Corporate governance has always been a key consideration for Fidelity. It is particularly important for me as a contrarian investor whose focus is on unloved stocks and limiting downside. When I consider investing in a stock, I pay a lot of attention to any potential risk that could affect the share price, and ESG factors are key considerations. At Fidelity, our research analysts carefully consider ESG as part of their in-depth fundamental analysis and highlight any potential issue. However, rather than simply looking at a company’s track record and avoiding poor ESG performers altogether, we engage with company management and discuss our concerns and their plans going forward. This not only encourages improved practices, but can also be a source of value creation as any improvements can then translate into share price re-ratings. For instance, we invested in UK-listed global utility firm ContourGlobal when it was shunned by ESG-conscious investors, but through engagement with the company we could see a marked shift in the outlook of management. The company recently announced that it had scrapped plans to build a coal-fired power plant in Kosovo and said it would make no further coal plant investments globally. The stock has been one of the portfolio’s strongest performers this year.
ESG integration at Fidelity International is carried out at the fundamental research analyst level within its investment teams, primarily through the implementation of the Fidelity Proprietary Sustainability Rating. This rating was established in 2019 and is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities, based on sectorspecific key performance indicators across 99 individual and unique sub-sectors. In addition, Fidelity’s portfolio managers are also active in analysing the effects of ESG factors when making investment decisions.
Fidelity’s approach to integrating ESG factors into its investment analysis includes the following activities:
• In-depth research
• Company engagement
• Active ownership
• Collaboration within the investment industry
Examples of ESG factors that Fidelity’s investment teams may consider as part of its company and industry analysis include:
• Corporate governance (e.g. Board structure, executive remuneration)
• Shareholder rights (e.g. election of directors, capital amendments)
• Changes to regulation (e.g. greenhouse gas emissions restrictions, governance codes)
• Physical threats (e.g. extreme weather, climate change, water shortages)
• Brand and reputational issues (e.g. poor health and safety record, cyber security breaches)
• Supply chain management (e.g. increase in fatalities, lost time injury rates, labour relations)
• Work practices (e.g. observation of health, safety and human rights provisions and compliance with the provisions of the Modern Slavery Act)
Fidelity operates analyst training and development programmes which include modules on ESG themes, topics and strategies and attendance at external seminars on the trending ESG issues in the market globally as well as conferences to explore new ways of integrating ESG into the investment process across all asset classes.
Fidelity uses a number of external research sources around the world that provide ESG-themed reports and it subscribes to an external ESG research provider and rating agency to supplement its organic analysis. Fidelity receives reports that include company specific and industry specific research as well as ad hoc thematic research looking at particular topics. The ESG ratings are industry specific and are calculated relative to industry peers and Fidelity uses these ratings in conjunction with its wider analysis. Fidelity’s sources of ESG research are reviewed on a regular basis.
The ESG ratings and associated company reports are included on Fidelity’s centralised research management system. This is an integrated desktop database, so that each analyst has a first-hand view of how each company under their coverage is rated according to ESG factors. In addition, ESG ratings are included in the analyst research notes which are published internally and form part of the investment decision. The external research vendor also provides controversy alerts which include information on companies within its coverage which have been identified to have been involved in a high-risk controversy that may have a material impact on the company’s business or its reputation.