Fiona O’Neill

Fidelity International’s annual ESG Analyst Survey finds signs of year-on-year progress towards netzero but confirms there is a long way to go on the journey towards a more sustainable economy.

The Fidelity ESG Analyst Survey studies the views of its in-house analysts across the world and is based on almost 200 responses from equity and fixed income teams*.

Europe is still out in front on the transition to net zero, with the highest proportion of companies recognised as “leading the charge” by Fidelity’s analysts. And while China has the smallest proportion of companies leading the charge for now, more than half of Chinese companies are starting to change according to Fidelity’s analysts, meaning over 70 per cent are considering the transition to a low carbon economy.

Fiona O’Neill, head of strategic initiatives, Global Investment Research, Fidelity International, comments: “This year’s survey has found tangible signs of corporate progress towards net zero, despite the impact of the war in Ukraine, and an increase in the immediate demand for substitute fossil fuels, including coal, to alleviate higher prices.

“The positive trajectory of China’s transition shows that Chinese companies are responding positively to increasing investor awareness and top-down cues after Beijing’s 2020 announcement that it is targeting net zero by 2060.

 “However, many businesses are still early in their ESG journey and have a long way to go. Overall, progress is slower than we would like but it is happening. As a business, we continue to focus on identifying those companies taking concrete actions and continue allocating capital to where we believe it can do the most good.”

The survey also finds Fidelity’s analysts in aggregate see more opportunity than risk from the green transition, especially over the long term. Japan stands out, with analysts highlighting significant opportunities expected to emerge in autos, consumer staples and semiconductors over the next decade. China is also likely to benefit from green opportunities and is already a leader in areas such as solar panels.

Ms O’Neill continues: “A key theme we are watching is that of a ‘just transition’. This is the idea that the move to a greener economy risks adversely impacting some individuals and communities, such as those working in the fossil fuel industry, and that efforts should be made to mitigate such risks.

“Our analysts see signs of incremental progress, with a greater proportion of businesses having announced initiatives to promote a just transition by supporting displaced employees.”

More companies adopting policies on key ESG issues

It’s not just greenhouse gas emissions dominating discussions in meetings with boards and managements in the last 12 months. The survey highlights the marked increase in interactions across the board on social topics like employee welfare and diversity.

Ms O’Neill adds: “After the disruptions of the past year, supply chains are in focus, especially labour concerns, which showed the largest increase in mentions by the analysts. But the natural world is a key concern and, from a low base, biodiversity features in 26% of analysts’ conversations, with our team expecting that to rise in the year ahead.”

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Over half of Fidelity’s analysts believe companies will step up their focus on workers, consumers and the wider community as a direct result of the pandemic.

One consistent message across many sectors and regions is a new focus on employees. This takes the form of improved safety, partly in response to the pandemic, but also a longer-term effort to improve employee satisfaction with better conditions and in some cases, higher pay.

Fiona O’Neill, deputy head of equity research, comments: “The health of staff has been at the forefront of company managements’ minds, and our analysts from just about every region and sector confirm that companies will devote more attention to employees’ safety and wellbeing in the future. But the changes will be deeper and broader than just that.

“The survey responses also demonstrate that the global virus pandemic will accelerate a wider move towards stakeholder capitalism. There are many examples of this emerging – from European telecoms companies offering free data or devices to people in vulnerable demographic groups, consumer staples firms increasing their involvement in public hygiene initiatives and even pharmaceutical companies developing vaccines with plans to distribute at cost price. How persistent the post-virus changes prove to be, and whether additional costs will depress margins will emerge in the months to come.”

Situation challenging but optimism building

Other parts of the survey confirm a continued challenging backdrop for companies. Cuts to earnings forecasts are about as large as those expected last month whether the disruption abates from here or continues for the rest of the year.

However underneath the averages, dispersion is rising both among and within sectors. While expected earnings cuts are little changed from last month overall, variation is starting to emerge between sectors and regions as the extent of the downturn becomes clearer. Consumer discretionary and industrials analysts are more optimistic than last month, while financials analysts are less so.

The proportion of analysts expecting the pandemic will have a negative impact on earnings has fallen to 85 per cent from a peak of 91 per cent last month, indicating that negative sentiment is at least stabilising and has perhaps already peaked. The rising optimism among consumer discretionary analysts is particularly interesting because the sector has been hit hard by lockdowns enacted to curb the virus’ spread.

Fiona O’Neill adds: “While the economic backdrop remains extremely challenging, more analysts are reporting leading indicators in their sectors are positive this month compared to last month, a sign that while conditions might be harsh, at least some optimism is slowly building. It might be too early to call this the turn, but analysts are reporting that companies are beginning to set their sights on a strategy for recovery. China is still ahead in this respect, but other regions are starting to show signs of life too.

“The road ahead will not be smooth but we are keeping a close eye on emerging green shoots, looking for idiosyncratic opportunities in sectors and regions recovering at different speeds. Good active management based on both solid fundamental and sustainable research will be critical in a post pandemic world.”

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[1] The Fidelity Pulse Survey was conducted between 4-11 May and featured 205 responses from 146 analysts around the globe (analysts who cover more than one sector or region take the survey more than once).

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