Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/370781/SSO/NA
Last year’s COP26 climate change summit saw countries and businesses make a range of pledges to tackle climate change. Now the challenge is to deliver.
Fidelity International is at the forefront of efforts by the investment industry to support and drive the transition to a net zero future by using engagement as a lever for change. In this collection of features, we take a look at what’s on the agenda this year, including:
The key challenges that need to be addressed. Why engagement is often preferable to divestment. The transition to a net zero future: headwinds and tailwinds.
Engagement, not divestment, is needed to meet climate goals
Carbon-intensive assets must be transitioned rather than sold into private hands
The three major sustainability challenges for 2022
And how Fidelity is tackling them through engagement
FUND Q&A
Walking the walk: Fidelity’s own sustainability plans
How Fidelity aims to make its investment portfolios net zero by 2050
How Fidelity integrates sustainability factors
The building blocks of Fidelity's approach
Focused exposure to global ESG leaders
Fidelity's Sustainable Global Equity Fund
A focus on quality and sustainable dividend payers
Fidelity's Sustainable Global Equity Income Fund
The transition to a net zero future: headwinds and tailwinds
Effective risk management is vital in a time of crisis
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Time to deliver
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Sustainability in 2022
This is for investment professionals only and should not be relied upon by private investors.
• • •
The future of sustainability
Deforestation
Deforestation came to prominence at COP26 when more than 100 countries, accounting for 90% of the world’s forests, pledged to halt forest loss and land degradation by 2030. This was supported by a commitment from countries to provide US$12bn in forest-related climate finance between 2021 and 2025.
Just transition
A second priority for Fidelity in the year ahead is a “just transition”. Tan says this is about ensuring that the social and financial burdens of transitioning to a net zero economy are shared fairly, with no-one left behind. That includes the workers and communities that are dependent on the fossil fuel industry but also those countries that are still reliant on carbon-intensive sources of energy.
In tackling the problem, Fidelity joined 30 other financial institutions at COP26 to sign a pledge to eliminate commodity-driven deforestation risk from their portfolios by 2025. To do that, Fidelity’s sustainable investing team are conducting an assessment of the group’s exposure through their investment portfolios to companies that are significantly contributing to deforestation.
“The loss of forests impacts multiple sectors, including primary industries such as construction and agriculture but also secondary and tertiary industries such as tourism, pharmaceuticals or chemicals.”
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity, says deforestation sits at the intersection of climate change and biodiversity loss: forests are carbon sinks, absorbing about one-third of the CO2 emitted by burning fossil fuels. They are also home to 80% of the world's animals and plant species, and this biodiversity contributes to clean air, fresh water, good quality soil and crop pollination, which are essential to the prosperity of the world’s ecosystems.
He adds: “A just transition is intended to maximise the net social benefits of the transition, whether that is creating higher quality green jobs or mitigating some of those social risks, such as stranded workers and communities.”
A recent report from the World Benchmarking Alliance found that the vast majority of high-emitting companies are failing to demonstrate efforts towards a just transition, which risks leaving key stakeholders behind and excluding them from decisions that affect their future. As such, considerations around a just transition form a critical part of Fidelity’s climate engagements, and Fidelity is engaging with companies to encourage them to consider the wider implications of their transition on their stakeholders.
Tan gives the example of the banking sector, which is exposed to climate change risks through its lending portfolios – banks may be financing assets that will become “stranded” or mortgages for homes that are exposed to flooding or damage from extreme weather events. However, at the same time, “banks are vehicles for the reallocation of capital in our economy and, as such, are a critical element in achieving climate transition.
Tan also gives the example of Fidelity’s engagement with palm oil growers since 2018 to try to halt tropical deforestation. “We’ve pushed them to adopt sustainable palm oil growing practices, while encouraging them to improve the traceability of their supply chains and provide disclosure on their progress.
Tan says: “Deforestation is a systemic risk, similar to climate change. Forests are essential for the provision of water, they mitigate climate change, they produce food for us, they are home to many local communities.
Double materiality
The traditional way of integrating ESG issues into financial analysis has been to look at the impact on the financial characteristics of the company. By contrast, double materiality aims to incorporate not only the financial risks to the company, but also how the company's behaviour can create negative or positive impacts on the environment and society.
