CONTENTS
Fidelity's Sustainable Family of Funds
Fidelity’s approach to sustainable investing
Hunting for sustainable growth in Asia
Dhananjay Phadnis introduces the recently repurposed Fidelity Sustainable Asia Equity Fund
The most powerful lever for change?
Learn how engagement with companies can bring change in key areas such as coal financing
ENGAGEMENT
Best grown from the ground up?
Discover the value of taking a forward-looking stance on sustainability
SUSTAINABLE INVESTING
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
The investment industry is rolling out its response to the existential challenges our world faces, but key questions remain.
For example, are sustainable investors competing to find sustainable alpha or collaborating to raise investment standards? Is the main aim to exclude corporate transgressors or to engage with them to change behaviour?
In this guide, Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, lays out the thinking of one of the world’s leading investors, Fidelity International.
We look at why it might be critical to shift to a forward-looking stance on measuring sustainability; how engaging with companies can make a demonstrable difference in key areas such as the financing of coal-fired power, biodiversity and digital ethics; and why it might be perilous to ignore sustainable investing in Asia. Finally, portfolio managers Dhananjay Phadnis and Vincent Durel explain their respective approaches to selecting sustainable companies.
We hope this guide helps professional investors discover the difference that responsible investing can make to our world.
Build back better – but how?
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The future of sustainability
sustainability
This is for investment professionals only and should not be relied upon by private investors.
Subhead: 25/39 Body copy: 23/37 Source: 20/28 Icon: 18px BOX/Graphs 32/38 Large quote 34/46
Backing Europe’s ESG leaders
Portfolio Manager Vincent Durel explains his approach in selecting sustainable companies
FIDELITY SUSTAINABLE EUROPEAN EQUITY FUND
Learn about Fidelity’s ESG ratings, engagement and industry collaboration
Discover a growing range of sustainable actively managed funds and ETFs
Industry change is being driven by the scale of the fundamental threats. The earth’s surface has already warmed by more than one degree centigrade, leading to Arctic sea ice retreat and glacier retreat and increasingly intense weather events, with a real danger the world will fail to meet the 2015 Paris Agreement to hold the increase to well below two degrees.(1) “If we don’t decarbonise our society it’s now clear what will happen – it's hard to imagine a bigger, more universal, more immediate challenge,” Jenn-Hui says.
Risk drivers
Solving those twin problems plays to Fidelity’s strengths, says Jenn-Hui. “There are two things we’re known for. The first is fundamental bottom-up investing using our own research from a global team of 180 analysts.(2) We want to focus the same level of analysis on the sustainability of the companies we’re invested in – what they’re doing in practice, not just what they’re disclosing.”
Analytical strength
At the heart of Fidelity’s sustainable investing strategy is a proprietary Environmental, Social and Governance (ESG) ratings approach rolled out since 2019 and being refined during 2021. Much of the industry, Jenn-Hui says, follows a 'quantamental' model, which assembles data about a company from a variety of third party sources and weights each in various ways depending on industry sector and other materiality-based factors.
“The second element Fidelity is known for is engagement, for example company meetings and long-term relationships. We have a hugely extensive process around meeting management teams,” he says, “with 16,000 company meetings every year across an investment universe of around 4,000 companies, meaning we may meet a company on average four times a year.”(3)
“As data availability and competition erode return opportunities from financial analysis, we think the next big signal of alpha may be companies’ sustainability, where data and disclosure is much poorer.” But he’s quick to point out that industry collaboration is as important as competition.
“Biodiversity is also critical but much less well understood,” he says, “and the pandemic has exacerbated inequalities and other fault lines in our society: so how exactly can investors help the world to build back greener, stronger, fairer?”
The benefit of top-down rating models is that you can scale them quickly, for example, to cover over 10,000 issuers, so long as you can access data. But Jenn-Hui doubts that there is much value in most models because of two problems: “The first is that you are really only as good as the data that you are buying,” he says, “and most data is non-standardised, non-verified, and not necessarily comparable.”
The second is a broader philosophical problem. “When a few years ago we used quantamental ratings to show portfolio managers how sustainably their funds were constructed, we found they might agree they had a D-rated company but argue that was because they believed the company would improve going forward,” he says. If correct, that belief might be critical in directing capital towards positive change, but it needed to be documented and its validity tracked.
So the team took their model, rebuilt it and put it in the hands of the analysts who drive the Fidelity business. “We told them, we've built this for you but, company by company, you're the ones that have to do the research. Find the data, get it from primary sources, or whatever sources you can including company meetings. If you can't do that, form a view in the face of uncertainty. Then create an ESG rating.”
Summing up
Fidelity’s research during 2020 showed that companies with high Fidelity ESG ratings tended to be more resilient in terms of share price than lower rated firms during the pandemic-inspired market volatility.
As a long-term investor, Jenn-Hui is wary of leaning too heavily on the short-term evidence: most ESG funds are underweight energy and overweight technology, which gave many a lift during the pandemic market gyrations.
But he says there is a growing body of evidence that “elements of ESG seem able to identify companies that are better managed, have higher quality, more long-term thinking management teams, and more robust and resilient characteristics – the companies that a long-term investor like us might want to prioritise.”
If ESG does indeed turn out to be an indicator of higher quality companies, then investors seeking outperformance will need to be able to recognise ESG strengths early – before valuations rise. That strengthens the business argument, says Jenn-Hui, for investing in proprietary, forward-looking ratings while also generating deeper engagement insights unavailable to the wider market.
