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Capital Group

PRI reporting framework 2020

You are in Strategy and Governance » ESG issues in asset allocation

ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe We developed a framework that maps the ranges of potential temperature changes onto ranges of economic and market outcomes. We have also developed a specific scenario practice that ties major uncertainties to ranges of economic and market outcomes, and initiated a process to incorporate the climate uncertainties into this framework.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]

While our analysts typically develop their own proprietary earnings models, we do not have standardized valuation criteria, a mandatory screening process, or an overriding macroeconomic model. Instead, our analysts are empowered to find the financial model they believe best characterizes the industry they cover. In this way, fundamental, bottom-up research drives our firm’s investment methodology.

Analysts evaluate companies’ management structures, financial strength, resources, products, services, business climate, future earnings and dividends. Such fundamental research is crucial for identifying investment opportunities and risks. This on-the-ground research is combined with comprehensive macro analysis, with our equity and fixed income analysts working together to pool resources.

By identifying the difference between the underlying value of a company and the price of its securities, Capital builds its portfolios on a stock-by-stock basis, regardless of their size or volatility relative to their benchmark. Our focus is on long-term investing, not on short-term market swings. Our analysts look for attractively valued companies that can be core holdings for many years.

Other considerations include an appraisal of social, economic, cultural, political, industry and currency factors — all of which may affect the company's financial condition and outlook


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

We look at 2-degree, 4-degree and 6-degree temperature rise scenarios using our in-house framework and analyze the impact on economic and market outcomes. We also look at the implications of incorporating carbon emissions cost into stationary power generation based on a few scenarios: $0 per ton CO2, $10 per ton CO2, $50 per ton CO2, 10% fuel increase and 100% fuel increase. These could help analysts and portfolio managers identify and assess material climate related risks and opportunities, and factor them into investment decisions as part of their fundamental research process.

Describe

Fundamental research is at the heart of what we do and ESG is intrinsic to that process - backed by in-house expertise in engagement and stewardship. Our investment professionals conduct rigorous primary research and construct portfolios from the bottom up by picking companies based on convictions generated by our in-house analysts. These analysts develop deep sector expertise by following the companies in their coverage for many years - and in so doing, build up deep relationships and knowledge of these companies at many levels.

We developed a framework that maps the ranges of potential temperature changes onto ranges of economic and market outcomes, as well as different scenarios assessing implications of carbon cost. We use the outcomes to inform our identification of companies that we engage with on climate change as part of our stewardship activities.  

In general, we believe engagement, not exclusion, is a more effective path toward positive impact. When we have a strong conviction regarding a certain stock but have identified potential climate-related risk exposure, we can exercise our influence as an owner to engage with the company’s key decision makers to manage the risk over time. We have included climate issues in our voting policy. Many of these issues are reviewed and voted on a case by case basis.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

For equities, our typical investment horizon is three to four years, with many investments held much longer. In our scenario analysis, we will consider different investment time-horizons, including long-term scenarios that go beyond our typical investment horizon.

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          In-house scenarios outlined above
        
Other
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

14.4. If you selected disclosure on emissions risks, list any specific climate related disclosure tools or frameworks that you used.

We are advocating the use of SASB's framework that integrates TCFD reporting.

14.5. Additional information [Optional]


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Weighted average carbon intensity
          Monitoring
        
          tonnes CO2e/$M revenue
        
          Scope 1 and 2 greenhouse gas emissions relative to market cap, weighted according to each company's weight in a portfolio. Calculations are based on ISS carbon emissions data.
        
Carbon footprint (scope 1 and 2)
          Monitoring and portfolio reporting
        
          tonnes of CO2e
        
          Absolute scope 1 and 2 greenhouse gas emissions associated with a portfolio. Calculations are based on ISS carbon emissions data.
        
Portfolio carbon footprint
          Monitoring and portfolio reporting
        
          tonnes of CO2e
        
          Absolute scope 1 and 2 greenhouse gas emissions associated with a portfolio. Calculations are based on ISS carbon emissions data.
        
Total carbon emissions
          Monitoring
        
          tonnes of CO2e
        
          Absolute scope 1, 2 and 3 greenhouse gas emissions associated with a portfolio. Calculations are based on ISS carbon emissions data.
        
Carbon intensity
          Monitoring
        
          tonnes CO2e/$M revenue
        
          Scope 1 and 2 greenhouse gas emissions relative to market cap. Calculations are based on ISS carbon emissions data.
        
Exposure to carbon-related assets
          Monitoring
        
          % of portfolio exposed to fossil fuel
        
          Percentage of portfolio’s assets invested in fossil reserve owning companies. Calculations are based on ISS carbon emissions data.
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

All of our funds are managed to their investment objectives on a bottom up basis and we do not have top down policies covering risk management.

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

We actively engage with SASB and its members to encourage companies to use these standards which include TCFD integration.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

9.3 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

          excludes tobacco and alcohol for US investors only
        

Asset class invested

9.3 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

We have had two large listed equity funds since the 1950's offering US investors exposure to blue chip companies which do not produce alcohol and tobacco.

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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