly Insights magazine.

Aaron Petersen is a wealth research specialist covering planning topics relevant to high-net-worth investors. He has 19 years of investment experience and has been with Capital Group since 2000.

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