“We realised sustainability must be part of the way fund managers make their investment decision”
As well as company-focused meetings the firm pursues thematic and collaborative engagements, with recent campaigns around the financing of new coal-fired power stations and seafarer welfare – a campaign in 2020 sparked by one of Fidelity’s shipping analysts led the company to join forces with 85 investors representing over $2trillion in assets. Fidelity subsequently led an open letter to the United Nations urging them to act on a number of measures and ease the plight of stranded seafarers.
The financial industry has begun answering that question by acknowledging that financial decisions have non-financial consequences. But Jenn-Hui says the industry is only just beginning the next two phases of its journey: working out how to measure non-financial impacts; and how best to target them alongside financial outcomes.
The firm’s three key engagement themes for 2021 focus on the need to build back better after the pandemic.
All change
“We realised, going into 2019, that if we wanted to integrate sustainability in a genuine way to our investment process, we’d need to integrate ex-ante rather than ex-poste: it must be part of the way fund managers make their investment decision,” he says. That meant building sustainability ratings using a more ground-up approach.
The big difference between Fidelity’s proprietary ratings and most third-party ratings is their forward-looking nature. “If you're rating based on what companies are disclosing, then you are rating what they've done in the past; you're not trying to forecast,” he says. “Our analysts consider what companies have done in the past because it’s an important indicator of what may happen in the future – but our approach is based on our company interactions and therefore places a greater weight on a company’s direction of travel with respect to sustainability.”
ARTICLE:
Putting sustainability to the test
READ THE ARTICLE
CONTACT DETAILS
For more Fidelity insights, visit: professionals.fidelity.co.uk/realengagement
Email: premierline@fil.com
Phone: 0800 368 1732
Teamwork
Using analyst expertise also helps the firm to build ratings that focus on the core sustainability topics for each sector – taking account of local peer and market practice – which is especially important in areas such as Asia, where Fidelity is a leading investor. Jenn-Hui believes that none of the key global challenges can be solved without addressing Asia.
A fast-expanding team of ESG specialists provides support. “Our oils analyst, for example, understands oil companies better than any ESG analyst could hope to do. But our ESG team supplements that with knowledge of the broader themes, for example around the shift to renewables, carbon tax pricing, and the implications of climate change,” he says.
Future forward
Fidelity’s new ratings approach, launched in June 2019, had achieved coverage of over 4,400 issuers by early 2021, and this year the firm is embarking on an ambitious revision of the granularity and focus that its analysts place on each key sustainability factor.
The revision will also shift the focus further away from financial materiality towards what Jenn-Hui calls ‘double materiality’. “The dominant view previously was that investors looked at ESG factors because they posed a material risk to the company”, he explains. “But increasingly we also want to ask much more directly: What is the material impact of companies on the environment and society, as well as judging them on ESG financial materiality.”
Financial materiality: Big polluters risk incurring financial penalties including loss of license to operate
The new emphasis on double materiality chimes with emerging ideas about the purpose of corporations. “What is the purpose of companies? Is it simply to make money? Or to also help us move society forward in a certain way?” Jenn-Hui asks. But he thinks that more progressive sustainable mindsets could potentially also be linked to more robust investment performance.
Fidelity has constructed a forward-looking approach to sustainability ratings
Material impact: They also create damage that stakeholders want to discourage, that sends out poor quality signals, and that forewarns about financial materiality
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Do you think the investment industry understands how critical Asia is? A lot of the global investment industry ESG focus is on the developed world, with big teams in London, the US and so on. We think we can make a big difference simply by looking carefully at the Asian aspect of the sustainability challenge. Our team composition reflects that. More than half of our global sustainable investing team, myself included, are based in Asia, in Shanghai, Tokyo, Hong Kong, and Singapore. That reflects the importance we place on Asia to the global ESG investing movement, in our view.
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Many other issues from modern slavery to biodiversity all have a critical Asian dimension and dealing with them means understanding the Asian context. For example, in 2020, we became a founding member of Investors Against Slavery and Trafficking Asia-Pacific, to help address this key issue.
03 / 07
How important do you think Asia is in terms of global sustainability? You will not solve a single meaningful ESG issue without involving, or having your solution originate in, Asia. More than half of the world already lives in Asia and it is probably already the growth driver of the world. So all kinds of ESG challenges and related issues track through Asia. Take carbon emissions: most of Asia produces goods and services for a global, particularly developed market consumer base. Carbon emissions at a national level are weighted towards Asia because they are accounted for at the point of production, rightly or wrongly, rather than the point of consumption.
02 / 07
Jenn-Hui Tann explains why it’s so important to invest sustainably in Asia and reviews the key issues and challenges.
Is Asia the key to global sustainability?
01 / 07
Does it make sense to talk about Asia as a single entity? Asia is the most diverse investing region in the whole world. It encompasses Japan, Korea, and Singapore but also Indonesia, Philippines, Sri Lanka, and Myanmar. Every country is at a different stage of economic development and has different sustainability challenges. For example, the market structure of China is completely different to the developed world. If you want to understand ESG in China, you need to understand the role of the state, in public enterprises but also in private companies. You need to understand the social licence of Chinese companies to operate in that market and what that means in terms of regulatory and consumer behaviour. You need to have feet on the ground.
05 / 07
How fast are sustainability attitudes changing in Asia? The region is catching up incredibly fast. We did a report last year on attitudes towards stewardship within the Chinese asset manager community, e.g., voting records for the last two years, to track how investors were changing their behaviour. Meanwhile, China-based signatories to the UN’s PRI are rising fast (see graph). We also do regular surveys of our analysts, looking at the attitudes of the companies they cover to ESG. One of the key findings from last year was that across the world globally, including in China and in Asia Pacific, most companies are paying close attention to ESG issues. The attitudinal gap is closing very quickly.
