The scale and sophistication of China’s modern equity markets belies the fact that they are only 30 years old. For many Chinese domestically listed A-share companies, the priorities to date have centred on survival and growth. More recently, however, corporate mentality has begun to shift as the country rebalances its economy from a model of growth at all costs to one that stresses quality and sustainability.
A vast and growing body of middle-class consumers who care about the environmental and social footprints of what they buy means companies need to take sustainability more seriously. The rise of sustainable investing offers further incentives for companies to step up their ESG efforts for the sake of easier financing. Given this confluence of factors, it is unsurprising that companies are generally willing and, at times, keen to engage with investors on ESG issues.
Launched during the reporting year, Fidelity International’s inaugural China Stewardship Report features a proprietary study of shareholder voting patterns across nearly 7,000 shareholder meetings and 40,000 company filings at Chinese A-share firms, plus on-the-ground evidence from Fidelity’s onshore ESG engagements in China. The report paints a clear picture of steady progress across-the-board when it comes to investment stewardship in China.
As a stock picker, our Portfolio Manager attempts to assess the quality of governance in the companies he researches and visits, as experience has clearly shown that better governed companies make better investments. Dale and his investment team have been on the front foot in lobbying for better disclosure and governance. Fidelity International as an organisation embeds ESG factors in its investment decision making process including considerations relating to the reduction of carbon emissions by investee companies.
In recent years Fidelity International has developed a proprietary sustainability ratings system leveraging its internal research and interactions with issuers. The ratings are designed to generate a forward-looking and holistic assessment of ESG risks and opportunities. Analysts quantify the direction of change of companies’ ESG performance (positive, neutral or negative trajectory). Analysts rate companies in ESG using a scale of A to E. The Board pays close attention to the ratings of underlying portfolio companies and challenges the Portfolio Manager and his team on any stocks with lower (so-called ‘D’ and ‘E’) ratings.
Fidelity International has embedded Environmental, Social and Governance (“ESG”) factors in its investment decision making process. Fidelity International 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. A breakdown of the ratings of the companies in the portfolio using MSCI and Fidelity’s own proprietary ratings can be found in the latest Annual Report. In addition, Fidelity’s portfolio managers are also active in analysing the effects of ESG factors when making investment decisions.
Fidelity International’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 International’s analysts have overall responsibility for analysing the environmental, social and governance performance of the companies in which it invests, 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 International’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 often visit the companies in person to develop a view of every company in which Fidelity International invests and ESG factors are embedded in this research process.
Examples of ESG factors that Fidelity International’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 International 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 International 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 International 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 International uses these ratings in conjunction with its wider analysis. Fidelity International’s sources of ESG research are reviewed on a regular basis.
The ESG ratings and associated company reports are included on Fidelity International’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.
A change in how Chinese corporates think about ESG
We have genuinely seen an increasing willingness among most Chinese corporates to engage on a range of ESG matters. Take, for example, newly listed companies proactively engaging with us on their first discussions regarding ESG topics. This clearly demonstrates that we are viewed as a trusted partner by many Chinese firms and hence are well positioned to facilitate positive ESG change at these companies, many of whom are just starting their ESG journey.
Another example is Pony.ai (the autonomous driving company, which is an unlisted holding). During our engagements with the company, we were made aware of their proactive approach in partnering with local government to provide the necessary training to drivers-at-risk to help them transition into new roles. They highlighted that they have already hired some former taxi drivers to be their safety drivers and maintenance workers but will investigate other ways to address this issue in a more structured way.
Furthermore, China’s ambition to reach peak carbon emissions before 2030 and achieve carbon neutrality by 2060 will require companies to transform to a lower-carbon business model. Improved ESG reporting that makes emissions data visible, comparable and accountable is a key component for achieving these goals and will further help embed ESG into the way Chinese corporates operate and think.