Pursuing Sustainable Investing With a “Best-in-Progress” Approach
The future may lie in recognizing companies advancing sustainability even before they achieve “best-in-class” status.
Key Takeaways
Many investing approaches that incorporate sustainability focus on companies already recognized as best-in-class or leaders in sustainability issues.
We believe a best-in-progress approach can identify companies with the potential to deliver real-world outcomes and generate alpha while helping reduce the style biases seen in best-in-class strategies.
Our framework leverages the best-in-progress concept in a Global Sustainable Value strategy that seeks to deliver attractive financial returns while contributing to a more sustainable world across every sector of the economy.
Institutional asset owners must decide whether to focus solely on established sustainability leaders or broaden their horizons to include companies making active progress toward a sustainable future but not yet achieving best-in-class status. We believe the future of sustainable investing lies in recognizing and embracing the potential of so-called best-in-progress companies. Here's why.
Shifting the Focus from Best-in-Class to Best-in-Progress Firms
Many sustainability-minded investors have tended to gravitate toward companies already achieving top-tier sustainability ratings. While this approach has merit, it may overlook a significant opportunity: investing in companies actively pursuing and making substantial progress toward sustainability but not yet being recognized for the value their efforts generate.
We believe these best-in-progress firms offer three potential benefits to institutional asset owners:
1. Driving Real-World Outcomes
By investing in companies committed to improving sustainability, investors can contribute to positive environmental and social change and benefit from the economic value these efforts create. In this way, investors help to accelerate progress toward a more sustainable future.
2. Generating Alpha
Identifying companies creating value by pursuing sustainability may lead to higher excess returns. These companies may be undervalued by the market, offering opportunities for investors to benefit from their growth potential and commitments to sustainability.
3. Reducing Size, Sector and Style Biases
Traditional approaches to sustainable investing can lead to style biases such that portfolios become skewed toward large-cap growth stocks or specific sectors. A best-in-progress strategy may provide investors with more diversification potential, which can help reduce the risk of over-concentration.
Identifying Best-in-Progress Companies
We developed a robust framework called the Improvement Pathway to implement a systematic best-in-progress approach. Integrating into our time-tested value investment process, this framework seeks companies making active progress in their sustainability efforts. The result: an innovative solution for sustainability-minded institutional asset owners that we call Global Sustainable Value.
The Global Sustainable Value strategy leverages the best-in-progress concept to construct portfolios that seek to deliver attractive financial returns while contributing to a more sustainable world. It's an investment strategy built on the belief that by supporting companies in every sector of the economy committed to pursuing opportunities and reducing the risks that environmental and social issues present, investors can create positive outcomes for their portfolios and the planet.
Sustainable Value: The Way Forward
Institutional asset owners have choices in pursuing sustainable investing, and we believe the best-in-progress approach offers a fresh perspective on navigating this complex landscape. By looking beyond traditional sustainability leaders to identify companies actively working toward a greener future, investors can drive real-world outcomes, seek new opportunities that could generate alpha and reduce style biases in their portfolios.
The future of sustainable investing is about more than making marginal improvements in where we are today; it's about acknowledging the tremendous potential for progress. To delve deeper into this transformative approach and learn how it could benefit your portfolio, we invite you to read "Investing with a Best-in-Progress Approach." It's a roadmap to unlocking the untapped potential of investing in underappreciated companies embracing opportunities in sustainability.
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: 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.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
Diversification does not assure a profit nor does it protect against loss of principal.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.