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Asset managers
Are practices changing as fast? Translating attitudes into tangible practices requires more work in Asia. Disclosure practices are still much more evolved in Europe, for example. There can still be a bit of a misunderstanding around what ESG is, for example, versus corporate social responsibility. In addition, most Asian companies are controlled companies owned by the state, a founder, a family or a wealthy individual. So the dynamic around the shareholder relationship, and how you can influence that company, is quite different.
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Double materiality
“The rise of sustainable investing is one of the most significant changes in the investment industry in a generation representing a fundamental re-alignment of global policy, investor focus and consumer interest,” says Jenn-Hui Tan, Fidelity’s sustainability lead.
Source: PRI, Fidelity International, ZD Proxy, November 2020.
Asset owners
Service providers
2017
2018
2019
2020
60
40
20
0
Cumulative number of China-based signatories to the UN’s Principles for Responsible Investment by type
Competition versus collaboration
“Are you going to address big societal challenges better just by competing with your competitors or by also collaborating? No matter how big a player you are, you're not bigger than the industry in aggregate. One of our foundational beliefs is that the future is about the financial industry coming together.”
In the natural world, animals compete with each other while co-operating against larger threats
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, tells us why he thinks sustainability needs to start at the analytical ground level in order to reach for the stars
Sustainable investing
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Source: (2) Fidelity International, as at end Dec 2020
Source: (3) Fidelity International, Sustainability Report 2020, July 2020, p.7
Source: (1) United Nations Environment Programme, Making peace with nature: A scientific blueprint to tackle the climate, biodiversity and pollution emergencies, 2021, p68
2
1
Including digital inclusion and ethical AI design
3. Redefining ethics for a digital world
3
Including supply chains and wider communities
2. Looking after employees
Including climate change and biodiversity
1. Understanding nature-based risks
three key themes
NEXT ARTICLE >
< HOMEPAGE
Covid-19 pandemic may have been triggered by pressure on habitats and biodiversity loss(6)
75% of the Earth’s ice-free land surface has already been significantly altered(5)
Freshwater megafauna such as the sturgeon, Mekong giant catfish and river dolphins are under special pressure(4)
Average 68% fall in monitored populations of mammals, birds, amphibians, reptiles and fish between 1970 and 2016(3)
Half the world’s GDP (c.$44 trillion) is “moderately or highly” linked to the availability of natural capital(2)
Up to one-fifth of wild species are at risk of extinction this century due to climate change alone(1)
The biodiversity crisis
Click on a cross symbol to explore the crisis
Sources: 1 WWF, The Living Planet Report, 2020, p26 3 WWF, The Living Planet Report, 2020, p4 4 WWF, The Living Planet Report, 2020, p25 5 WWF, The Living Planet Report, 2020, p6 https://f.hubspotusercontent20.net/hubfs/4783129/LPR/PDFs/ENGLISH-FULL.pdf 2 WEF, Nature Risk Rising, 2020, p.8 http://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf 6 For example, see Sara Platto, et al., Biodiversity loss and the Covid-19 pandemic, Oct 2020 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7566801/
View sources
SOURCES
X
For example, see Sara Platto, et al., Biodiversity loss and the Covid-19 pandemic, Oct 2020
6
WEF, Nature Risk Rising, 2020, p.8
WWF, The Living Planet Report, 2020 (1) p26, (3) p4, (4) p25, (5) p6
1, 3, 4 & 5
Standfirst: 28/44 Subhead: 25/39 Body copy: 23/37 Source: 20/28 Icon: 18px BOX/Graphs 32/38 Large quote 34/46
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Read Fidelity's article on putting sustainability to the test
FURTHER READING
How fast are sustainability attitudes changing in Asia? The region is catching up incredibly fast. We did a report last year on attitudes towards stewardship within the Chinese asset manager community, e.g., voting records for the last two years, to track how investors were changing their behaviour. Meanwhile, China-based signatories to the UN’s PRI are rising fast (see graph).
07 / 09
For example, the market structure of China is completely different to the developed world. If you want to understand ESG in China, you need to understand the role of the state, in public enterprises but also in private companies. You need to understand the social licence of Chinese companies to operate in that market and what that means in terms of regulatory and consumer behaviour. You need to have feet on the ground.
06 / 09
05 / 09
Do you think the investment industry understands how critical Asia is? A lot of the global investment industry ESG focus is on the developed world, with big teams in London, the US and so on. We think we can make a big difference simply by looking carefully at the Asian aspect of the sustainability challenge. Our team composition reflects that. More than half of our global sustainable investing team, myself included, are based in Asia, in Shanghai, Tokyo, Hong Kong, and Singapore.
04 / 09
03 / 09
02 / 09
01 / 09
Carbon emissions at a national level are weighted towards Asia because they are accounted for at the point of production, rightly or wrongly, rather than the point of consumption. Many other issues from modern slavery to biodiversity all have a critical Asian dimension and dealing with them means understanding the Asian context. For example, in 2020, we became a founding member of Investors Against Slavery and Trafficking Asia-Pacific, to help address this key issue.
That reflects the importance we place on Asia to the global ESG investing movement, in our view. Does it make sense to talk about Asia as a single entity? Asia is the most diverse investing region in the whole world. It encompasses Japan, Korea, and Singapore but also Indonesia, Philippines, Sri Lanka, and Myanmar. Every country is at a different stage of economic development and has different sustainability challenges.
09 / 09
08 / 09
We also do regular surveys of our analysts, looking at the attitudes of the companies they cover to ESG. One of the key findings from last year was that across the world globally, including in China and in Asia Pacific, most companies are paying close attention to ESG issues. The attitudinal gap is closing very quickly.
How important is engagement within your sustainability toolkit?
