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Capital Group

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
84.4 Integration alone
15.6 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
84.4 Integration alone
15.6 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

The investment process behind all of our strategies integrates ESG in a similar approach. Our rigorous investment process is holistic and long term in nature, hence we actively integrate ESG factors and do not separate them into a different category. We invest client assets according to the objectives of each fund or mandate.

In fixed income, we apply a ‘screen and engage’ process based on the UN Global Compact Ten Principles to several of our Luxembourg-domiciled UCITS corporate bond funds. This systematic integration of norms-based screening more explicitly demonstrates to our clients how we integrate engagement on controversies.

 

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

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  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

We utilise a wide variety of research material; however, our primary source of information, be it environmental, social and governance (ESG) related or not, comes from our own in-house research. Investment professionals at Capital are sector specialists that have the depth and breadth of knowledge that enable them to make decisions that will enhance long-term value for all stakeholders, including our clients.

In many instances our investment professionals have been researching a particular sector for decades and have seen a number of business cycles. This longevity of experience and insight is juxtaposed to the decreasing tenures of CEO's for example and gives our investment analysts an advantage when meeting with management old and new.

Outside research, be it sell-side or specialist research, augments and supplements our understanding and views on sectors, companies, countries or issues. Our long-term lens enables our investment professionals to look past short-term issues whilst continually assessing the current and future prospects. We acknowledge the relevance of ESG factors in contributing to long-term returns and consider them in our research alongside the financial, operational or economic indicators that we use in coming to our investment decision.

02.4. Additional information. [Optional]

We have expanded our use of MSCI screens to their ESG ratings and controversies’ flags and reduced our use of sell-side research as part of the new MiFID 2 regulations. 


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

specify description

          We are in the process of developing/ maintaining sector specific materiality frameworks.
        

03.2. Describe how your ESG information or analysis is shared among your investment team.

          Sector specific or thematic ESG topics are discussed at the bi-monthly ESG calls with analysts and portfolio managers,
        

03.3. Additional information. [Optional]


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (financial)
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

With the launch of our Capital Group Global Corporate Bond Fund (LUX) in 2018, we took the opportunity to test whether integration of the UN Global Compact principles could strengthen our investment process, encourage more focus internally on ESG and facilitate conversations with clients. This portfolio uses a third party provider, MSCI, to assess whether companies in our investment universe are in breach of any of the 10 principles set out in the UN Global Compact. These ‘flags’ (red, amber, green) are incorporated into our compliance and risk management systems on an ongoing basis and analysts are notified pre-trade on new issues or if we already hold the security. Importantly, this is not an exclusion-based approach but a screen and engage tool. The third party assessment acts as flag to prompt further investigation and provides additional research for the analyst to consider. Typically our own in-depth analysis will already have identified the issues and if we believe that the company has sufficiently addressed them or has been unfairly flagged, we may continue to hold the bond.

In 2019, we extended this process to Capital Group US Corporate Bond Fund (Lux) and Capital Group Euro Corporate Bond Fund (Lux).

 

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

UNGC 7th Principle Breach - Businesses should support a precautionary approach to environmental challenges

A large multinational oil and gas company have continued to face long-standing controversy over allegations of responsibility for substantial environmental damage to the Niger River Delta. It is accused of poor maintenance of its pipelines, resulting in thousands of spills over the course of more than 50 years and is flagged for breaching Principle 7 of the UN Global Compact.

We have engaged with the company and encourage them to continue with their transparent approach to ESG issues. This company is very transparent about oil spills in Nigeria and has reported spill data since 1995, and makes available on its website a detailed accounting of all spills in Nigeria, including the cause, which are often caused by crude oil theft and sabotage. Despite not being responsible for these criminal acts, the company always moves as quickly as possible to clean up all spills, regardless of fault.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

UNGC 3rd Principle Breach - Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining

A large multi-national retailer has been accused of engaging in anti-union practices, in an alleged effort to thwart union participation among employees, specifically in the US. From our engagements with the company’s management team, the company appears to be making demonstrable progress mitigating some of its social risks. The company completed a large investment in the U.S. that included increases in spending for associate wages, training, and education. Beyond labor relations issues, the company has demonstrated progress in addressing environmental and governance issues, which has helped to bolster its long-term franchise value. 

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

UNGC 7th Principle Breach - Businesses should support a precautionary approach to environmental challenges

A German healthcare and agriculture conglomerate has faced severe controversy related to the environmental impact of its genetically modified (GM) products, after its completion of acquiring a US agricultural products provider. We have engaged with the company on an ongoing basis, particularly following its acquisition. The company started to implement a series of measures to drive transparency and sustainability across its business. These measures are aimed to address questions and concerns the company has heard about its role in agriculture in the year following its acquisition. Based on recent investor events, the company appears to be more engaged with multiple stakeholders on its Crop Science business.  

05.2. Additional information.


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Norms-based screening

other description

          ESG (Compliance with UN Global Compact Principles) Screen and Engage tool. We screen companies in our investment universe for compliance with the UN Global Compact
        

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

Fixed income analysts at Capital are industry specialists with many years' experience following industry sectors. They consider ESG risks in the same way as any other factors which may affect the ability and willingness of an issuer to make payments on its debt. Our bottom-up research process relies on in-depth analysis helping us to avoid risks which may not have been recognized by other investors. An example of this is our consideration of transparency of information related to bribery controls. The lack of controls can be seen as an indicator with the potential to affect the risk profile of an investment, similarly the level of socio-economic stability can indicate if there is a risk to the incumbent regime. Our fixed income analysts work closely with their equity counterparts which enhances their access and contact with senior and operational management of companies.