“By channelling their capital towards businesses in high-emitting sectors that need support to transition to low carbon alternatives, banks can help these companies to become less carbon intensive while financing investment in climate solutions.”
CONTACT DETAILS
For more Fidelity insights, visit: professionals.fidelity.co.uk/realengagement
Email: premierline@fil.com
Phone: 0800 368 1732
Financial materiality: Banks may be financing mortgages for homes that are exposed to flooding
Material impact: They are also a critical element in achieving climate transition
Today, AAK’s entire supply base is covered by satellite monitoring.(2) Fidelity were encouraged that their discussion with the company was followed by concrete action and are continuing to monitor AAK’s progress towards its target. Other firms are also expanding how they use the technology. The Singaporean agricultural firm Wilmar now uses NASA data daily to identify fires and improve early detection of forest destruction. Read more about Fidelity’s efforts to tackle palm oil deforestation
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One such example was their engagement with AAK, a Swedish oils and fats company. Palm oil is one of AAK’s most important raw materials. Fidelity asked CEO Johan Westman how AAK was ensuring its palm oil was on track to meet its target of being entirely deforestation-free by 2025. Just under 70 per cent of its palm oil met this criterion in 2021, up from 50 per cent the year before. (1) AAK told Fidelity that it was scaling up its satellite monitoring programme to improve traceability throughout its palm oil supply chain. Since Fidelity has engaged with them, AAK has partnered with Satelligence and environmental consultancy Earthqualizer to use satellites to identify deforestation, logging cases as grievances with suppliers and engaging with them to improve their practices. If engagement yields no results, AAK will consider suspending the relationship.
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In 2021, Fidelity’s sustainable investing team participated in the Satellite-based Engagement Towards Deforestation group, which used analytics to push companies sourcing palm oil from Malaysia to end deforestation in their supply chains. Many firms responded proactively and investigated the cases they shared with them.
Case study: How Fidelity engaged with AAK on palm oil deforestation
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The world is facing a series of complex, interdependent problems. And as countries set about the task of delivering on their COP26 pledges, Fidelity has identified three areas that are coming into particular focus: deforestation, a just transition and double materiality. The scale of these challenges is large, but Fidelity is already helping address them through its engagement work.
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Source: (1) 'All about better sourcing of palm,’ AAK, 2021
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For its part, Fidelity is in the process of substantially enhancing its system for rating the sustainability of companies and is explicitly integrating the concept of double materiality within that framework.
In addition, Fidelity collaborated with several institutional investors on a joint statement calling on three Singaporean banks to implement an outright ban on coal financing. Before the statement could be read out as intended at the banks’ AGMs, one of the banks announced it would no longer offer financing to any coal-fired plants except its current projects, to which it was contractually obliged. Read more about Fidelity’s efforts to drive positive change on coal financing
Initially focused on Singapore, research showed that while Singaporean banks had introduced climate change and responsible finance policies, the original policies were not specific enough and continued to permit new CFPP financing in emerging markets. With this in mind, Fidelity’s Asia banks analyst and Sustainable Investing analysts engaged with the chief sustainability officer of a leading Singapore bank, discussing its sustainability strategy and approach to CFPP financing. The bank committed to speaking with its lending partners in the region about their coal exposure and to report in accordance with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations.
Phasing out financing for coal-fired power plants (CFPPs) is a crucial step towards a more sustainable global economy. it was for this reason that Fidelity initiated a thematic engagement with banks on their financing of such plants in Asia.
Case study: Engagement with banks to phase out coal financing
In this video, see how a sustainability-linked bond helped to drive change at Suzano, a Brazilian paper and pulp producer
Engagement in action
Read Jenn-Hui Tan’s article on how Fidelity’s engagement approach is helping to meet climate goals
As global investment managers, Fidelity believe that how they hold investee companies to account today will help shape a more sustainable tomorrow. That’s why they place active engagement at the core of their approach to sustainable investing. Active engagement is about using their influence as shareholders or lenders.
They use it to encourage companies to adopt more sustainable business practices and ultimately achieve broader societal sustainability objectives – whether those are financing a net zero transition or ensuring that modern slavery is not occurring in global supply chains. They believe that working with companies to improve their sustainability practices and awareness of ESG risks and opportunities will help create more resilient business models, which should in turn translate into the long-term sustainability of a company and positive investor returns.
