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Morningstar

American Funds Fundamental Invs 529A CFNAX Sustainability

Morningstar Medalist Rating
| Medalist Rating as of | See American Funds Investment Hub

Sustainability Analysis

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Sustainability Summary

 | Published as of .  Based on data as of

American Funds Fundamental Invs may not appeal to sustainability-conscious investors.

This fund has above-average exposure to ESG risk relative to its peers in the US Equity Large Cap Blend category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. Funds with 4 or 5 globes tend to hold securities that are less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

One potential issue for a sustainability-focused investor is that American Funds Fundamental Invs doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. The fund exhibits relatively high exposure (9.64%) to companies with high or severe controversies. Companies with controversies may be involved in incidents such as corruption, employee abuses, and environmental incidents that have a negative impact on stakeholders or the environment. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they can damage the reputation of both companies themselves and their shareholders.

American Funds Fundamental Invs has an asset-weighted Carbon Risk Score of 7.7, indicating that its companies have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.

Currently, the fund has 7.5% involvement in fossil fuels, which is roughly in line with 8.5% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

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ESG Commitment Level Asset Manager

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Growing, but yet to bloom.

Capital Group’s ESG resources rest predominantly with its 45-plus central sustainability team, which supports the broader firm in incorporating ESG risks into the investment process. Since 2018, the firm has made 25 external hires including a global head of ESG and an ESG integration lead. The integration lead works directly with equity portfolio managers to deepen their understanding of ESG risks and opportunities, as well as enhancing the firm’s tools by embedding ESG metrics and frameworks in the central database.

In 2020, the ESG team set out to build 30 proprietary, sector-specific investment frameworks that would distill the ESG and investment analysts’ perspectives on the most material, long-term sustainability issues. Backed by several dedicated software engineers and product managers, the in-house ESG platform—Ethos — aggregates and displays the data for sector-specific material ESG considerations. Although the firm does not offer ESG-focused products in the United States, it makes sure that the data is available to all in-house investors. For the most part, investment teams analyze ESG data from the bottom up, alongside traditional financial data, and integrate it as they see fit.

The firm continues to use its voice as a large asset manager to advocate for climate-related disclosure through comment letters to regulators and engagement with different investor coalitions. For instance, the firm signed on to the Net Zero Asset Managers initiative in 2022 and is set to publish its emissions reduction targets before the end of 2023.

Although Capital Group continues to strengthen internal resources and broaden external engagements, the firm still has room for improvement in its own disclosure practices. It does not report its rationales for proxy-voting decisions, and outside of a few scattered governance topics, the firm lacks a clear engagement and escalation policy outlining priorities and expectations for outcomes at portfolio companies. Explicitly detailing desired outcomes on climate change and clearly outlining the firm’s escalation strategy for companies that lag on environmental and social priorities would bring the firm closer to best practice.