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Capital Group

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » Outputs and outcomes

Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

Screening reduces the investment universe in funds where exclusions of certain companies or sectors are a stated objective, such as tobacco and alcohol.

Screening reduces our investment universe for segregated accounts where individual clients have requested a specific set of exclusions be applied to their accounts.

Specify the percentage reduction (+/- 5%)

5 %

Select which of these effects followed your ESG integration.

12.2. Additional information.[Optional]

ESG factors can act as a signal to buy or to sell a stock; decisions not to buy are also considered positive choices. Analysts with concerns over a company's bylaws, e.g. super voting rights for selected shareholders, might consider this a signal to not invest. Similarly, where environmental or social issues are identified as major areas of risk, we will engage with company management. If we fail to achieve a positive resolution with the company, we could, and have, chosen to divest. 

ESG factors are not static and they can develop over time or even relatively quickly. Our investment approach recognises this. We, therefore, are continually monitoring those companies in whom we invest and those companies we do not. Our long-term approach ensures that we are able to infer from the current decisions of management what impacts, positive or negative, those decisions may have on the future prospects and long-term sustainability of the business. The quality of the management team is paramount to our investment thesis throughout the lifecycle of the investment.

 

 

 

 


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Air travel innovations impact climate

Cleaner fuels and industrial materials are a necessary component of improving environmental conditions. Our industrials and materials analyst has closely followed innovations from a large industrial company. Earlier in 2019 the company released details of bio-jet fuel. The bio-jet fuel releases 65% to 85% less greenhouse gas emissions than petroleum-based jet fuel. This fuel has already powered trans-Pacific flights and doesn’t require changes to the aircraft fuel tanks or other technology.

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

According to our sector analyst, the ability and amount companies in this sector are able to innovate is the key to their long-term success.  Innovations such as this better position the company to navigate the potential ESG risks and opportunities the company may face.  As this company builds both the products and the process, they can scale pricing to make their products competitive.

ESG factor and explanation

Governance Improvement

In China, the transition of a major appliance manufacturer from a state-owned enterprise (SOE) to a public company is a first-of-its-kind example of Chinese SOE reform. This change was brought about after a China-based investment firm purchased a 15% stake in from the local government. The move is considered a positive development in our analyst's evaluation of the company’s governance, with the potential for several positive implications for the company.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

The investment decision is influenced by how the company’s operations might improve with greater scrutiny from the new owners; how the use of equity compensation to executives could impact incentives and the firm's long-term prospects; and how the investment market’s perception of the company might improve, which could potentially lead to a higher valuation. Having the new shareholders greatly increases the chance of unveiling the intrinsic value of the firm through better investor communication and better governance.

ESG factor and explanation

Valuing social impact of pharmaceutical companies

Pharmaceutical companies have significant social impact given the effect their products have on human health and well-being. As a long-term investor in a Japanese pharmaceutical company, we value its role in addressing the needs of society globally. The company’s vision is to address social issues by "creating a more vigorous society" while also "protecting people from the threat of infectious diseases".

ESG incorporation strategy applied Integration

Impact on investment decision or performance

According to our sector analyst, the company is executing well on its strategy to build a socially responsible, R&D-driven pharma business focused on infectious diseases and relieving suffering and isolation in old age.

ESG factor and explanation

Stronger governance to tackle corruption

In a recent visit to Brazil, our Latin America investment analyst met with the vice president of corporate governance for a transport infrastructure firm. The company is revamping its internal controls around bribery and corruption in public contracts, and commissioned an independent internal investigation.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

According to the analyst, infrastructure is the most corruption-prone sector in Latin America and virtually every single construction company has faced allegations of impropriety in the past few years. While the company has arguably the strongest governance in the industry, it has faced lawsuits around illegal campaign contributions and bribes. The company has now reached a turning point. Having implemented robust controls, management can put the legal issues behind it and focus on growing its core business.

ESG factor and explanation

Identifying renewable leader

Utility companies are becoming increasingly focused in their pursuit of decarbonisation. On a recent visit to one of the innovation hubs of an Italian utility company, our analyst saw an innovative company that he considered materially different from the market’s general perception. The company is typically treated as a sprawling, complex machine, exposed to Italy’s macro risks. However, our analyst’s impression was that “the company’s innovation efforts to reduce costs, increase safety and drive revenue opportunities could open up a significant competitive wedge against other utilities unable to innovate at scale.” Innovative projects he noted ranged from “heterojunction bifacial” solar panels that capture 30% more solar energy, to customised, inflatable motorcycle jackets for line-workers, which are equipped with technology to detect falls.

By devoting significant resources to on-the-ground research, our analysts can gather material ESG information without relying on external data providers, while linking it to the business case.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

According to our sector analyst, the company has taken huge strides in transforming itself into a renewables leader, bringing green and affordable energy to the world at scale. The analyst’s approach to ESG is based on sustainability of earnings. The only way for an electricity generation business to have earnings in 20 years is to seek leadership in renewables, which will ultimately replace most thermal generation because of lower all-in costs. Environmental sustainability and financial sustainability go hand-in-hand.

13.2. Additional information.[Optional]


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