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By Guillaume Mascotto - September 21, 2018
Environmental, Social and Governance (ESG) investing continues to gain momentum in investment management. Yet managers and investors still disagree about the most effective approach to ESG investing. An immediate step that American Century Investments® ESG and Investment Stewardship team took in the expansion of our ESG capabilities was the creation of an integration framework to help our analysts and portfolio managers assess ESG risks and opportunities through their investment process.
Combining both top-down and bottom-up inputs, the framework is aligned with our fundamental analysis process, and can be applied to various investments strategies in the equity and fixed income space.
American Century Investments' ESG Integration Framework is composed of three layers of analysis: macro (Global issues), sector, and issuer (i.e., company or security).
We leverage third-party research and in-house macro assessments to identify ESG issues which could potentially affect long-term global market dynamics and regulatory developments. Examples include climate change, cybersecurity (including privacy), technological advancements, demographic changes (including population growth and urbanization in emerging markets).
Given that not all sectors are exposed to the same macro issues, our ESG team works with our sector analysts to isolate the issues that could potentially alter long-term sector-specific competitive forces. As a result, we created proprietary sector weightings across environmental, social, and governance pillars.
For example, environmental issues may be most relevant in asset-intensive sectors such as energy and construction. However, they're not as relevant to the financial or healthcare sectors, where the "S" and "G" pillars would warrant higher weights. Our analysts whittle down the full set of available ESG factors to the ones most relevant, from a financial standpoint, to that sector.
While sectors could be exposed to the same ESG issues, their level of significance can vary across companies. To assess whether sector ESG issues could result in risks to a company's market valuation or cause a downgrade of its fundamental profile, we use two proprietary tools.
The first is the American Century® Sector Relative E&S Value, which allows our analysts to measure and rank companies' relative performance against various quantitative environmental and social (E&S) indicators derived from reported data. The tool also captures whether a company's risk management practices against the issues above in step two (sector analysis) are getting better or worse over a three-year period.
Governance risk analysis is already central to our fundamental research process. We designed a complementary governance tool, the American Century® Governance Heat Map, which benchmarks companies against an extensive list of governance indicators based on both company reported and third-party data, regardless of sector. Governance issues include business conduct, board independence, accounting practices, risk management structures and executive pay-for-performance alignment.
We believe it's crucial to maintain the independence of our fundamental analysts and the integrity of the investment process. That's why the ESG views our three-layered framework create are considered in the context of our analysts' fundamental research process, with a focus on investment performance implications.
Plus, our access to company management contributes to our ESG team's views on selected names. The portfolio management team works closely with our ESG team to address with company management any material ESG issues and controversies our process identifies. Portfolio managers can consider these engagement inputs when evaluating investment decisions.
Our ESG integration framework also extends to our active ownership initiatives. We created an ESG Proxy Team, which reviews ESG-related proxy proposals affecting client portfolio holdings. The ESG Proxy team assesses the financial significance of the ESG issues underpinning the proposals and makes voting recommendations to portfolio managers.
We apply our framework across our global and non-U.S. equity discipline and various strategies in our U.S. growth equity discipline—and we're working to find out how we can apply it to more investment disciplines. As we strive to deliver superior investment results, we'll continue to grow our ESG resources and strengthen our cross-functional collaboration. We'll also continue to offer customized solutions across the various approaches to ESG investing to help our clients meet their investment objectives.
The ownership structure of American Century Investments is unique in the asset management industry. With over 40% of our company dividends distributed to the Stowers Institute for Medical Research, we enable our clients to directly support important research and contribute to the global fight against cancer and other gene-based diseases. With responsible investing firmly rooted in our DNA, American Century Investments' focus on ESG factors is integral to our corporate citizenship and business model. This aligns us with goal number three (good health and well-being) of the U.N. Sustainable Development Goals (SDG), a collection of 17 global goals the United Nations established in 2015 .
Also, American Century Investments is a signatory of the United Nations-supported Principles for Responsible Investment (UNPRI) , publicly demonstrating our commitment to ESG and responsible investment. Against this backdrop, we will continue to leverage our unique and long-held responsible investment business model by creating differentiated impact products for our clients, especially in the healthcare and life sciences themes.
Focusing on quality has historically led us to companies with strong financial and ESG characteristics.
A successful ESG integration strategy relies on 10 key steps.
Listen to our experts Bernard Chua, CFA and Jonathan Bauman, CFA discuss how American Century approaches Environmental, Social and Governance (ESG) investing and how it's incorporated into our new ETFs.
We discuss carbon emissions exposure at the sector and industry levels by considering electricity usage by data centers, a large and growing segment of the information technology sector.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.