Find out more about Fidelity's active approach
Fidelity’s active approach TO sustainable investing
Source: (2) Ibid
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Yet, the problem of forest loss has been well-known and understood for some time.
“It is also important to recognise the broader social issues associated with deforestation, such as modern slavery, which are a key feature of our engagements.”
This concept is important at a national as well as a local level. Tan is clear that the way Fidelity conducts transition engagement activities should reflect the circumstances and the structure of individual economies: “China is a largely coal-based economy; it is unrealistic to suggest that it can become renewable overnight. A ‘just transition’ reflects historic and current responsibility for climate change.”
This assessment spans the entire value chain, from producers of key deforestation-linked commodities, such as beef, soy, palm oil and timber, to companies further down the value chain, such as food retailers, construction companies, supermarkets and FMCG companies as well as enablers such as financial institutions.
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“Deforestation is a systemic risk, similar to climate change. Forests are essential for the provision of water, they mitigate climate change, they produce food for us, they are home to many local communities”
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing
“A just transition is intended to maximise the net social benefits of the transition, whether that is creating higher quality green jobs or mitigating some of those social risks, such as stranded workers and communities”
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0322/370462/SSO/NA
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Excluding ‘difficult’ assets from a portfolio can seem like an easy way to achieve net zero. Rather than trying to force companies to change, why not simply avoid them?
However, neither of these approaches is an effective way to achieve environmental or social goals. “Allowing assets to flow into private hands may not be the best way to ensure these industries transition to lower-carbon approaches,” says Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity. “Investors must support companies to transition these activities through financing and engagement, even if it is more difficult and time-consuming.”
In reality, there are a range of tools that can be employed before investors get to that point. “That includes voting against management and/or the board and escalating our concerns through collaborative action with other investors, including shareholder proposals and media channels,” says Tan.
Similarly, companies may see divesting carbon-intensive divisions of their businesses as an appealing way to meet net zero targets.
Divestment: a last resort
For investors, divestment should only be used where engagement has failed. It should be the ultimate sanction for the inaction of a company in key areas such as decarbonisation, board diversity or biodiversity.
“Engagement is a long-term process,” he adds. “In its initial phases, it's often about identifying the key issues for individual companies, and helping the company understand why their failure to address these problems will ultimately be detrimental to their future success.”
Engagement is powerful, and in the long-term it is far more likely to be successful than divestment, he concludes. “Companies respond well to active engagement and want help in setting clear long-term targets. We are seeing companies bring about real change as a result of our work with them.”
“We can only reduce carbon emissions by transitioning those businesses to cleaner alternatives. Or, where transitioning is not possible, closing down those businesses and enabling companies to diversify to other areas. It is vital to provide the companies who operate those assets with the support and financing that they need to make changes.”
The problem is that while listing on public markets brings disclosure and governance requirements, these aren’t as stringent for private companies, according to Tan. “Demonising these assets and forcing them out of public hands is counter-productive,” he says. “The companies continue to make the same carbon emissions, but no-one is pushing them to change.
$44bn has moved into private hands
Since the start of 2018, the Economist reports that the six big oil majors have sold around $44bn of fossil fuel assets. At the same time, the past two years have seen private equity funds spend about $60bn on oil, gas and coal assets, significantly more than they have spent on renewable energy assets.
This shouldn’t be surprising – fossil fuel assets remain cash generative and profitable. “Midstream” assets in particular, such as oil pipelines, gas grids and fuel storage tanks, tend to be safe and defensive, with contracted revenues paid for by large organisations.
Engagement is necessary to ensure carbon-intensive assets are transitioned rather than merely sold off, says Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing
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“Investors must support companies to transition these activities through financing and engagement”
Source: Economist
Private equity funds have spent about $60bn on oil, gas and coal assets since 2018
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Asia Equity Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can also use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0321/34016/SSO/NA
Engagement, not divestment,
is needed to meet climate goals
In engaging with companies to improve their environmental, social and governance practices, it is clear that we can't ask them to take action that we’re not prepared to take ourselves. In this spirit, we’ve scaled up ambitions for our own operations, including cutting carbon emissions, promoting diversity, equity and inclusion and supporting local communities.
