Faced with environmental, social and governance challenges – chief among them being the unfolding climate crisis – fund managers can play a decisive role in creating social and environmental value while seeking to provide investors with attractive returns on their investments.

A new investment approach

In this new episode in our “Investing for the long term” series, Matt Lanstone, Head of ESG Research and Investing at Capital Group, talks about the key changes currently underway in the world of ESG investing. “With the advent, or rather the growing importance, of ESG concerns, we’re seeing a fundamental shift in thinking about long-term investing,” explains Lanstone. “In today’s world, it’s vital that we integrate environmental, social and governance aspects into our overall investment approach. That means we don’t look at them as a basis on which to offer an independent or isolated product; rather, we adopt an integrated approach to each and every investment with the aim of helping companies build sustainable business models. In other words, for us, ESG factors transcend the investment approach.”

Mastering knowledge to maximize influence

o integrate ESG issues into its view of long-term investing, Capital Group has first and foremost invested in fundamental research. The challenge here is to master ESG criteria so they can be considered and integrated into the heart of portfolio construction. “We always invest over a three- to five-year period, if not longer in many cases. Developing a long-term view is absolutely critical when it comes to ESG. Sustainability issues, by definition, are long-term issues. So we’re able to align with that way of thinking and take into account sustainability issues when we’re thinking about long-term financial returns,” continues Lanstone.

However, if asset managers want to help drive operational change on the ground to support a more sustainable approach, they cannot content themselves with playing a passive role. “Our approach is to work with teams of investment managers to understand their objectives and commitments in relation to sustainability. The key is to also be able to share with them our knowledge of ESG so they can dialogue as effectively as possible with the companies they invest in – about developing their business, making operational changes that drive continued progress toward their environmental and social objectives, and improving their governance,” adds Lanstone. 

Data-driven approach

Any successful ESG approach must be underpinned by data. These days, the field of sustainable investing is awash with data providers offering assessments and ratings that are meant to help asset managers. However, the data they provide isn’t always specific or accurate. “We’re very careful when we’re using third-party data,” says Lanstone. “While this data is important, we mainly use it as the start of a conversation with management teams at the companies we invest in, to gain an understanding of their issues and get a handle on their risks. The idea isn’t just to use the data and then bolt it directly onto our portfolio construction, like you might do with stock-picking criteria, but to verify it, dig into it and use it to build a deeper understanding.” 

Choosing relevant criteria

Using this approach, Capital Group is able to better assess the issues and focus on those factors that are truly material in the target investment sector. This means each investment can be aligned with the investor’s personal objectives. “The way we work that out is by pulling together groups of experts, who on average have been following their industries for 14 years or so. Drawing on their knowledge, we ask them to tell us what really matters and we then stick to those key criteria when we’re putting together and managing our portfolios,” explains Lanstone.

Guarding against greenwashing

Capital Group sees greenwashing, which could undermine investor confidence, as a serious threat to be guarded against. “While it’s important to understand the industries, sectors and companies you’re investing in, it’s just as crucial to take the time to talk to investors. You have to be clear about the objectives so you can make sure your investment approach is aligned with the investor’s aspirations.” 

ESG investing is forcing the financial industry to face up to new challenges. As it navigates this change, the industry has a key role to play in nurturing the emergence of a more sustainable, responsible and balanced world. “That means adapting, as we have done, so as to able to better leverage these changes. It’s also vital to develop new knowledge and invest in talent,” concludes Lanstone. 

To learn more about Capital Group’s expertise in emerging markets, visit .