A Practitioner’s Guide (Part I)

Integrating ESG Criteria in Multi-Asset Portfolios

For more than 60 years, American Century Investments has focused on delivering superior risk-adjusted performance through active management to serve the best interests of clients. This risk-and-return-based investment focus complements our long-standing commitment to socially responsible outcomes. American Century’s ownership structure is unique in the asset management industry. By investing with us, you also invest in the future of others and potentially impact the lives of millions. That’s possible through the distinct relationship with our controlling owner, the Stowers Institute for Medical Research. Our dividend payments support the institute’s dedicated work of uncovering keys to the causes, treatment and prevention of genetically based diseases.1

With sustainable investing firmly rooted in our culture, American Century’s views on environmental social and governance (ESG) factors are integral to our corporate citizenship and business model. We believe integrating material ESG factors into fundamental analysis contributes to better investment outcomes. As of Dec. 31, 2020, 80% of our assets under management integrated ESG considerations.

Within American Century’s Multi-Asset Strategies (MAS) team, we are aware of our clients’ desire for meaningful ESG solutions. Our own history as a firm shows a commitment to responsible investing principles, from our earliest “no tobacco” screens to our present investment approach, which has evolved to a comprehensive assessment of ESG investing considerations. This is part of our focus as a firm on continuous improvement, wherein we review our approach against industry standards and best practices to ensure alignment with our processes.2

This paper is part one of a two-part report laying out our process for integrating ESG principles into our multi-asset portfolios. Our aim is to highlight the various aspects of ESG integration operating at every level of the multi-asset equation, including:

  • Issue and manager/fund selection
  • Sector, credit and geographical allocations within asset classes
  • Asset allocation and portfolio optimization across asset classes

The aim of this report is to provide a framework or context for asset allocators dealing with the pressing complex issue of ESG integration in their portfolios.

We will do so by showing how we incorporate ESG considerations in our own manager evaluation and selection processes. We will delve into the various approaches to ESG, combination of ESG ratings and assessments we use in manager selection, and why we believe asset allocators do well to build a solid framework for integrating ESG considerations and strategies into their multi-asset portfolios, models and fund lineups.

In our forthcoming report (Part II), we will follow up with our views and analysis around how ESG considerations can be factored into the overall asset allocation and portfolio construction process.

We believe the process of integrating ESG principles into multi-asset portfolios is an evolutionary one. Our own approach evinces our commitment to provide investment solutions best suited to our client’s needs and preferences.

Integrating ESG Criteria in Multi-Asset Portfolios

1 Please see our Corporate Responsibility Report.

2 Of course, the drive for ESG adoption has not occurred in a vacuum. Regulators and investment practitioners recognize the need for consistent, reliable ESG disclosure and standards. For example, the CFA Institute is in the early stages of developing consistent, transparent ESG reporting standards. European regulators are setting the bar for ESG-related client communication. As a result, asset managers with exposure to the European Union will need to comply with the new Sustainable Finance Disclosure Regulation and associated EU Taxonomy. These regulations will likely have a positive effect by making "greenwashing" more difficult. Greater transparency and clarity will raise the barriers to entry, and it will be more difficult for asset managers to stick an ESG label on their investment products. Such rigor and oversight is to be welcomed, as it arguably gives a competitive advantage to asset managers with stronger ESG capabilities.

Whether ESG regulations in Europe reverberate globally will depend on the regional context and, by extension, the policy priorities of respective countries. The imperative for addressing and standardizing ESG communication is gaining consensus in the investor community. The U.S. Securities and Exchange Commission recently established a Climate and ESG Task Force in the Division of Enforcement, while Japan’s Financial Services Agency reviewed new rules for mutual funds to protect investors from possible “ESG washing.”

In this context, we believe the U. S., as well as some east Asian and Australasian markets, will likely look at western Europe for guidance on ESG investing best practices. Overall, we believe investors will increasingly demand clear, verifiable evidence that ESG considerations are formally integrated into a manager’s investment process. We wholeheartedly welcome these changes.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

When portfolio managers incorporate Environmental, Social and Governance (ESG) factors into an investment strategy, they consider those issues in conjunction with traditional financial analysis. When selecting investments, portfolio managers incorporate ESG factors into the portfolio's existing asset class, time horizon, and objectives. Therefore, ESG factors may limit the investment opportunities available, and the portfolio may perform differently than those that do not incorporate ESG factors. Portfolio managers have ultimate discretion in how ESG issues may impact a portfolio's holdings, and depending on their analysis, investment decisions may not be affected by ESG factors.

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.

This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your retirement plan investments. You should consider all options before making a decision. Our representatives can help you evaluate all of your distribution options.