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/370781/SSO/NA
Our overarching environmental goal is to achieve net zero across our investment portfolios by 2050, but we have also set a series of incremental targets to ensure that we are on track. In our 2021 corporate sustainability report, we accelerated our commitment to reduce company-wide operational carbon emissions to net zero to 2030, 10 years ahead of our previous goal of 2040. In addition, we have committed to phasing out thermal coal from our portfolios by 2030 in OECD markets and by 2040 in non-OECD markets.
Data and transparency
We use third-party data vendors to provide data on the carbon emissions of our portfolio companies, and we use that to calculate the emissions on our portfolios. Transparency is also very important: we provide that disclosure through our TCFD report, which publishes our approach to climate risks under the guidelines of the Task Force on Climate-Related Financial Disclosure. Ultimately, we expect to be held to the same standards as those to which we hold our investee companies.
Voting
Our climate voting policy is also a vital part of our strategy. In 2021, we announced a significant change to our voting policies, with a new approach to voting on climate change. The policy aims to encourage improvement on climate change strategy, governance and disclosures, providing a clear set of criteria that we believe companies should be achieving to effectively address climate risks and opportunities.
Climate ratings: assessing alignment with Paris goals
We have developed a suite of tools to track our progress and ensure we are on a credible path. The first is our climate rating, which harnesses our fundamental research capabilities to identify the extent to which our investee companies are aligned to the goals of the Paris Agreement. It will assess which companies are in the best position to transition to net zero or have a positive trajectory towards achieving that transition.
This analysis focuses on three specific areas: net zero ambition, climate governance and capital allocation. Each area consists of underlying assessment factors and are complemented by some additional factors based on the company's sector and classification. Having measured the alignment of our portfolios to net zero, we can set priorities for engagement where companies are falling short of expectations.
Climate ratings, voting and transparency are key elements of Fidelity’s goal to make its investment portfolios net zero by 2050, according to Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing
Fidelity’s own sustainability plans
Walking the walk:
We also want to make sure that we incentivise engagement. If we were to set a carbon-reduction target on a fund, we would incentivise the fund manager to trade out of high emitters into low emitters over time. Our ratings are designed to encourage our investment professionals to engage with companies. Their goal is to raise the scale of companies’ ambitions so that we score them better.
We notified companies last year and have subsequently engaged with many issuers to provide guidance to meet the minimum expectations set out in our policy, allowing time for companies to incorporate our expectations in their FY21 disclosures. We have now started to vote against the boards and directors of companies where they are not meeting our minimum standards.
“Our overarching goal is to achieve net zero across our investment portfolios by 2050”
“We have developed a suite of tools to track our progress and ensure we are on a credible path”
“Our climate voting policy is a vital part of our strategy”
Jenn-Hui Tan, Global Head of Stewardship Sustainable Investing
The war in Ukraine has come with vast and tragic human costs, displacing millions of families and causing huge suffering. It has also had profound financial repercussions, as governments and companies have sought to cut Russia out of the financial system and supply chains. For investment managers, these financial and non-financial impacts cannot be ignored.
As active stewards of our client capital, we took the decision to implement a firm-wide prohibition on new purchases of Russian and Belarusian securities for the foreseeable future and sought to address existing exposures where possible and appropriate.
Supply chain transparency, fundamental research and an effective ESG rating framework are vital for effective risk management in a time of crisis, says Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing
In the medium term, we believe it will drive governments to reduce energy dependence. This means an acceleration in adoption of renewable energy sources to achieve energy independence and reach net-zero targets. While there are still challenges ahead for the transition, we expect that in the not-too-distant future, Europe’s energy grid will be both cleaner and more self-sufficient.
The impact on renewables adoption
The war has had clear implications for the way countries source energy in the longer-term. It has exposed the risks of a reliance on autocratic regimes for fossil fuel provision.
However, in the meantime, there may be short-term environmental impacts from the war. It is possible that we will see an increase in emissions and costs as Europe confronts its reliance on Russian fossil fuels. Mainstream commodities needed for the transition (such as steel and aluminium) were already rising prior to the invasion of Ukraine due to high demand following Covid-19, and they have risen even further.
