Portfolio Manager David Byrns argues exclusion of “worst performing” industries results in “disconnect” between sustainable fund flows and real world outcomes.
American Century Investment’s new Global Sustainable Value Equity Strategy will actively engage with firms that have sustainable potential irrespective of the wider perception of the industry they operate in.
David Byrns, Portfolio Manager at American Century, told ESG Investor the firm believes current sustainable offerings have “failed to deliver on real world outcomes because of their construction”.
He noted that despite trillions of dollars flowing into sustainable funds, global greenhouse gas (GHG) emissions and coal demand hit an all-time high last year.
Byrns said that the “disconnect” between the “massive flows into sustainable funds” and real world outcomes is largely due most sustainable funds being constructed to “exclude the worst performing industries”.
“For us to decarbonise society, we need to get emissions down in these incumbent businesses,” Byrns said. “We think the best way to accomplish this is to invest in them and actively engage with the management teams to ensure their performance improves.”
American Century emphasised the role active engagement can play in “further driving improvements and creating lasting change”.
Byrns said that the strategy’s objective is to offer “sustainability minded” investors a solution that “drives real world outcomes and generates an attractive, differentiated return profile”.
He added that this is something current sustainable offerings have “yet to deliver on”.
The strategy is implemented by the value team at American Century, which has more than US$35 billion in AUM and more than three decades of value portfolio management using the “same philosophy and process”.
Byrns pointed to the strategy’s ability to “alleviate or eliminate style tilts” that are “inherent in most traditional forms of sustainable investing” as being a further benefit.
The private investment management company’s investment team will collaborate with its sustainable research team to identify suitable companies for the new strategy, including those with improving sustainability characteristics that “may be undervalued by the market”.
“The teams collaborate in a number of ways, such as sustainable and field-level research, engagements, and reporting,” Byrns said.
The strategy’s holdings will be sourced from the firm’s 575 company universe, which has been developed over 30 years and utilises the existing valuation framework the team has for each security. American Century’s value team applies sustainability research and valuation work across every security in this universe.
“It’s a big competitive advantage,” Byrns noted.
The strategy will maintain 45-75 securities to be managed by Byrns, alongside Global Value Equity CIO Kevin Toney and Senior Portfolio Manager Michael Liss. Byrns stressed that the securities will be diversified across economic sectors and that all holdings will have a “well-defined pathway to improving the sustainability of its business model”.
“Every company in our portfolio needs to be on a path to improvement from a sustainability perspective,” he said.
“One of the goals of this portfolio is to drive real world outcomes and the best way to do that is to drive business model progression,” Byrns added. “We’re extremely excited about the benefits it can offer to clients, so we are excited to explore partnerships with potential investors.”
Framework for improvement
The firm’s investment team will use American Century’s Improvement Pathway (IP) framework to identify companies that recognise the importance and value of transitioning their business operations to support a more sustainable economy.
The proprietary framework identifies companies with improving sustainability profiles currently not appreciated by the market in four categories. These include sustainable committers, operational improvers, unrecognised leaders, and sustainability enablers.
Committers are firms seen to be “actively enhancing” the sustainability profile of their own or their customers’ businesses through capital or operating investment. Improvers are companies that “might have been mismanaged from a sustainability perspective” but are working to address these issues.
Leaders are sustainability leader businesses that do not receive proper credit for their leadership positions, while enablers are firms with “indispensable” products or services to a sustainable economy but can be “masked by the nature of their underlying business”.
The IP framework was enabled by a key performance indicator (KPI) framework, which has built out a “comprehensive set” of KPIs for each individual industry in American Century’s investable universe.
“The KPIs give us something to hold ourselves [and our] management teams accountable to,” Byrns said.