Engagement is a big part of our toolkit for creating positive change. If you want to achieve goals such as decarbonisation, you can't do that entirely by funding new exciting start-ups, no matter how much money you give them. At a certain point, you're going to have to engage with existing industries and the high carbon-emitters of today.
We believe ESG can enhance investment returns not only through better and more complete investment analysis, but also because you can then generate alpha by driving improvement in company behaviour after you own a security, rather than by simply trading that security.
The second is around employee welfare and Covid-19’s impact, particularly on women and minorities. The third is around digital inclusion and digital ethics, which has become even more important now that so much of our lives is spent on technology platforms.
Our two big aims are to integrate sustainability into our research and then to use our investment platform to engage and promote the types of positive sustainability practices we want to see.
What are your key themes for 2021 and how did you choose them?
We identified three key themes for 2021, all of which have at their heart this idea of building back from Covid in a better, fairer way and what we can do as a firm to contribute. One is the preservation of ‘natural capital’, which includes climate change and decarbonisation but also puts biodiversity firmly on the agenda – the scale of the biodiversity emergency we face needs to be much better understood.
How do you work day-to-day with your research and investment teams?
When it comes to research and its interface with engagement, we are effectively a resource for the fundamental teams. We sit in company meetings with them, we will help them to prepare questions, sometimes we'll co-host meetings, we will help to answer their questions – and sometimes have intense debates. The ESG team is now across six of our offices and counting. We want the ESG team to be sitting where the portfolio managers and the analysts are sitting.
This sounds very different from the traditional life of an investment professional?
The job of an investment professional is changing, certainly within Fidelity. Engagement and stewardship are now a key part of the evolution of an investment professional's toolkit – to the extent that it may become difficult to be an investment professional in the future without having these as a core part of your skill set.
Members of my team, for example, are assistant fund managers or co-fund managers on a number of our sustainable products because we want those funds managed not just for financial performance, but also for sustainability performance.
Jenn-Hui explains Fidelity’s work on seafarer welfare and Fidelity’s three key engagement themes for 2021: decarbonisation, employee welfare, and digital inclusion.
WATCH
What is a long-term mindset?
“An investor that bought a firm and simply held it for 60 years would be a long-term investor in terms of duration but might not have contributed anything to the firm’s long-term success or sustainability,” says Jenn-Hui. “So we think it’s more about what kind of mindset we bring to security selection. If you're buying because you are playing some kind of arbitrage, waiting for a price in one market to converge with the price in another market, that's not long-term. But if you're buying because of a long-term view that the company is a structural winner with sustainability a key component of its success, then that is a long-term mindset.”
How does your stance as a long-term investor inform your engagement style?
It’s often said that long-term investors need to move from a mentality of renting equity to one of owning equity. But what does that mean for the kinds of practices that a long-term equity owner wants to see? Probably not a focus on next quarter's profits because how relevant is that going to be? Probably much more of a focus on employees and how they're being looked after; customer data privacy; cyber security; and other big issues that feed into the sustainability of the company’s business practices.
In addition, all of our investing at Fidelity is fundamental and bottom up so I think our ESG approach needs to be as well: understanding companies within the context of their markets, their businesses, their peers, what they're trying to achieve, what their governments are trying to get them to achieve. That takes on-the-ground engagement, as well as analysis, and a long-term mindset.
As well as thematic engagement we conduct many collaborative engagements. For example, we recently led a large collaborative engagement on the issue of seafarers. We also participate with industry bodies to help to standardise approaches to sustainable investing, for example how to measure non-financial outcomes.
For example, we did that in Asia with textile supply chains last year. And we had a really successful engagement with ASEAN banks on the financing of new coal-fired power plants, in which we questioned their business rationale given the stranded asset risk of governments phasing out thermal coal to achieve their net zero ambitions – and how this is likely to happen over a much shorter timeframe than is commonly expected.
Is one-on-one company engagement your main focus?
We have two more styles of engagement, the next being thematic engagement. Here we are not trying to differentiate companies, but to take advantage of the fact that they're all within a certain space so we can engage with them in a consistent way on a specific issue.
How do you track your success in affecting the key sustainability issues?
As well as monitoring ESG ratings across our investible universe, we now have an engagement tracker on our research platform to help us monitor our ESG engagement. For each company, we can set an objective and set milestones and then track progress, e.g., through a series of meetings with the company conducted by the ESG analyst, the fundamental analyst, or the portfolio manager.
Where do you sit in the debate over engagement versus exclusion?
In general, we favour engagement over exclusion as a tool of implementing change. Exclusions can be very effective if what you're trying to do is clean up your portfolio. But if you're trying to create change, exclusion simply means that you don't own it but someone else is going to own it. So what change are you actually making?
I’m based in Asia, and it’s common to hear that investing in Asia requires some sort of consensus approach. But my experience is that most companies respond well to a consensus approach, whether they are in a developed or developing market. You achieve the best outcomes not by naming and shaming a management team, but by persuading them that you genuinely know and care about their business and that you have insights to add to the way they run their business.
How a company manages and monitors its supply chain forms a critical part of Fidelity’s analysis of any potential investment
Ecommerce – Does it need a smaller environmental footprint?
The world is not phasing out coal-fired power generation anywhere near fast enough. Marion O’Donnell, Fidelity’s Director of Sustainable Investing, explains how engagement is helping to turn that around.
The Joshua tree can live for hundreds of years in harsh conditions, but is threatened by climate change
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Ecommerce giants are starting to: • publish carbon footprints • cut packaging bulk
3. But there are ways forward
Delivery vehicles in the world’s largest 100 cities may increase by 36% between 2019 and 2030
2. Ecommerce is not just virtual
Global demand for filled-air packing is predicted to increase by $US1.16 bn between 2020 and 2024
1. Online shopping boosted by the pandemic is creating waste
Air cushion packaging market analysis highlights the impact of Covid-19, BusinessWire, August 2020
WEF, The Future of the last-mile ecosystem, January 2020
Click here to read Fidelity’s latest article on how cutting ecommerce footprints offers a win/win for all
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, tells us why sustainability means working with companies to promote the positive
Will engagement prove the most
powerful lever for change?
