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Capital Group

PRI reporting framework 2020

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
87.3 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
12.7 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

Capital is a discretionary investment manager with a bottom-up investment process focused on delivering long-term sustainable results. We are independently and privately owned, which has allowed us to develop a specific investment philosophy.  “The Capital System” along with our code of ethics and culture of long-term investing, ensures a robust investment process which recognises the relevance of environmental, social and governance (ESG) factors in contributing to long-term sustainable businesses.

The "Capital System" is a unique approach designed to enable our investment professionals to focus on their highest conviction ideas. Our diverse group of portfolio managers and analysts bring complementary investment approaches, experience levels, backgrounds and areas of focus to each fund. Our portfolios are composed of individual managers' and analysts' highest conviction investment ideas. Combining the best independent decisions of experience professionals into one portfolio results in diversification and creates the potential for superior results over time.

Our investment professionals are sector specialists and have the depth and breadth of knowledge that enable them to make decisions that will enhance long-term value for our clients. We acknowledge the relevance of ESG factors in contributing to long-term sustainable businesses by integrating them into fundamental analysis and valuation and considering these ESG factors alongside financial, operational and economic indicators, amongst others. The long-term lens means that the identification of ESG risks and opportunities is intrinsic to building an understanding of a company’s long-term business model or a sectors' long-term prospects.

Our research approach also leads to opportunities to engage with companies. Our investment professionals collectively make thousands of company visits annually, regularly meeting with the executives, senior management and board members. These meetings allow our investment professionals the opportunity to engage with companies on a wide range of topics including ESG factors. We make use of our formal rights, such as the ability to vote at shareholder meetings, and informal influence, to enhance long-term value or to seek mitigation of risks that impact negatively on long-term value of the business.

ESG factors can also be part of a positive investment decision. Our analysts may recommend investing in companies which they believe can deliver superior returns over the long-term while providing sustainable environmental benefits. Recent investments have been made in companies which provide renewable energy, irrigation solutions in emerging markets and companies which deliver energy efficiency benefits. In each case the environmental or social benefit was seen as part of the reason that some of our analysts believed the company would be a successful investment.

We may exclude certain investments via negative screening, although these are generally client-specific at the account level rather than the fund level. For example, some of our clients have ethical (or other) reasons why they may not want to invest in securities of companies with certain business interests. These securities will be excluded from the investable universe. The criteria for exclusion of securities or sectors are chosen in discussion with our clients and our systems offer the flexibility for segregated accounts to exclude securities or sectors.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Please see LEI 01.2 above.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.4. Additional information. [Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

We have an in-house Governance and Proxy team which supports and monitors our proxy voting process as well supports ESG engagements held by investment professionals and the ESG team.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

We only apply exclusion criteria to our funds where this is a part of the objective or where we are required to by law.  We have a fiduciary duty to invest in a way that helps clients achieve their long-term investment objectives. Consistent with these objectives and our duties, our investment decisions are made based on the long-term financial opportunity offered by the selected securities.

For separate account clients who require a portfolio that avoids certain types of companies, we are able to implement screens where information regarding the screening criteria is readily accessible (such as tobacco, alcohol, etc). We also are capable of screening account holdings based on ESG metrics as provided by a third party source.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

Screening criteria, and any changes thereto, are specified by clients.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

          Our analysts are questioned on screening by our global ESG team, investment specialists and portfolio managers, where relevant.
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

In circumstances where client screening guidelines have been breached or limits have been exceeded, a group of experienced associates from relevant business areas (operational, legal & compliance and marketing) review the facts and assess the various options for correcting the breach.  Corrections could include selling the security or asking for a waiver from the client to keep the security. A risk assessment team will investigate ways to mitigate the chance of future breaches.

06.3. Additional information. [Optional]


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

          Our ESG and Governance and Proxy teams also engage with analysts and PMs to ensure we are integrating ESG considerations into our investment process.
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          Material ESG information that is relevant for a specific investment idea is incorporated into our analysts' investment research and / or recommendations.
        

09.6. Additional information. [Optional]


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

          see LEI 01.2
        

10.3. Describe how you integrate ESG information into portfolio weighting.

Portfolio construction decisions, such as sector and industry allocation, can be influenced by ESG considerations. For example, climate change may influence energy sector allocation, the energy companies selected and their relative weightings.

When determining position weights, our portfolio managers consider the high-quality characteristics of a company, including ESG factors, as well as risk and fund/ strategy objectives, among other considerations.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

Valuation models are constructed for each and every holding in our portfolios and are based on thorough, rigorous fundamental research and in-house analytics. Material ESG issues are evaluated alongside of financial valuations to inform our analysts' judgements on an investment's prospects for long-term success.

10.6. Additional information. [OPTIONAL]


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