For sovereign bond investors the aim is to assess and understand credit risk and identify securities issued by a government whose risk profile is improving. In our experience ESG issues are relevant for country analysis and can affect our evaluation of the risk premium for sovereign bonds. Valuing the risk premium requires an understanding of the extent to which ESG factors can impact a country and is particularly the case in emerging markets.

A true understanding of the ESG-related risk does not necessarily mean we will not invest in a particular country, but it helps us price the risk accordingly.

Our approach relies on our investment analysts identifying attractive investment opportunities such as countries on a trend of credit improvement and securities which may have a superior yield due to mispricing of risk. For example, the health and education spending by governments can be leading indicators of economic stability over the long-term and improving regulation of banking systems and anti-money laundering procedures can lower the risk profile.

Greater transparency generally translates to less risk. Therefore we also consider transparency around a company’s or country’s internal controls, processes, policies and procedures when making investment decisions.

As a global investor, we believe the impacts of climate change are broad and relevant, creating risks and opportunities across different sectors. With ESG integration, we embed our understanding of climate change into our investment decision making. This enables us to focus on the investment decisions where we see climate change and related issues as material financial factors.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

For sovereign bonds our integrated approach relies on our investment analysts identifying attractive investment opportunities, such as countries on a trend of credit improvement and securities which may have a superior yield due to mispricing of risk. For example the health and education spending by governments can be leading indicators of economic stability over the long-term, and improving regulation of banking systems and anti-money laundering procedures can lower the risk profile. For sovereign bond investors the aim is to assess and understand credit risk and identify securities issued by a government whose risk profile is directionally improving. In our experience ESG issues are relevant for country analysis and can affect our evaluation of the risk premium for sovereign bonds. Valuing the risk premium requires an understanding of the extent to which ESG factors can impact a country and is particularly the case in emerging markets.

A true understanding of the ESG-related risk does not necessarily mean we will not invest in a particular country, but it helps us price the risk accordingly.

Corporate (financial)

We seek long-term value in the corporate bonds segment by devoting significant resources to internally generated, fundamental research aimed at identifying broad market trends, relative sector value, and credit-driven opportunities. We use our in-house research to find securities with valuations that compensate for the various risks (including repayment/credit risk, liquidity risk, and market risks, amongst others) entailed in holding them and then construct portfolios within a risk management framework that seeks to diversify sources of risk and return at the overall portfolio level.

Our corporate bond analysts are industry specialists with many years' experience following industry sectors. They work closely with their equity counterparts which enhances their access and contact with senior and operational management of companies. In coming to an investment decision we will consider transparency around controls, processes, policies and procedures as an indicator of risk, greater transparency generally translates to less risk.

Corporate (non-financial)

See corporate section above.

Securitised

See corporate section above.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

For sovereign bond investors the aim is to assess and understand credit risk and identify securities issued by a government whose risk profile is improving. In our experience ESG issues are relevant for country analysis and can affect our evaluation of the risk premium for sovereign bonds. Valuing the risk premium requires an understanding of the extent to which ESG factors can impact a country and is particularly the case in emerging markets.

Our fixed-income investment analysts consider ESG risks in the same way as any other factors which may affect the ability and willingness of a government to make payments on its debt. Our bottom-up research process relies on in-depth analysis helping us to avoid risks which may not have been recognized by other investors. An example of this is our consideration of transparency of information related to bribery controls. The lack of controls can be seen as an indicator with the potential to affect the risk profile of an investment, similarly the level of socio-economic stability can indicate if there is a risk to the incumbent regime.

Our approach relies on our investment analysts identifying attractive investment opportunities such as countries on a trend of credit improvement and securities which may have a superior yield due to mispricing of risk. For example the health and education spending by governments can be leading indicators of economic stability over the long-term, and improving regulation of banking systems and anti-money laundering procedures can lower the risk profile.

Corporate (financial)

Our approach is to incorporate ESG risks and opportunities into investment decisions. Our team of more than 200 in-house equity and fixed income analysts and 100 portfolio managers are responsible for evaluating all relevant financial and non-financial factors – including ESG issues – as part of their fundamental research in order to generate long-term value, weighing risks in the context of the sector and geographical focus of their investments.

Within Capital Group, these individuals have the most in-depth knowledge, regular interaction with and understanding of companies, and we believe they are best placed to generate investment convictions on behalf of our clients. While our global network of more than 300 investment professionals are the frontline resources in considering ESG factors as part of their overall evaluations, they are assisted by the ESG team and the Governance and Proxy team.

We believe deep on-the-ground research and systematic corporate engagement is the key to sound long-term investing. As part of our investment process, we continually review the sectors and the companies in which we invest, and this includes the assessment of ESG-related risks and opportunities. Where material, these assessments will form a part of our valuations. In terms of corporate engagement, we maintain a robust dialogue with key decision-makers for our investment holdings. Our fixed income team benefits from the strong relationships and access to management through their equity counterparts.

Corporate (non-financial)

Please see above.

Securitised

Please see above.

12.3. Additional information.[OPTIONAL]


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