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Can you introduce the fund and explain your investment approach?
The Fidelity Sustainable Asia Equity Fund was launched on 26 April 2021 through the repurposing of the Fidelity Emerging Asia Fund. It is designed to offer investors exposure to 50-70 high quality, growth stocks with a specific focus on sustainability. The fund is part of our Sustainable Family cross-asset class fund range, which is built on our core approach to sustainable investing.
The result is an enhanced focus on environmental, social and governance (ESG) criteria, along with deeper levels of engagement with individual companies to help influence more sustainable investment outcomes.
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
Our approach to sustainable investing focuses on two key aspects: ESG integration via our proprietary ratings, and research and active engagement with companies. The fund also has exclusions around sectors such as tobacco and thermal coal. Within this construct, the fund is also committed to ensuring that at least 70% of its investments are in high-rated issuers, with a detailed engagement approach to the remaining up to 30% of assets.*
The discussion also helps us to understand the company’s progress thus far and the plans they are putting in place. In terms of frequency, we divide companies into three tiers based on their ESG attainment and rating. We then adopt a high intensity approach for the ones with the most significant ESG issues and a relatively less intense approach for the best-rated names. This does not stop us from engaging with companies on ad hoc issues such as AGM/EGM proposals.
Can you give examples of a successful engagement?
We’ve seen remarkable success in terms of getting companies to speak to us because of our reputation as a long-term investor and business partner. Examples include Singapore and Korean banks on coal-related financing as well as Asian semiconductor companies on corporate governance and shareholder return policies. We have also had an impactful engagement around stranded seafarers. We are also working with a global electronics group to use their influence as one of the biggest household consumer brands to persuade their key suppliers to reduce their carbon emissions – we think this could prove an extremely effective approach.
Can you talk more about your engagement philosophy and how you use it to improve shareholder outcomes?
Our engagement approach is one of partnership: helping and hand holding our investee companies through their sustainability journey. We take a structured approach to our engagements both in terms of issues discussed and frequency. On the discussion topics, we identify the issues that are material to that company and also take into account any controversies. These points are discussed with the companies alongside specific suggestions on what can be done to address them.
Why should investors consider Asia when it comes to investing sustainably?
What makes Asia so interesting and attractive is that it is in the early stages of its sustainability transition. That means investors have to contend with weaker disclosures, and less independent shareholding structures, as well as the low general level of awareness. But that can give an advantage to firms with strong engagement and research capabilities, and the good news is that Asian companies are rapidly catching up with regard to ESG approaches.
Many of the companies we speak to are just starting to make operational and disclosure improvements to reduce risks and deliver performance. Fidelity’s approach is to be actively engaged in this maturation process, so that we can act as partners for companies in their journey towards better sustainability.
“The good news is that Asian companies are rapidly catching up with regard to ESG approaches”
Portfolio manager Dhananjay Phadnis introduces the recently repurposed Fidelity Sustainable Asia Equity Fund – outlining his focus on quality growth companies, coupled with deep ESG integration and engagement
On the hunt for
sustainable growth in Asia
We believe that a sustainable approach means looking for companies whose approach to ESG is improving and that also accounts for a wide range of stakeholders – these are the companies that we believe will deliver long-term value creation for investors.
The fund has the dual objective of continuing to deliver attractive returns, but to do so in a manner that is sustainable. We have long held the conviction that companies that are run on sustainable principles, that take care of their stakeholders, and that strive for continual improvement are ones that can deliver long term value.
Although the Vietnamese market is not very liquid, liquidity seems to be on a slow road to resolution in terms of removing foreign ownership limits and the government allowing trading. Unfortunately, we’re seeing another wave of Covid-19 in Vietnam, too. However, we continue to believe that Vietnam is one of the best opportunities in the region, with attractive demographics, a rising middle class, and the migration of manufacturing activity that has traditionally been located in China. We see Vietnam as 15 or 20 years behind China in terms of that same journey of job creation and consumption. Hopefully at some point liquidity will become abundant enough to allow us to take an even more high-conviction position in the country than we have today.
05 / 05
India has traditionally been a consistent and significant overweight for the fund, but we now have one of the smallest overweight positions that we’ve had for a long time. India is going through a really terrible crisis, especially in the healthcare system, and consumption has been set back. However, the market is still trading at high multiples and hasn’t really corrected. If the market corrects to reflect the underlying reality of earnings, that could be an opportunity to build our overweight back up. India remains a really strong long-term opportunity; it has favourable demographics, consumption, infrastructure, and an abundance of really high-quality management talent. Taken together, this should deliver positive outcomes in the longer term.
04 / 05
But our local presence and our long investment history – we have been in China for decades – has built a reputation for Fidelity as an investor that understands the local context. This is particularly important when it comes to engaging in Asia with companies that are new to ESG. Good relationships with most of the companies we have engaged with and invested in over the years, and our research capabilities, allow us to have mutually constructive dialogues about how they could improve on their environmental and social performance. Companies in Asia are trying to improve but they need guidance as they start out – and they tend to reach out to investors that they trust, such as Fidelity.
03 / 05
In my view there are two Chinas: the new economy China centred around the internet, healthcare and consumption. Early in 2021, this area became expensive with a lot of retail buying driving a frenzied market. Given this dynamic, the Fund has been expressing valuation discipline for some time and has trimmed into this rally. Then there is old economy China, which is driven by liquidity provision, government spending on infrastructure and real estate – these areas are seeing a meaningful slow down. There is no secret ingredient in terms of gaining access to Chinese state-owned entities (SOEs).
