Portfolio Adviser • Portfolio Adviser Magazine Responsible Investing • WHY A SUSTAINABLE FUTURE DEMANDS REAL ENGAGEMENT

It’s becoming increasingly clear that simply reshaping capital flows towards more sustainable companies isn’t going to be enough to resolve the urgent environmental and social issues we face. What is going to make a difference is a fundamental change in corporate behaviour, enabled by meaningful stewardship and active engagement by investors.

For this reason, we place active engagement at the core of our approach to sustainable investing. We also believe that working with companies to improve their sustainability practices and awareness of ESG risks will help create more resilient business models, which should in turn translate into the long-term sustainability of a company and positive investor returns.

Recent history shows that sustainability does have an impact on market returns. Indeed, our own recent research showed that highly rated ESG firms outperformed in the 2020 market crash and the subsequent rebound across both equity and f xed income markets. Our findings support the hypothesis that a company’s focus on sustainability is fundamentally indicative of its board and management quality and its resilience and, if anything, we expect this correlation between market performance and sustainability to strengthen going forward.

That’s why at Fidelity, for companies and sectors that fall outside of our principles-based exclusion list, we have a strong preference for engagement over exclusion. We believe we can create more positive change by leveraging our size and scale – and exercising our rights of ownership – to improve the focus of management teams on sustainability issues. Given the breadth and depth of global capital markets, we believe exclusion simply moves this responsibility to another capital provider, who may or may not have the same incentives and goals.

But for engagement to be meaningful, it must go beyond simply sending an email to a generic company inbox. Our approach adds value by demanding direct dialogue with leadership teams, working closely with other stakeholders for maximum impact and, where necessary, employing the use of proxy voting and shareholder resolutions to improve practices. In 2020, we conducted 923 ESG engagements with 716 companies, including 152 meetings with chairs and non-executive directors. Key themes included executive remuneration, governance and climate change. We also voted at over 3,800 shareholder meetings globally, opposing management at around 28% of the meetings at which we voted*.

Direct company engagement – where we engage with an individual company on a specific issue relating to their operations.

Thematic engagement – where we engage with a number of companies at once, aiming to accelerate progress on broad sustainability issues that cut across different sectors and regions, such as climate change and supply chain sustainability.

Collaborative engagement – where we work with other asset managers, policymakers or industry bodies to drive corporate change on critical issues. By collaborating we can maximise impact to advance the way industries are regulated and companies are managed.

Our fundamental research plays a pivotal role in highlighting material ESG risks that present an opportunity or requirement to engage with a company. For example, we may pursue an engagement based on a sustainability rating we’ve assigned to a company, or a broader industry-level risk we have identified. This comes from close collaboration between our analysts – who are experts on individual stocks and sectors – and our sustainable investing team, who supplement this knowledge with insights on broader ESG themes.

Once we have identified an engagement opportunity, we then create an engagement plan. This is done at the outset of each engagement, with defined goals, objectives and milestones, as agreed by our investment team. The sustainable investing team, supported by our portfolio managers and investment analysts, will then spearhead constructive dialogues with companies to explain our beliefs and expectations, and encourage shifts in long-term behaviour.

All engagements are recorded in our centralised engagement app and are regularly monitored. This enables our teams to track the progress and outcomes of engagements closely. It also helps us evaluate their success against the defined set of goals, objectives and milestones to ensure we are effectively influencing companies. In this regard, desired outcomes commonly involve improved disclosure on material ESG issues; the development of formal sustainability policies or management systems; improved performance and/or performance measurement.

We subsequently follow up through regular meetings with company management to ensure that our engagement activity is effectively driving more sustainable practices. Where companies fail to improve against agreed goals or there is a pattern of deteriorating sustainability scores, we would then review our holding, with the ultimate option of selling our position if adequate progress isn’t being made.

We are currently focusing our engagement attention on three key sustainable investing themes

1.Build back greener: Understanding nature-based risks as part of tackling climate change.

Climate change is the critical issue of our time. Without the rapid reduction of carbon emissions, it will become increasingly difficult, if not impossible, to avoid catastrophic climate effects.

As part of our response to this threat, Fidelity is a member of programmes such as the Climate Action 100+ initiative. This is a five-year initiative led by investors to engage systemically with companies globally that have significant opportunities to drive the clean energy transition and achieve the goals of the Paris Agreement. This agenda specifically seeks commitments to implement comprehensive business strategies to reduce emissions and provide enhanced corporate disclosure. Fidelity’s conversations are centred on how companies are planning to reduce emissions and how credible the strategies are to deliver these targets.

We are also working hard to raise our own sustainability standards. Fidelity has a stated goal of being net-zero as a business by 2030 and we also recently published our own TCFD (Taskforce on Climate Related Financial Disclosure) report. We strongly believe that is important to live by the standards we set – we believe they improve our own business resilience. Our long-term dedication to raise our own ESG standards also gives us more credibility when we ask investee companies to do the same.

2.Build back stronger: Looking after employees, supply chains and communities

This theme focuses on the social element of ESG, and particularly on narrowing the social divide. We are putting pressure on companies to take greater accountability, not only for the welfare of their employees, but for the community at large, and for the individuals in their often complex supply chains. Our objective is to increase the overall transparency relating to how companies manage their supply chains, to prevent human rights abuses and to promote good corporate governance.

In 2020, for example, we led a large collaborative engagement of a group of 85 investors, representing over $2trn in assets, on the humanitarian crisis of 400,000 seafarers stranded at sea. We engaged with shipping companies, charterers, and airline companies in our portfolios; co-signed a letter to the UN; and leveraged our media relations to develop mainstream media attention. By May 2021, the number of stranded seafarers had halved to 200,000. It is clear that active engagement made a difference, but we also recognise that more work needs to be done as our campaign continues.

Our third focus area is around digital ethics, which has become even more important now that so much of our lives is spent on technology platforms. With global reach come global responsibilities – and increasing risks to business models. Our digital ethics framework is based around six core areas: data governance, cybersecurity, misinformation, online welfare, ethical artificial intelligence and digital inclusion.

In terms of digital inclusion, we saw a big gap during the pandemic between the haves and the have-nots in terms of digital access. 41% of the world’s population are still not active internet users and this has created a divide between those that can access digital opportunities and those that can’t. ■

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 clients may get back less than they invest. 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 also be more volatile than 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. Funds that 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. The status of a security’s ESG credentials can change over time. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0921/36627/SSO/NA

We expect this correlation between market performance and sustainability to strengthen