Fidelity Japan Trust | ESG

At Fidelity, we believe that high standards of corporate
responsibility generally make good business sense and have
the potential to protect and enhance investment returns. The
investment process undertaken by our research analysts takes
ESG issues into account when, in our view, these issues have a
material impact on either investment risk or return. ESG analysis is
carried out at the analyst level within the investment team and, as
the Portfolio Manager, I am also active in analysing the potential
effects of ESG factors when making investment decisions for
the Company.

By working closely with our Sustainable Investing team on the
ground in Japan, we are able to identify laggard companies that
are implementing real change and moving up the governance
scale. This is particularly relevant for small and mid cap
companies, where third party coverage is limited and simple
disclosure, especially in English, is often limited. When the markets
recognises these companies’ efforts, there is a good chance for
them to be rerated and revalued.

Fidelity has embedded Environmental, Social and Governance
(“ESG”) factors in its investment decision making process.
Fidelity has been a signatory to the United Nations Principles
for Responsible Investment (UNPRI) since 2012 and submits
an annual report detailing how it incorporates ESG into its
investment analysis.

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 sector
specific 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

Although Fidelity’s analysts have overall responsibility for
analysing the environmental, social and governance performance
of the companies in which it invest, it has a dedicated
Sustainable Investing Team working closely with the investment
teams and is responsible for consolidating Fidelity’s approach to
stewardship, engagement, ESG integration and the exercise of its
votes at general meetings.

The Sustainable Investing Team have a key role in assisting the
investment teams with ESG integration which includes:

• Implementing Fidelity’s proxy voting guidelines.

• Engagement with investee companies on ESG issues
including attending company meetings.

• Working closely with the investment team globally across all
asset classes in integrating ESG into analysis and decision-making.

• Providing internal ESG reporting including analyst reports,
portfolio manager reviews and industry analysis.

• Co-ordinating and responding to specific client queries on
ESG topics.

• Publishing client reporting on ESG integration and proxy
voting.

• Maintaining a thorough understanding of current ESG
themes and trends around the world.

• Attending external seminars and conferences focusing on
trending ESG issues and ESG integration.

• Providing ESG training to the investment team and across the
business.

Fidelity’s investment approach involves bottom-up research. As
well as studying financial results, the portfolio managers and
analysts carry out additional qualitative analysis of potential
investments. They examine the business, customers and suppliers
and may often visit the companies in person to develop a view
of every company in which Fidelity invests and ESG factors are
embedded in this research process.

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.

Japanese companies are often perceived by overseas investors
as commercially successful, but lagging international peers on
environmental, social and governance factors. That perception
no longer matches the reality in several areas. For example,
Japan now has the largest number of TCFD (Task Force on

Climate-related Financial Disclosures) supporters and CDP
(Carbon Disclosure Project) A-rated companies in the world.
Greater disclosure can therefore be expected by companies
on plans to tackle climate change in the future. The Japanese
GPIF (Government Pension Investment Fund) also reports that
Japanese companies have more technological know-how which
will allow them to adapt to climate change better than those in
other countries, based on analysis of the patents they hold.

As disclosure improves, the efforts of Japanese companies
to address ESG concerns are likely to become more widely
recognised, leading to higher ESG scores and more investor
capital.