Rare metals needed for electric motors, photovoltaic cells and batteries could be particularly sensitive to price squeezes. Retaining access to these key supply chains will be critical to a successful transition to renewable energy.
Transparency
These recent events reinforce the importance of disclosure and transparency throughout the supply chains of our investee companies. It is vital for management teams to be able to understand and manage their exposure to Russian assets.
Our proprietary ESG ratings and engagement framework play a critical role in addressing the material non-financial risks and implications for investors. Developing an open and honest dialogue with our investee companies helps us manage those risks effectively.
Often, the risks we look at will be uncertain and long-term in nature. In benign times, the apparent importance of transparency and good governance can fade. However, it is at times of crisis like today that robust risk management becomes vitally important to generate outcomes that are in the best interests of our clients.
From an ESG perspective, the war has reinforced the important fiduciary role we play as asset managers and our duty to act in the best interests of our clients.
“The war has had clear implications for the way countries source energy in the longer-term”
“Rare metals needed for electric motors, photovoltaic cells and batteries could be particularly sensitive to price squeezes”
headwinds and tailwinds
The transition to a net zero future:
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Global Equity and Sustainable Global Equity Income Funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/370781/SSO/NA
Fidelity Sustainable Global Equity Income Fund
EngagementS in 2021 at a glance
336
Meetings with senior leadership*
1,113
Companies actively engaged with
1,464
ESG engagements
Engagements by region
Americas
22%
11%
United Kingdom
Europe ex UK
21%
MEA
1%
Asia
Oceania
38%
7%
Engagements by theme
Engagements by type
Corporate governance Executive remuneration Board structure Climate change Diversity Greenhouse gas emissions Sustainability reporting Employee management ESG integration Biodiversity Business ethics Energy consumption Business strategy Supply chain management
Conference call
*This comprised 94 meetings with chairs and other non-executive directors and 242 meetings with CEOs, CFOs, and other executive directors.
There are five pillars to their firm-wide approach to sustainability
530
488
339
279
220
180
141 138
97
92
69 69
67 67
In-person
Written correspondance
8%
54%
The Fidelity Sustainable Global Equity Income Fund aims to deliver an attractive dividend-based total return, with lower volatility than global equity indices, through a concentrated portfolio of 40-50 quality companies with leading sustainability practices.
sustainability at fidelity
Investment management
Integration across asset classes backed by dedicated and globally distributed specialists
Proprietary sustainability rating constructed by fundamental research analysts
We engage with companies to improve their sustainable footprint and create societal value
Deliver solutions to our clients to achieve their sustainability objectives
Improving our own sustainability footprint
Sustainability rating
Active stewardship
Sustainable solutions
Corporate sustainability
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2
3
4
5
Fidelity’s sustainability journey
Launch of Fidelity Proprietary ESG Ratings
Development of Sustainable Fund Family
Global ESG Team
Systematic carbon foot- printing
ESG in risk management
ClimateAction 100+
Engagement digital platform
Launch of ESG ETFs
Enhanced client reporting
First TCFD report
Integrating climate risk
Regulatory change
Net zero commitment
Launch of version 2 proprietary ratings
New thematic engagement campaign
Enhanced voting platform
Impact and stewardship reporting
Third wave of Sustainable Family Funds
First corporate sustainability report
2003
2010
2011
2012
2013
2015
2016
2019
2020
2021
Launch the FIRST ESG All Country World Fund
First fixed income ESG mandate
Establish the ESG Oversight Group
Firm Exclusion Policy
Rated “A” in first UNPRI Assessment
Third-party research integrated into global research platform
PRI signatory
Start the five-year LTIP campaign
Adopt UK Stewardship Code
Support the TCFD
Launch five new thematic engagement campaigns
Establish an ESG Policy
Subscribe to third-party ESG data
Launch Principles of Ownership
Five-year plans endorsed as best practice in UK Corporate Governance Code
Harnessing our corporate access, research capabilities and investment scale
ENGAGEMENT
Benefitting from Fidelity’s global reach
Fidelity’s research network is strategically located on-the-ground across key global markets. This provides on-the-ground touchpoints to each part of the value chain within which companies operate, with ESG considerations fully integrated into our platform alongside the analysis of traditional financial metrics. This delivers unique and comprehensive insights into the resilience of corporate earnings, cash flows and dividend streams, creating the bedrock for sustainable long-term investment returns.
