The key element of our investment approach is always to act in the best long-term interests of our clients according to the fund objectives.

All of our investment activity, including how we integrate ESG issues into investment decisions and our engagement activities, is driven and directed by this principle. Intrinsic to our investment approach is the understanding that long-term sustainable and successful businesses incorporate and manage all relevant factors whether they be economic, financial, operational, environmental, social or governance related. Our bottom-up long-term investment approach therefore incorporates all these factors in a forward looking manner and reflecting the specific context of the issuer or sector.

Engagement with senior management and non-executive board members is also a core element of our investment approach. Engagement helps our investment professionals discern the risk appetites of management, their ability to manage risk, as well as their strengths and weaknesses. The management of risk is an important factor in building our investment thesis as is our conviction in the quality of the senior executive management team and non-executive board. This acknowledges the importance of having a strong team leading the business.

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.

The material climate related risks and opportunities we have identified include:

Risks

• Climate regulation: Companies that do not anticipate regulatory developments may be at risk of a higher cost of capital and more expensive regulation which will affect their business models and, ultimately their valuations. We are mindful about the impacts of carbon emission regulations, which have already created winners and losers. According to our analysts, there is enough public concern and political action to affect industry and investment decisions.
• Stranded assets: Some of our analysts have started to reallocate a portion of their portfolio according to their exposure to stranded assets, beyond the energy sector. They also engage with management to encourage them to be part of the solution and not part of the problem, especially in the mining sector, as it relates to unsustainable activities like thermal coal.
• Divestment campaigns: Whether or not to divest from fossil fuel companies has been considered carefully, and we have taken into account the effectiveness of such an approach and the impact it would have. In the view of some of our analysts, divestment will not lower the global demand for fossil fuels, which is the key to reducing greenhouse gas emissions. The divestment movement will transfer the supply of fossil fuels to less environmentally conscious companies, which may even cause emissions to rise. Therefore, rather than divest, we have to date opted to engage with companies to encourage more climate-friendly action to accompany the transition to a low carbon economy.

Opportunities

• Energy transition: The transition towards a low-carbon future will be a slow evolution rather than a revolution. However, this "slow evolution" will impact commodity prices, investments and ultimately, stock prices. We believe companies positioned to benefit from the transition to a low-carbon economy are attractive long-term investments. We invest in companies providing low-carbon solutions such as renewable energy, energy efficiency, water and waste management solutions. In fixed income we invest in green bonds issued by financial institutions, utility/energy companies and agencies that fund renewable energy projects.
• Waste management: The waste management industry has significant growth potential because of its increasing importance. By providing collection and optical sorting systems to food and recycling businesses, waste management companies could benefit from major global trends: expanding environmental regulation, increasing recycling rates, greater automation, urbanisation and rising food consumption.
• Electric vehicles: The move towards lower/zero emission vehicles will require significant R&D expenditures. This will ensure that some auto parts companies grow faster than the industry average. To identify opportunities in this field, we look at the proportion of spending on R&D, as a key indicator of which companies are prepared for increasingly restrictive emissions standards.

In our view, the timescale for climate related opportunities is mostly short or medium term, while opportunities deriving from technological shift could be on a medium to long term timescale. We already invest in companies which we believe are benefiting or will benefit from these opportunities.

For climate related risks, the timescale could be further out. We believe the costs of climate change are limited in the short term but can be expected to rise over the next five to ten years. As long-term investors, our holistic and rigorous in-house research leads us to invest in companies which we think are effectively managing long-term risks, including climate risk.

While we have not yet publicly expressed our support for the TCFD, we are closely following its developments. Through our active participation in the Sustainability Accounting Standard’s Board (SASB) Investor Advisory Group, we support greater disclosure of ESG-related data, as such information can help us better assess the long-term value of a company. As it relates to climate-related disclosure across companies’ governance, strategy, risk management, metrics and targets, TCFD’s Implementation Guide extensively references the SASB Standards as a tool for implementing TCFD Recommendations.

The integration of climate related risks is an important part of our research-driven investment process. Capital Group has always invested for the long term on behalf of our clients and incorporated the impact of environmental issues into the decision-making process. As an asset manager, we recognise that clients trust us to invest in a way that helps them to meet their long-term investment objectives. Responsible investing forms an integral part of our bottom-up investment process, reflecting our belief that successful companies are likely to be those that take environmental, social and governance (ESG) issues seriously.

Consistent with our responsible approach to investing, it makes sense for us to be attuned to major sustainability issues, especially as they relate to the environment. With regard to those companies operating in industries about which some analysts might have concerns, we generally favour engagement rather than categorically restricting investment in them. We conduct bi-monthly dedicated ESG calls with analysts and portfolio managers to discuss specific sectors and themes including climate change, and capture examples of ESG integration. Internal and external ESG data forms the basis for the preparation for these calls and referencing our engagement with companies to enrich the discussion.

ESG factors can also be part of a positive investment decision. Our analysts are sometimes able to recommend investing in companies that they believe can deliver superior returns over the long term while providing sustainable environmental benefits. Successful investments have been made in companies that provide renewable energy and irrigation solutions in emerging markets, and in those that deliver energy efficiency benefits. We also follow developments in new technology, such as batteries for energy storage, which could accelerate the transition to a lower carbon economy.

Our parent company, Capital Group, is privately owned and engaged solely in the business of investment management. As a result, we believe we’re less likely to encounter situations where our interests conflict with those of a client. However should a conflict of interest arise, our policy is to resolve it fairly in the best interests of the client. 

Capital associates adhere to our Code of Ethics, maintain the highest ethical standards and must put client interests ahead of the firm's and their own. Key policies support these principles, including rules prohibiting insider dealing, restricting personal trading, political contributions and business-related gifts and entertainment. Rules requiring disclosure of personal or other interests may lead to associates being excluded from the voting decision. The Code of Ethics disclosure is reviewed and signed quarterly by all associates globally.

To prevent undue influence by clients on voting decisions, our process is to scrutinise voting decisions in which Capital’s clients with significant assets under management have an interest. A client may have an interest in a vote by reason of being the portfolio company concerned or by having tabled a shareholder resolution, made public statements or directly attempting to influence our decision.