02 / 05
Dhananjay Phadnis offers his view of three key countries – China, India and Vietnam
How do opportunities vary across Asia?
01 / 05
China
CHINA (continued)
INDIA
VIETNAM
Find out more about the Fidelity Sustainable Asia Equity Fund
“Our engagement approach is one of partnership: helping our investee companies through their sustainability journey”
Then there is old economy China, which is driven by liquidity provision, government spending on infrastructure and real estate – these areas are seeing a meaningful slow down. There is no secret ingredient in terms of gaining access to Chinese state-owned entities (SOEs). But our local presence and our long investment history – we have been in China for decades –
has built a reputation for Fidelity as an investor that understands the local context. This is particularly important when it comes to engaging in Asia with companies that are new to ESG. Good relationships with most of the companies we have engaged with and invested in over the years, and our research capabilities, allow us to have mutually constructive dialogues about how
they could improve on their environmental and social performance. Companies in Asia are trying to improve but they need guidance as they start out – and they tend to reach out to investors that they trust, such as Fidelity.
India has traditionally been a consistent and significant overweight for the fund, but we now have one of the smallest overweight positions that we’ve had for a long time. India is going through a really terrible crisis, especially in the healthcare system, and consumption has been set back. However, the market is still trading at high multiples and hasn’t really corrected.
If the market corrects to reflect the underlying reality of earnings, that could be an opportunity to build our overweight back up. India remains a really strong long-term opportunity; it has favourable demographics, consumption, infrastructure, and an abundance of really high-quality management talent. Taken together, this should deliver positive outcomes in the longer term.
and the migration of manufacturing activity that has traditionally been located in China. We see Vietnam as 15 or 20 years behind China in terms of that same journey of job creation and consumption. Hopefully at some point liquidity will become abundant enough to allow us to take an even more high-conviction position in the country than we have today.
INDIA (continued)
Although the Vietnamese market is not very liquid, liquidity seems to be on a slow road to resolution in terms of removing foreign ownership limits and the government allowing trading. Unfortunately, we’re seeing another wave of Covid-19 in Vietnam, too. However, we continue to believe that Vietnam is one of the best opportunities in the region, with attractive demographics, a rising middle class,
*Minimum ESG rating of BB by MSCI. However, the portfolio managers will aim to achieve a higher threshold, targeting at least 70% of the portfolio invested in companies rated BBB and above by MSCI. If unrated by MSCI, rated C or above by Fidelity Sustainability Ratings. Our ratings score issuers on an A-E scale and trajectory forecast based on fundamental bottom-up research and materiality assessment using criteria specific to the industry of each company.
Fidelity's approach to sustainable investing
Fidelity sustainable European equity fund
Engagement
HOME
Fidelity sustainable ASIA equity fund
The Fidelity Sustainable European Equity Fund was launched on 27 January 2021 through the repurpose of Fidelity European Opportunities Fund. The fund’s investment policy has been changed to incorporate a sustainable investment focus and it is now part of Fidelity’s Sustainable Family cross-asset fund range.
A minimum 70% of the fund is invested in Europe ex UK companies with strong sustainable characteristics. The fund aims to have a lower carbon footprint compared to that of the broader market, by excluding companies with high carbon intensity. The fund’s investment framework incorporates both norms-based screening and negative screening of certain sectors, companies or practices based on specific ESG criteria to be determined from time to time.
“We have been increasing our exposure to banks with attractive ESG credentials”
Why we’re backing Europe’s ESG leaders
Portfolio Manager Vincent Durel introduces the newly repurposed Fidelity Sustainable European Equity Fund – lifting the lid on his investment process and the importance of engagement
To further enhance our engagement and research capabilities, I am delighted to be supported by Assistant Portfolio Manager Aela Cozic. Aela is a highly experienced sustainable investing practitioner and acts as a dedicated ESG specialist for the strategy. Her focus will be on company engagement and analysis of ESG factors.
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. The Fidelity Sustainable European Equity Fund has the potential of having high volatility due to the concentrated nature of the portfolio. 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
The aim of this high-conviction fund is to promote companies having the best practices in terms of sustainability. To this end, we select 35-50 companies with the best sustainable models, both in terms of financial and non-financial performances. We strongly believe this convergence in our stock selection will bring measurable and positive sustainable impacts to our clients.
How do you engage with companies? Can you provide one example of how you have engaged with a company?
The fund aims to positively influence and engage with all companies in the portfolio through an active engagement framework. Through this approach, we are able to gain enhanced, holistic corporate insights which influence investment analysis and the proxy voting process.
One recent example of engagement is with EssilorLuxottica, which is the largest eyewear company in the world. Under the merger agreement between France’s Essilor and Italy’s Luxottica in 2017, the two companies were supposed to share executive powers. As an active shareholder in EssilorLuxottica, we wanted to ensure that the terms of the merger agreement were respected by all parties.
After a few years of active engagement, during which we collaborated with other shareholders and even voted against the management at company AGMs, we were pleased to see the appointment of a new CEO and deputy CEO at the end of last year, preserving the balance of power between the two companies and abiding by the terms of the merger agreement.
The Covid pandemic created strong appetite for sustainable investments. But since the beginning of this year, equity markets have been more focused on the reflation trade. Commodity-related sectors are generally excluded from your investment universe, how much of a challenge is this for you?