A focus on quality and sustainable dividend-payers
Targeting a cross-cycle dividend-based total return by investing in high quality businesses with strong ESG characteristics at reasonable valuations. This approach provides the potential to protect capital during periods of risk aversion, while offering a healthy and sustainable above-market dividend yield. Investors should expect a minimum of 70% exposure to companies rated BBB or above by MSCI’s ESG Ratings. The fund will also have a lower carbon footprint than the MSCI AC World.
Active ownership and engagement
Our fundamental research process identifies material ESG risks and opportunities at both the individual company and sector levels. A low turnover strategy facilitates deep and comprehensive engagement with holdings within the portfolio. Ongoing engagement on critical sustainability issues such as climate change and diversity & inclusion aims to positively influence corporate sustainability practices and enhance investment outcomes.
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Introducing Fidelity's sustainable global funds
Our fundamental research process identifies material ESG risks and opportunities at both the individual company and sector levels. Deep and comprehensive engagement is undertaken with all holdings within the portfolio to positively influence corporate sustainability practices and enhance investment outcomes.
Fidelity’s global research network provides on-the-ground touchpoints to each part of the value chain within which companies operate, with ESG analysis fully integrated into our research platform. This means we can identify opportunities at an early stage, exploiting market inefficiencies created by underestimated growth potential and changing fundamentals at either a company or sector level.
We believe investing in quality companies with leading sustainability practices provides the potential to deliver higher and more durable returns over time, while also being a driving force for positive societal change. The portfolio targets a carbon footprint of at least 50% less than the MSCI AC World, with holdings assessed against investable UN Sustainable Development Goals.
Fidelity Sustainable Global Equity Fund
The Fidelity Sustainable Global Equity Fund offers focused exposure to global ESG leaders through a quality growth portfolio of 40-60 companies.
Fidelity Sustainable Global Equity Income Fund >
Our fundamental research process allows us to identify material climate-related risks and opportunities
Our access to senior management gives us the opportunity to engage directly with decision-makers
We engage over the long-term and target meaningful carbon emission reduction and net zero characteristics, which we expect to lead to improved financial and non-financial outcomes
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Research analyst Sustainable investing analyst Portfolio manager
Company management
Engagement targeting highest emitters and climate laggards for emissions reduction targets and net zero strategies
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Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0321/34016/SSO/NA
2017
2018
This is predicated on our belief that companies addressing the greatest environmental and social challenges stand to earn more positive and consistent returns over time. These companies are more likely to enjoy better growth opportunities and lower long-term risk profiles, and therefore have the potential to deliver strong returns to shareholders.
But we want to go one step further and look for stocks that not only have a best-in-class ESG profile, but also offer a compelling financial profile in terms of both fundamentals and valuation. This approach forms the basis of our integrated three-step investment process:
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Global Equity Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/370781/SSO/NA
How are sustainability factors integrated into analysis and decision making?
The knowledge and experience of Fidelity’s extensive team of sector and ESG analysts, who are on-the-ground across major global markets, underpins our proprietary Sustainability Ratings. This gives us unique insights into a company’s sustainability profile, as well as shaping our strategy for engagement to help companies excel in their sustainability practices.
The three steps come together in an iterative process to form a concentrated, high conviction fund of 40-60 names, offering a balanced combination of quality, growth, best-in-class ESG profiles and a significantly lower carbon footprint than the benchmark.
How is the fund aligned to the UN’s Sustainable Development Goals?
The UN Sustainable Development Goals (SDGs) provide an excellent framework for analysing a potential investment’s positive impact during the sustainability assessment stage of our three-stage investment process. We group the SDGs into three overarching themes, which allows us to analyse a company’s contribution in a more holistic way: Public Health, Equal Opportunity and Climate & Planet. Every company we invest in addresses one of these themes and is closely aligned to identifiable SDG targets.
“Active engagement is at the core of our approach to sustainable investing”
What is the ethos behind the fund?
