ESG Trends

Explore Our investment Outlook

Two Key ESG Trends We’re Watching

Progress on Sustainable Development Goals Equals Progress on Human Rights

As the world continues to fight the pandemic and mitigate the damage caused by deforestation and pollution, we believe investors will increasingly consider the environment, public health and global economy intertwined. More investors are seeking exposure to the circular economy investment theme.

Asset owners are increasingly interested in issuers rethinking their resource consumption, supply chains, energy usage and manufacturing processes. They seek investments committed to eliminating waste, addressing modern day slavery issues and generating renewable outputs. Circularity can contribute to solving energy, poverty and biodiversity problems.

ESG Issues Create EM Opportunities

While environmental, social and governance (ESG) issues, such as human rights, are often deemed risks, they also offer opportunities in the investment screening process to help advance human rights, especially in emerging markets. These countries have lower standards of living, significant socioeconomic inequalities and fragile ecosystems that make them more vulnerable to environmental damage and epidemics.

Our emerging markets investment teams have identified long-term growth trends and improving corporate practices that we believe can uncover investment opportunities. We believe our mechanism—enabling growth and active engagement—may help tilt portfolios toward high-quality growth issuers. Investors can help achieve positive social impact in these regions, and help advance certain U.N. Sustainable Development Goals (SDGs):

Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations General Assembly. They were developed by a global team of industry and government leaders and adopted by all 193 member states, the SDGs include 17 goals and 169 attendant targets aimed at solving some of the world’s most pressing problems by 2030. The goals include eradicating poverty, providing environmental resources, and achieving gender and income equality.

As global investment markets expand and globalized flows increase, investors’ returns will become more closely tied to the global economy’s success. Not accomplishing the SDGs could add to avoidable macroeconomic risks. At the same time, all investable SDGs drive progress on human rights, while advances in human rights drive the SDGs.

Climate Change and the Energy Sector: Innovate or Be Overlooked

We expect asset owners focused on decarbonizing their portfolios to redouble their efforts. Continued improvement in technological learning curves, toughened environmental regulations and shifts in investment mentalities will continue to support the transition to a lower-carbon economy. This shift can be achieved despite the cyclical recovery and improving consumer confidence that may support a rebound for the energy sector.

Asset owners can still use tactical fossil fuel divestment to reduce climate change-related risks. This is especially true for assets deemed harmful to human health and the environment (e.g., coal, tar sands). But we believe investors will choose to focus their energy sector allocations rather than choose full-fledged divestment.

We anticipate a combination of clean tech (e.g., negative-emissions technologies, batteries, green hydrogen, renewables and bioenergy), thematic tilting and active ownership (e.g., engagement and proxy voting).

Academic research has also shown energy-producing firms—which are often explicitly excluded from ESG funds’ investment universe—can be key innovators. This could potentially support the global BTU green transition. We recommend continued dialogue with energy players that may have room for improvement but have strategic direction for adapting to a carbon-constrained energy system.

Q1 2022 Investment Outlook Resources

A strategy or emphasis on environmental, social and governance factors ("ESG") may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus. A portfolio's ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards.

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.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

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.

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