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Capital Group

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(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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