The Fidelity Sustainable Global Equity Fund offers investors focused exposure to global ESG leaders through a quality growth portfolio of 40-60 companies. The fund invests in quality companies with leading sustainability practices and thereby provides the potential to deliver higher and more durable returns over time, while also being a driving force for positive societal change.
High quality stocks trade at a premium valuation, which is often understandable given their strong outlooks. We look for companies where the valuation is well supported and defendable over time, offering the potential for strong shareholder returns over a three-to-five-year period
3. Valuation
We find stocks which we believe will beat consensus expectations over the medium-term
2. Fundamentals
We identify companies with exceptional ESG credentials and a low carbon footprint, and which make a meaningful contribution to the UN Sustainable Development Goals.
1. Sustainability
our integrated three-step investment process
How important is engagement with investee companies?
Active engagement is at the core of our approach to sustainable investing. For companies and sectors that fall outside of our principles-based exclusion list, we have a strong preference for engagement over exclusion. We believe this is the best way to positively influence corporate behaviour.
We also believe that working with companies to improve their sustainability practices and awareness of ESG risks will help create more resilient business models, which should in turn translate into the long-term sustainability of a company and positive investor returns.
As long-term investors, we believe we can create more positive change by leveraging our size and scale - and exercising our rights of ownership - to improve the focus of management teams on sustainability issues. Given the breadth and depth of global capital markets, we believe exclusion simply moves this responsibility to another capital provider, who may or may not have the same incentives and goals.
We regularly engage through direct dialogue with investee companies as part of our investment monitoring and research activities, or in response to a specific event or situation or in relation to sustainability issues. This might be a one-to-one dialogue with the company, or in collaboration with other shareholders or stakeholders. While we prefer to engage through dialogue and achieve objectives in a consensual manner, we may choose to escalate our engagement if we deem it necessary.
Themes that we are currently engaged on include financing climate change, animal protein, supply chain sustainability, responsible palm oil and corporate sustainability reporting.
Should investors expect a structural overweight to developed markets within the fund given ESG practices and disclosures are less advanced across large parts of the developed world?
It’s true that Asia’s awareness of ESG generally lags behind developed markets. The region is just starting to wake up to the concept of ESG.
However, it’s waking up very quickly and catching-up with the rest of the world. Our recent Analyst Survey, for example, showed that while Europe is leading on decarbonisation efforts, significant progress is being made in China. This is mainly due to the Chinese government’s 2060 net zero target and its aim of fostering innovation among Chinese companies through supply-side policies.
This is one of the reasons why Asia is exciting for sustainable investors. Most of the positive impact comes from the improvers, and there are a lot of Asian companies in this category. We believe we can help them along their journey by sharing our experiences of best practice in other markets.
Jamie Harvey, Lead Portfolio Manager
Lead Portfolio Manager Jamie Harvey discusses how Fidelity’s Sustainable Global Equity Fund is aiming to create positive societal outcomes and more durable returns over time
Fund Q&A
“The UN Sustainable Development Goals (SDGs) provide an excellent framework for analysing a potential investment’s positive impact during the sustainability assessment stage of our three-stage investment process”
“Themes that we are currently engaged on include financing climate change, animal protein, supply chain sustainability, responsible palm oil and corporate sustainability reporting”
Find out more about Fidelity’s Sustainable Global Equity Fund >
The attributes of resilience and reliability that we seek in a company go hand in hand with a strong corporate culture of risk management. This extends to a company’s attitude to the environmental and social impact of their business operations. If companies don’t manage these appropriately, they open themselves up to risks such as litigation, erosion of brand value and potentially stranded assets. These are all meaningful risks that can impact cash flows and shareholder value over time.
Important information The Fidelity Sustainable Global Equity Income Fund has the potential of having high volatility due to the concentrated nature of the portfolio. This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Global Equity Income Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/370781/SSO/NA
The Fidelity Sustainable Global Equity Income Fund is a concentrated portfolio of around 40-50 quality companies with leading sustainability characteristics and long-term dividend growth potential. The fund aims to deliver three key outcomes to investors:
The portfolio typically has low turnover (historically around 20%), which reinforces its ability to engage meaningfully with companies. This engagement can drive improvements in companies’ sustainability credentials and increase our conviction in their long-term resilience.
What’s unique about this strategy?
