Letter to Shareholders
With July 2023 coming in as the warmest month ever recorded, it’s becoming more difficult to ignore the perils of global warming and climate change. Unfortunately, July isn’t an outlier as global temperature records have been occurring more frequently since the early 1980s.
To help size up the problem, some scientists have estimated a relationship between accumulating levels of greenhouse gases in our atmosphere and rising global temperatures. Their work suggests that at the current growth rate, we have 11-14 years until we begin to enter the zone of potentially irreversible climate disruption and harsher environmental adversity. How a business plans and manages for potential future risks and opportunities, including climate, is growing ever more critical in today’s investment landscape.
The recent conversation around sustainable investing has taken a decidedly political and values-based tone. We prefer to direct the conversation toward our investment-led process, which seeks to integrate sustainability to add value rather than impose our values on the portfolio. We seek to identify companies that best integrate sustainability into their business operations to maximize shareholder value across all sectors of the economy.
American Century’s Sustainable Research team has identified five themes and subthemes to assess long-term sustainability-related risks and opportunities:
Diversity, equity and inclusion, wage structures human/labor rights, and upward mobility.
Recycling, production, food systems, and product life extension.
Alternative energy, biodiversity, water, climate mitigation, and climate technologies.
Innovative treatments, improved medical equipment and services, access to medicine and health care services, and solutions to reduce health care costs.
Environmental, social and governance (ESG) aspects of digitalization, financial technology, ecommerce, connectivity, and automation.
Importantly, these themes are not siloed—they impact each other. This framework helps us to identify these interrelationships and take a holistic view of sustainability.
We continue to be encouraged by the sustainability commitments many companies are making across our five themes and we highlight several in this report. While sustainable investing and investors’ expectations evolve, our core beliefs remain:
Companies that excel at managing both business fundamentals and material ESG issues will likely outperform their peers over time.
ESG analysis complements traditional financial analysis and results in a more comprehensive understanding of risks and opportunities.
ESG integration, rather than exclusionary screening, improves diversification and produces a more robust opportunity set.
The value and/or returns of a portfolio will fluctuate with market and economic conditions.
Different investment styles tend to shift in and out of favor depending upon market and economic conditions, as well as investor sentiment. A fund may outperform or underperform other funds that employ a different investment style.
There is no guarantee that the investment objectives will be met.
International investing involves special risks, such as political instability and currency fluctuations.
Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Investing Definitions:
Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.
Sustainability Focused: Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, best-in-progress, thematic, and impact approaches.
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.