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Capital Group

PRI reporting framework 2020

Basic information [OO 01 - 09] Asset class implementation gateway indicators [OO 10 - 12] Peering questions [OO LE 01 - HF 01]

Strategy and Governance

Investment policy [SG 01 - 04] Objectives and strategies [SG 05 - 06] Governance and human resources [SG 07 - 08] Promoting responsible investment [SG 09 - 11] Outsourcing to fiduciary managers and investment consultants [SG 12] ESG issues in asset allocation [SG 13 - 15] Asset class implementation not reported in other modules [SG 16 - 17] Innovation [SG 18] Communication [SG 19]

Direct - Listed Equity Incorporation

ESG incorporation in actively managed listed equities [LEI 01 - 10] Implementation processes [LEI 01 - 10] (A) Implementation: Screening [LEI 04 - 06] (C) Implementation: Integration of ESG factors [LEI 08 - 10] Outputs and outcomes [LEI 12 - 13]

Direct - Listed Equity Active Ownership

Overview [LEA 01] Engagement [LEA 02 - 08] Outputs and outcomes [LEA 09 - 11] (Proxy) voting and shareholder resolutions [LEA 12 - 21]

Direct - Fixed Income

ESG incorporation in actively managed fixed income [FI 01 - 12] Implementation processes [FI 01 - 03] (C) Implementation: Integration [FI 10 - 12] Fixed income - Engagement [FI 14 - 16] Outputs and outcomes [FI 17 - 18]

Confidence building measures

Confidence building measures [CM1 01 - 07]

Export Public Responses

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

(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.

Example 1

Type of fixed income

Corporate (financial)

Corporate (non-financial)

ESG factors

Environmental

Social

Governance

Screening

Norms-based

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.

Example 2

Type of fixed income

Corporate (financial)

Corporate (non-financial)

ESG factors

Environmental

Social

Governance

Screening

Norms-based

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.

Example 3

Type of fixed income

Corporate (financial)

Corporate (non-financial)

ESG factors

Environmental

Social

Governance

Screening

Norms-based

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.

Example 4

Example 5

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

Analysis is performed to ensure that issuers meet screening criteria

We ensure that data used for the screening criteria is updated at least once a year.

Automated IT systems prevent our portfolio managers from investing in excluded issuers or bonds that do not meet screening criteria

Audits of fund holdings are undertaken yearly by internal audit or compliance functions

Other, specify

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

None of the above

06.2. Additional information. [Optional]

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