ESG is woven into our long-term investment vision

We believe that investing in environmental, social and governance criteria is a long-term proposition (Photo: Capital Group)

We believe that investing in environmental, social and governance criteria is a long-term proposition (Photo: Capital Group)

“Active management but with a long-term view, a policy of engagement rather than exclusion, a combination of in-depth internal research and integration of external data: these are all pillars of Capital Group's ESG approach,” details Matt Lanstone, Head of ESG Research & Investing at Capital Group.

What is Capital Group’s approach to ESG?

We believe that investing in environmental, social and governance criteria is a long-term proposition, which is in line with the company's original mission: to improve people's lives through profitable investments. Our ESG teams identify issues in all sectors that offer long-term growth. We then compare our results with the most recognized external sources. Often, the points of discord provide an interesting basis for ongoing discussions, both with the companies involved and with analysts from other organizations. For example, if a significant ESG risk is detected by the latter, we look to see if the criteria are well suited to the sector and whether they took into account long-term policies and where the company is in its journey towards sustainability. Our active management gives us considerable scope and we don't limit ourselves to the front-runners.

What differentiates Capital Group from other with regard to ESG?

It comes down to a number of core factors many of which align with the long-term strengths of the group. We start everything we do in ESG with research. Research is at the heart of our process as investors and the same goes for our analysis of ESG factors. We didn’t just build our ESG capability in a bolt-on silo on the side of our organization, we built it in deep partnership with our investors. When we invest, we think about things on a long-term view of three to five years if not longer. Our average holding period is also very long which is critical when it comes to ESG. Sustainability issues by definition are long term so we are able to align that way of thinking when considering long-term financial returns. Lastly, and equally important, is that we have really good access to management teams. We are a trusted partner in investing with the companies and issuers that we invest in, and they are keen to understand our perspective. There’s little point in having all the greatest ESG research in the world if you aren’t able to bring all of those insights and observations into the board room and have discussions with management teams and seek to impact the companies’ strategies and operations in ways that are aligned with key sustainability objectives.

How do you decide which factors are important when looking at ESG?

It’s very important to get this right. We focus on materiality as a guiding principle. Our experts, our investment group analysts, have been following their industries on average for 14 years. We ask them what are the sustainability factors that really matter, and typically we find that there are 10 to 12 factors that are really important. When we build our investment frameworks for ESG and when we implement those as we integrate ESG into our investment process, we are careful to stick to the material things that matter and avoid getting drowned out by all the noise.    

How do you balance portfolios that meet ESG criteria whilst also enabling investors to meet their own expectations?

We want the asset owners to tell us what their key preferences and objectives are. For many, the focus will remain on the long-term financial results on their investments. We want to honour those needs to build up funds for retirement or for children’s college for the investor. At the same time, many investors are telling us that ESG factors are an important key influence in how they want their money to be invested. Across all of our funds and asset classes globally we have fully integrated ESG into the decision-making process but most of those funds will have a primary objective in terms of financial returns. We are working hard on thinking about funds where there might be other aspects to the mandate – a sustainability objective alongside a financial objective is important to balance. Greenwashing is a big threat to the industry – we don’t ever want to fall guilty of pretending to do more than we do.  

Is the move towards ESG a defining change and if so, is Capital Group ready for this evolution?

ESG is not a trend that will go away at the first sign of a market out-turn. I think it is an enduring change in how we think about the world and financial markets. It is visible in the behaviour of many companies and it dominates the media. As a whole, there is a complete change in the way we think about long-term investing. Capital Group has been preparing for the past several years and is ready and equipped for that change. We have invested in data and technology to aid our ESG data analysis. We have also invested a lot in talent and have very experienced ESG analysts and practitioners. The key is to put them next to the investing experts rather than operate them as a silo, as that’s when the benefits can be multiplied. We are excited about the next steps of the ESG development.

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