Gavin Lumsden asks Fidelity Special Values (FSV ) fund manager Alex Wright how he responds to the rising tide of investment with environmental, social and governance (ESG) criteria?
This is a third excerpt from last week’s virtual event with Fidelity Special Values.
If those whet your appetite, you can watch the one-hour ‘Big Broadcast’ in which Wright discussess the opportunities in the UK stock market and answers investors’ questions.
Can’t watch now? Read the transcript
Looking at the portfolio and thinking of the environment, you’re an investor who likes to go against the crowd. At the moment, the crowd is very much running towards stocks with high environmental, social and governance scores. How do you incorporate ESG into your stock selection?
So clearly, both investors, but then also, regulators and politicians have really ramped up how important, particularly, environmental and social issues are for companies over the last three or four years. Governance has always been incredibly important to me, as an investor and something we’ve spent a lot of time on at Fidelity, but we’ve increasingly spent more time on those E and S risks over the last 24 months and particularly, we’ve come up with our-, the fundamental analysts, so those 155 equity analysts, also in conjunction with their fixed income counterparts, as well, have come up with ESG ratings for all of the major stocks in the fund. So that’s particularly helpful because it gives us our own, in-house view of where those risks are, rather than just relying on external rating agencies because those external rating agencies are very backward-looking and very data driven and I would say have a box-ticking mentality. So actually, some companies appear incredibly good from an ESG point of view, even though when you think about actually, what they’re doing, they don’t actually score particularly well in terms of risks.
So, I’d say a good example there is CRH (CRH), which by MSCI is triple-A rated. Whereas, we have a lower score than that, internally because they have a very high carbon footprint. So, they’re a cement and aggregates business, primarily. The reason for the triple-A rating is MSCI is all rated relative to other cement companies. So actually, they score pretty well versus cement because they’re only actually about 50% cement and have other lower carbon initiatives. Then also, they do use a lot more recycled material because they’re much more in mature western markets where the price of carbon is high, compared to some Chinese producers, which all use virgin coal. Ultimately, when you think about the absolute rating, they still have a very high carbon footprint and they are going to see higher carbon costs going forward and that is something that could affect the costs to that business, which may be difficult to pass on to their consumers. So that’s one of the reasons that company traded up to high valuations last year, as people got very excited about the infrastructure plan in the US, given that that was very much in the price of the valuation and we had those worries, that differentiated internal rating was one of the reasons why we were keen to sell out and find better ideas.
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