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American Funds SMALLCAP World F1 SCWFX Sustainability

| Analyst rating as of

Sustainability Analysis

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Sustainable Summary

American Funds SMALLCAP World Fund may not appeal to sustainability-conscious investors.

This fund has above-average exposure to ESG risk relative to its peers in the Global Equity Mid/Small Cap category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. Investors concerned about ESG risk may be better off with funds earning 4 or 5 globes, as they tend to hold securities less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change and inequalities, 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 SMALLCAP World Fund 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.

Currently, the fund has 3.54% involvement in fossil fuels, which compares favorably with 5.54% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund exhibits negligible exposure (0.51%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, controversies can damage the reputation of both companies themselves and their shareholders.

American Funds SMALLCAP World Fund has an asset-weighted Carbon Risk Score of 10.60. This is situated at the lower end of the medium carbon risk band, suggesting that its current equity and/or bond holdings are moderately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Such funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition.

ESG Commitment Level Asset Manager

 | Basic

Capital Group is making a concerted effort to improve its scattered approach to ESG incorporation, warranting a Basic Morningstar ESG Commitment Level.

Capital’s ESG efforts have lacked structure and direction. The firm tasked its investment professionals with evaluating ESG risks and opportunities but didn’t provide top-down guidance or additional support. Capital didn’t have the necessary ESG specialists to support its army of investment analysts and monitor exposures across the firm’s large number of portfolio holdings. Further, the firm lacked a standardized approach to ESG analysis and engagement.

Yet Capital has recently prioritized ESG, leveraging its scale to construct internal processes. The firm has carved out a 16-person ESG team, with plans to hire additional support in the coming months. This group is working with Capital's industry analysts to construct and codify a firmwide ESG framework, which includes layering ESG metrics into quantitative investment screens to evaluate investment risks and prompt engagement with company management. The ESG team will also help portfolio managers monitor ESG exposures at the strategy level. Capital is also building a proprietary platform that will serve as the firm’s central ESG repository, housing internal and third-party data and fostering collaboration. Although these tangible efforts should bolster Capital’s ESG capabilities, there’s still considerable work outstanding.

Capital’s nascent ESG team should help clarify the firm’s philosophy. The firm has long advocated for shareholder-friendly corporate governance policies, though its stance on environmental and social issues is less clear. Capital eschews comprehensive, decisive statements, preferring to handle those matters internally at the industry and company levels. Although two of the firm’s oldest strategies exclude alcohol and tobacco stocks, most strategies don’t face exclusionary restrictions. Finally, Capital has robust systems to track and report proxy voting by strategy, but the firm could provide more insight into key voting decisions in its disclosures.