Last year was challenging and the current market continues to throw up new challenges. But there are also opportunities. Our main focus has been diversification, both in terms of sectors and stocks. We have been increasing our exposure to banks with attractive ESG credentials and stocks such as Umicore, a Belgian materials technology company, which has implemented best-in-class sustainable practices in its procurement processes. It is also a pure play on the circular economy for its metal recycling division.
We are also investing in the expected recovery in air travel. Although we cannot invest in airlines due to their high carbon footprint, we can invest indirectly through companies that will benefit from the rise in airline traffic. One such company is travel platform Amadeus, which offers good ESG credentials and has strong quality and growth characteristics. So, while it is true that we cannot buy some stocks, we can gain exposure to cyclical companies indirectly.
How do you think about current valuations given that valuations in some sustainable leaders may be stretched?
Through our fundamental analysis, each day we assess the valuations of the company based on forecasts, so we know exactly where we are in terms of valuations. If we look at renewable energy stocks - which have had a tough start to the year - what we see is that in many instances the market is not necessarily capturing the whole picture.
A company like Solaria for instance, which is ostensibly quite expensive at the moment, has multiplied its capex programme six fold - going from 1 GW to more than 6 GW by 2025. All these investments are secure, and they have started to sign third-party agreements on some of the operations, so while the company is quite expensive at current multiples, we have to consider multiples at the end of its investment programme in 2025, which currently implies an attractive valuation based on the construction costs.
“The fund aims to positively influence all companies in the portfolio through active engagement”
“The aim is to promote companies having the best practices in terms of sustainability”
Find out more about the Fidelity Sustainable European Equity Fund
Europe’s ESG leaders
Why we’re backing
Why our own ratings?
Our approach to sustainable investing
Ways we engage with companies
OUR ESG ANALYSIS CLOSES THE LOOP
Sustainability analysis and ratings approach
Our commitment to assessing companies on sustainable investment issues took a huge step forward in 2019 with the launch of our proprietary sustainability ratings system. These ratings leverage our research capabilities and corporate access to generate a forward-looking assessment of a company’s ESG performance and its trajectory. They are solely for the use of Fidelity’s investment teams and are informed by 180 (as at end Dec 2020) analysts around the world who participate in around 16,000 company meetings a year.
180
Analysts around the world
16,000
Company meetings a year
Do not rely solely on public disclosures
More forward looking
Fundamental analysis
Allows fuller coverage
How we make our ratings
Collaborative input across 180 equity and fixed income analysts
Rated relative to peer group on a standardised scale Show scale >
Forward looking assessment of a company’s ESG trajectory
Quantify impact on valuation
A
E
Ranked
Sub-sectors
99
5-8
KPIs each
Hide scale X
Engagement – our approach
Every investment decision has potential long-term financial and societal consequences. Fidelity’s size and scale provides a level of corporate access that very few of our peers enjoy and we are committed to using our position to steer companies towards the right business decisions on both matters.
Companies willing to adapt and behave responsibly today have the greatest chance of succeeding in a rapidly evolving future. We believe that by engaging with and changing corporate behaviour, we can help protect and enhance investment returns for our clients and generate positive non-financial outcomes for society too.
Company meetings and formal correspondence
Shareholder resolutions
Collaborative engagement
Proxy voting
Public policy
Fidelity’s analysts explain how they go about rating companies for their sustainability
Climate risks are a core part of the rating for all sub-sectors. The ratings capture the most material risks to the respective sector. For example, for utilities it is setting GHG reduction targets whilst for banks it is their fossil fuel-lending policy. The KPIs are tagged and therefore a climate assessment can be conducted across all holdings.
CLIMATE CHANGE
• • • •
Engagement in 2019 at a glance*
Meetings conducted with companies
4,300+
Shareholder meetings at which we voted
680+
Companies actively engaged with
Engagement by region
Americas
20%
UK and Ireland
Continental Europe
27%
MEA
1%
Asia
Japan
Oceania
7%
16%
9%
Financial analysis
ESG analysis
Capital allocation
Building forecasts
Valuations
Fundamental prospects
Environmental
Social
Governance
Climate change Natural capital Pollution and waste Environmental opportunites
Human capital Product liability Stakeholder opposition Social opportunites
Board composition Remuneration Corporate behaviour
• • •
Non-voting engagements by theme
Voting engagements by theme
How Fidelity voted in AGMs
Non-Voting engagements accounted for 40% of all engagements (275)
*UN Sustainable Development Goals
Voting engagements accounted for 60% of all engagements (407)
*Took no action
Source: Fidelity International, June 2020
Engagements by category (non-voting)
Engagements by category (voting)
Business ethics Water Waste UN’s SDGs* Other Energy Health and safety Supply chain management Data privacy and security Human capital Capital allocation Climate change Corporate strategy Governance
0%
40%
60%
M&A/Corporate structure Capital structure Shareholder proposal Governance structure Remuneration
80%
Votes with management
71.3%
Votes against management
23.6%
TNA*
2.6%
Abstain
2%
Blocked
0.5%
Tap the vote card for details.
Breakdown of AGMs by region
Oceana
5%
8%
UK
10%
Europe
17%
25%
34%
Hover over the world to reveal the breakdown.
standardised scale
Source: *Fidelity, Sustainability Report July 2020, p.7
Corporate engagement
Integrated sustainability analysis and proprietary ratings
Collaboration with policymakers, industry groups and non-governmental organisations across the globe
We are working to encourage policymakers to make company sustainability disclosures the norm in every region of the world, although we appreciate that we will achieve this more quickly in some jurisdictions than others. In addition, members of Fidelity’s Sustainable Investing Team work closely with external and collaborative sustainability-related bodies that seek to improve the way industries are regulated and companies are managed, as well as to promote sustainable investing and social development.
