Sustainable investing is often knocked down for poor performance, but Joe Rieland says that, if anything, using Environmental, Social and Governance Metrics Increases shareholder value.
The performance of his $3.9 billion US Century Sustainable Equity Fund (ticker: AFDIX) confirms this. Sustainable Equity is a Morningstar five-star fund that outperforms both the S&P 500 index and the large-blend category. on one-, three- and five-year basis, Also on a five-year basis, Sustainable Equity sits in the top 5% of its peers, and does so with an average expense ratio of 0.79%.
Riyland, the fund’s senior portfolio manager, explains that sustainable companies have strong governance at the management and board levels and often have low employee turnover because they are actively engaged in enhancing worker satisfaction and career development. They are generally conscious of their carbon footprint by effectively managing costs and resources, which usually means generating less waste and using less water and electricity.
“That means your costs are likely going to be lower, your margins are going to be higher, and that company is going to be more profitable,” Rieland says. “At the end of the day, shareholders are going to have more value.”
The 46-year-old, based in Kansas City, MO, joined American Century in 2000. He became the fund’s portfolio manager in 2008. Prior to joining American Century, he was an equity analyst at Commerce Bank in Missouri.
Two of Ryland’s co-managers, Justin Brown and Rob Bove, have also been with the fund since 2008, when it was called Fundamental Equity. In 2016, the team changed the existing quantitative and fundamental strategy to include sustainability analysis as more companies began to address the topic, and they changed the fund’s name to Sustainable Equity.
Managers balance quantitative metrics and fundamental research when they review potential holdings. On the quantity side, they look for stocks with positive growth, quality, valuation and momentum factors. The fundamental side seeks to improve the business, zeroing in on strong cash flows, which gives management the flexibility to meet needs. They also consider growth in earnings, margin and return on equity.
Their ESG analysis balances quantitative metrics using third party ESG ratings and their own fundamental analysis. The best names will be at the center of the Venn diagram of these analyses.
A change of strategy five years ago meant ousting companies like oil giant Exxon Mobil (XOM). 5 holding of the fund, Prologis (PLD), a commercial and industrial real estate firm, was one of its first purchases under the new strategy.
Riyland says Prologis is well positioned to benefit from growing e-commerce, with cities having favorable warehouse locations. He said the company has one of the largest green-certified building portfolios in the region and one of the largest generators of solar power in the US. Additionally, he says, Prologis has “great worker-training development programs.”
In April 2020, the fund added Aptiv (APTV) after the Irish auto-parts company was shown on its quantitative screen. Aptiv has broad capabilities in both vehicle electrification and active auto-protection features. “They’re at the crossroads of a lot of sustainability trends that’s really feeding that cash flow, that business-improving profile,” Rieland says.
Rather than omitting entire sectors like some ESG funds, Ryland evaluates companies by sector relative to peers, looking for the most sustainable in each. This means the fund may have a smaller stake in ConocoPhillips (COP). Ryland says the oil and gas exploration and production company is “very mindful of greenhouse gas emissions and lead.”
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The fund’s No. 8 holding is NextEra Energy (NEE), a utility with a focus on fossil-fuel and nuclear power generation, as well as a large and growing renewable energy business. NextEra’s strong cash flow growth enables it to reinvest in renewable energy, and focus on storm-resilient energy facilities by replacing wooden transmission structures and buried power lines.
Having some energy risk may not sit well with ESG purists. But that is not Ryland’s objective. He wants to make the fund compelling enough for people to go through tough times to say no to sustainable investing. “We want a joint account to be a competitive alternative to the ERISA plan,” he says. ERISA is the federal law on employee pension and benefit plans.
The United Nations Climate Change Conference, known as COP26, wrapped up earlier in November in Glasgow, with world leaders pledging to reduce methane gas emissions, the most harmful greenhouse gas. Rieland believes the fund will benefit if the focus is on mitigating climate change.
“If the average investor cares more about the environment, cares more about workers and the community, they’re going to buy more kinds of names from us,” he says. Overall, the fund’s holdings produce 67% less greenhouse gas emissions and 97% less waste than the broader S&P 500.
In July, ESG’s head of fund, Guillaume Mascoto, left. Rieland says Mascoto built the firm’s ESG framework, specifically on proxy voting, and that many of his responsibilities were shifted to a now six-person team, including a dedicated engagement analyst. American Century plans to eventually change that, but it will be at the corporate level, not just for the fund.
Increasing a strong focus on sustainability also coincides with American Century’s corporate structure. In 1998, American Century’s founder, Jim Stowers, and his wife founded the nonprofit Stowers Institute for Medical Research, which, in turn, held a controlling interest in the fund company. Forty percent of American Century’s profits, in the form of dividends, fund the work of the Institute.
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