ESG considerations are fully integrated into Fidelity’s research platform, alongside the analysis of traditional financial metrics. This delivers unique and comprehensive insights into the resilience of corporate earnings, cash flows and dividend streams, creating the bedrock for sustainable long-term investment returns.
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Why consider ESG factors for dividend investing?
We believe a focus on sustainability is highly complementary with a dividend-based approach to equity investing. When looking for companies with the potential to deliver sustainable dividend growth, we are seeking businesses with a high resilience of earnings over the long term. In turn, this drives a steady compounding of returns, with lower downside risk.
What high conviction stocks encapsulate what you look for in potential investments?
We focus on higher-quality businesses with strong balance sheets, recurring revenue business models and earnings resilience. These companies also exhibit strong sustainability profiles and trade at reasonable valuations.
Can you give examples of how your engagement activities work in practice?
We have been working to encourage banks in the portfolio to report the environmental impacts of their operations more robustly. This has included pushing them to adopt the Task Force on Climate Related Financial Disclosures standard. The longer-term goal is to get them to the position where they have gained a holistic picture of their exposures from an environmental perspective, including their loan book, and eventual alignment with science-based reduction targets.
Elsewhere, another programme has sought to understand companies’ gender policies and the practices they have put in place to improve gender diversity across senior management positions. This topic resonated with our investee companies, specifically regarding diversity higher up in the employee seniority spectrum - things like ensuring female representation, the availability of mentoring and flexible working programmes, unconscious bias training and recruitment.
The transition towards a sustainable economy is increasingly a key driver of the fundamental outlook for dividend-payers. For example, some utilities companies are playing a key role in the energy transition via the rollout of renewable generation; insurers are increasingly factoring in real world climate risks to their policies; and industrials companies are increasingly focused on electrical efficiency and automation.
Investors should expect a minimum of 70% exposure to companies rated BBB or above by MSCI’s ESG Ratings. The fund also aims to have a lower carbon footprint than the MSCI AC World.
When analysing companies, for example, we look beyond corporate reporting to construct more holistic views on sustainability issues. We look at factors such as governance - things like board composition and independence which can be drawn from company disclosures. However, we also focus on assessing issues that cannot be gauged from disclosure reports, such as whether management act like long-term owners of the business.
In this regard, we pay close attention to capital allocation and incentive alignment, which requires deep fundamental analysis. For example, we seek to determine whether a company is reinvesting successfully, or allocating capital to value-destructive M&A.
From a social perspective, we look at areas such as training, whistle-blower and data protection policies, but also company culture, scope of employee ownership and controversy records. Regarding the latter, if there have been any issues, we seek to determine what the company has done to mitigate future risks.
Generate attractive long-term dividend-based total returns
Deliver these returns with lower risk than the broader equity market, particularly during periods of heightened risk aversion
Improve companies’ awareness and management of sustainability issues through active ownership and engagement
Aditya Shivram, Portfolio Manager
“We believe a focus on sustainability is highly complementary with a dividend-based approach to equity investing”
Elsewhere, Schneider Electric is an example of one of our higher quality cyclicals in the portfolio. It is a global industrial business with leading energy-efficiency products. It is also the world’s largest player in energy supply for electric-vehicle charging stations. The company has strong competitive moats and attractive end-market exposure to construction and the structural growth of industrial automation. Its strong free cash-flow conversion and low levels of debt are supportive of long-term dividend growth. The company is also unique amongst peers in incorporating environmental metrics into its long-term incentive plan.
We are able to find a number of attractive opportunities in the financials sector, but our holdings here are typically higher quality, defensive businesses with low balance-sheet risk. For example, insurance broker Marsh & McLennan benefits from a capital-light business model with predominantly non-discretionary revenues. The company has made strong progress against its ambitious environmental goals, leads peers on corporate governance practices and has a highly engaged, motivated and diverse workforce.
Portfolio Manager Aditya Shivram introduces Fidelity’s newly repurposed Sustainable Global Equity Income Fund and how ESG complements a dividend-based approach
“The fund also aims to have a lower carbon footprint than the MSCI AC World”
“When analysing companies, for example, we look beyond corporate reporting to construct more holistic views on sustainability issues”
Find out more about Fidelity’s Sustainable Global Equity Income Fund >