As active stewards of capital, we believe the most effective way to improve investor outcomes is by influencing corporate behaviour through engagement. Fidelity’s size and scale grants us superior levels of corporate access, while our extensive resources mean we can thoroughly assess a company’s attributes.
Our teams work together to assess and review the sustainability issues affecting each individual asset at the security level. Our analysts are encouraged to explore any material differences between their internal ratings of companies and the external ESG ratings provided by third-party research agencies. Our dedicated Sustainable Investing Team add additional input where necessary.
Our clients expect us to use our access to influence corporate behaviours that will help build a better world at the same time as protecting investment returns. Our success as shareholders and asset managers in communicating the importance of a sustainable business agenda and actively engaging is crucial to creating long-term shareholder value whilst making a positive difference to the environment and society.
We have developed an approach to sustainable investing that draws together three complementary elements:
Click on icons for details
Pollution and waste Environmental opportunites
• •
Back to Fund selection
Explore the fund
*Sustainable characteristics may include, but are not limited to, effective governance and superior management of ESG issues. Aims for carbon intensity c80% - 95% lower than the reference index and significant exposure to ESG leaders (AAA & AA MSCI ESG rated businesses). This is representative of typical criteria, but may change from time to time in order to ensure desired investment characteristics are achieved in line with the fund’s investment objective as stated in the prospectus.
Fund category
Best-in-class
Fund structure
OEIC
Holdings
35-50
Fund size
£346m
Fund details
Fund theme: European equity strategy with at least 70% invested in European companies with strong sustainability characteristics.*
Managed by Vincent Durel
Three key sustainable strategies
In response to our clients’ rising sustainability expectations, we have substantially developed our in-house resources to scrutinise sustainability risks and also launched a growing Sustainable Family fund range.
Fidelity’s Sustainable Family of Funds
These funds are built on our core approach to sustainable investing, with an enhanced sustainable investing framework based on the three pillars of ESG integration, corporate engagement and exclusions.
The Sustainable Family fund range embraces both actively managed funds and ETFs and falls into two broad categories: best-in-class and sustainable thematic.
Explore the three funds featured below or click here to explore our whole Sustainable Family of Funds.
What does best-in-class mean? Actively seeking to select companies that are higher ESG performers relative to peers or where we identify an improving outlook (i.e. an expected outperformer).
What does sustainable thematic mean? Actively uses an investment approach that contributes to addressing sustainability challenges or creates a positive value-add to society and the environment.
Launch date
Originally launched 15/10/2012 and repurposed 27/01/2021
(as at 31.05.2021)
“The aim of this high conviction fund will be to promote companies having the best practises in terms of sustainability. I will select companies with the best sustainable models both in terms of financial and non-financial performances.”
Select one of the below for details
Fidelity Sustainable European Equity Fund
Fidelity Sustainable Water & Waste Fund
Fidelity Sustainable Asia Equity Fund
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. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Fidelity’s Sustainable Family of 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. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable European Equity Fund has the potential of having high volatility due to the concentrated nature of the portfolio. The Investment Managers’ focus across the Fidelity Sustainable Family of Funds range on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that could, at times, compare less favourably 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
Click here to view our full range
Sustainable thematic
35-55
OEIC £59m
OEIC 9 December 2019 (SICAV 7 November 2018)
“People can relate to water and waste within their everyday lives. It’s a powerful global story but it impacts us all on a local level”
Fund theme: Global equity strategy focused on companies connected to water and waste management
Managed by Velislava Dimitrova (Lead Portfolio Manager) Cornelia Furse (Co-Portfolio Manager)
50-70
26 April 2021
“I have always believed that companies with strong corporate governance practices and a focus on sustainable growth have a higher likelihood of protecting and enhancing long-term value creation for investors.”
Fund theme: The Fund offers core bottom-up exposure to Asia ex-Japan through a portfolio of 50-70 high quality sustainable growth stocks. At least 70% of the portfolio invested in Asia ex-Japan stocks with strong sustainability characteristics,* with holdings assessed against carbon footprint reports and relevant investable UN Sustainable Development Goals.
Dhananjay Phadnis (Lead Portfolio Manager) and Flora Wang (Assistant Portfolio Manager)
Fidelity Sustainable ASIA Equity Fund
Manager track record and fund launch: Dhananjay has managed the Fidelity Emerging Asia Fund since 2013 - which became the Fidelity Sustainable Asia Equity Fund on 26 April 2021. Following the repurpose, Dhananjay and Flora will continue to run the fund utilising the same quality growth approach, with enhanced ESG integration and deeper levels of engagement with individual portfolio holdings on ESG issues.
The full sustainable range
The three funds featured above are only one part of Fidelity’s expanding Sustainable Family Fund Range, which includes our sustainable ETF range.
Fund theme: Access to the best of Europe through a high conviction portfolio of 35-50 quality growth companies, which demonstrate strong sustainability characteristics and have a focus on generating long-term sustainable financial and non-financial returns.*
Fund theme: A thematic Environmental, Social and Governance fund that offers investors exposure to a global megatrend - uniquely combining the under-researched water & waste management sectors.
Fund theme: An equity based strategy offering core bottom-up exposure to Asia ex-Japan through a portfolio of 50-70 high quality sustainable growth stocks.*
Managed by:
Fund theme:
Fund details:
An equity based strategy offering core bottom-up exposure to Asia ex-Japan through a portfolio of 50-70 high quality sustainable growth stocks.*
Dhananjay Phadnis (lead portfolio manager) Flora Wang (assistant portfolio manager)
£331m
Access to the best of Europe through a high conviction portfolio of 35-50 quality growth companies, which demonstrate strong sustainability characteristics and have a focus on generating long-term sustainable financial and non-financial returns.*
£102m
OEIC £48m
