The American Century Sustainable Equity ETF (ESGA) seeks to enhance returns and positive social impact by using a fundamental approach with a unique blend of financial analysis and environmental, social and governance (ESG) screening criteria that provides a comprehensive view of securities. Generally, the fund performs well in accountability and intentionality, while credibility and transparency could be further improved, since it is mentioned that the fund is different from traditional ETFs as it won’t tell the public what assets they hold each day to ensure investment safety. To sum up, I give the ETF 1.4 out of 3 planets for its rating.
The top ten holdings of the fund are Microsoft Corp, 8.24%; Alphabet Inc, 5.15%; Apple Inc, 4.56%; Amazon.com Inc, 2.85%; Prologis Inc, 2.14%; NextEra Energy Inc, 2.11%; ConocoPhillips, 2.09%; Schlumberger NV, 1.99%; UnitedHealth Group Inc, 1.95%; Visa Inc, 1.86%. As of July 2022, the fund has total assets of $120,422,808.22 and shares outstanding of 2,570,000.
By screening the top holdings of the fund, its top three holdings are Microsoft, Google Class A shares, and Apple Inc. (AAPL), and it generally avoids controversies, though it is exposed to controversial weapons with its 0.81% weighting of Lockheed Martin Corp. After breaking down the fund portfolio by sector, the fund has 27.6% of its holdings on information technology, which is slightly higher than the average of other funds (26.84%). The fund’s sector breakdown is almost comparable to the industry average, with a higher number of investments in materials (3.23% compared with 2.6%) and a smaller number in utilities (2.12% compared with 3.1%). The total investment in utilities, energies, and healthcare is around 20%. However, given the fact the fund doesn’t have an outstanding performance in sectors that are directly influencing the environmental performance, it is hard to define whether the fund could bring strong positive impacts in dealing with environmental issues. It is also stated in its investment strategy that the fund “seeks to outperform the benchmark without taking on significant additional risk”. Investing in energy-intensive and resource-intensive industries does add potential risk in financial returns, which could be a concern for many fund managers. Overall, I will give the fund 1.2 out of 3 planets.
According to USNEWS comments, this ETF has a “secret”: it uses a proprietary model that incorporates value, future growth and ESG metrics and doesn't disclose certain information in order to prevent other traders from copying its strategy. The confidentiality for investment purposes hurts the fund’s transparency in understanding the detailed selection criteria and investment reasoning. The fund does receive high ratings among third-parties. In detail, approximately 44% of its holdings receive an MSCI ESG rating of AA and above, and 1% are rated B or below. ESGA's combined holdings have a moderate average carbon intensity of 113.3 tons of CO2 per million in sales, with 7.2% of revenues coming from green sources and 2.3% from fossil fuels. The weighted average board of directors for its holdings is ranked 83.1% on independence and 33.2% on diversity.
In the Portfolio Commentary, the fund looks for stocks of medium-capitalization companies they believe will increase in value over time, using proprietary fundamental research. It is claimed that the initial research process begins by analyzing themes aligned with the United Nations Sustainable Development Goals (SDG) to identify companies that generate, or could generate, social and environmental impact alongside a financial return. For example, portfolio managers will consider a company’s carbon emission profile (environmental), a company’s employee turnover rates and digital privacy (social), and a company’s corporate leadership, including board chair independence and the independence of audit and compensation committees (governance), as stated in the Prospectus.
The total portfolio impacts 64% of technological progress, 57% of environmental protection, 35% of sustainable living, 33% of healthcare, and 11% of empowerment. According to its impact thesis, the fund performs well in reducing its carbon footprint and outperforms many other ETFs in the market. Statistically, the three-year simple average carbon emissions for all the holdings in the portfolio is 174,949 tCO2e, 72% lower than the Russell Midcap Growth Index (an index that measures performance of the 800 smallest of the 1,000 largest publicly traded U.S. companies, based on total market capitalization with higher price-to-book ratios and higher-forecasted growth values). It also affiliates to the Carbon Disclosure Project (CDP) and Task Force on Climate-Related Financial Disclosures (TCFD) in demonstrating the credibility of measurements. Personally speaking, I consider that the public data could be more exhaustive in order to demonstrate the performance in addressing different environmental issues. For example, as stated in the impact thesis, the fund invests in companies that recycle plastic bottles, generate renewable energies, and purify recycled water. I wish to see a more detailed description reflected in the impact thesis concerning the quantity of recycled resources, the saved energy, and the benefited communities. Overall, I will give the 1.6 planets out of 3 in “How It’s Made” Section.
The four portfolio managers taking charge of the fund are Justin Brown, Rob Bove, Joe Reiland, and Rene Casis. All four fund managers are specialists in equity management and investments. Among them, Rob Bove was previously with United States Trust Company as a research analyst and vice president in the Equity Research Department covering specialty pharmaceutical, biotechnology, and medical supply companies. However, although the fund managers and the board of trustees do include professionals with backgrounds in healthcare and technologies, I didn’t find anyone on the board of trustees with a solid background in environmentalism. The board leadership structure questions the credibility of the fund’s ESG focus as it is unclear where the fund managers could get references for the invested companies’ environmental accountability. American Century Investments stated on its website that Sustainability is in its genes and its portfolios. While managing ETFs, American Century Investments incorporates a range of approaches that include exclusionary/ negative screening, ESG integration, Positive/ Best-in-class ESG, and impact investing. Given these facts, I would give the ETF a 1.4 planet out of 3 in the “Who Makes It” section.