Jenn-Hui Tan

2023 was the planet’s hottest year in recorded history, and Antarctic Sea ice coverage also dropped to a record low. With climate change one of the world’s most pressing risks, its social and financial impact is already visible in the increasing costs of climate disasters for countries where events occur and for their supply chains. As more governments and business entities have announced net zero carbon ambitions and launched climate disclosures, it is critical to ensure their transition roadmaps are robust and credible enough to lead us to a net zero future.

According to the International Renewable Energy Agency, US$5 trillion of global investments are needed per year from 2030-2050 to keep global warming on the 1.5-degree Celsius pathway. This means that investments must more than triple 2022 levels to meet this growing financing gap. However, transition financing remains a significant hurdle for corporates and financial institutions alike, as challenges like a lack of climate mitigation and adaptation planning, and fragmented climate data and disclosures remain. This is especially urgent in Asia as the region accounts for half of global carbon emissions and produces about 85% of its energy from fossil fuels but it is not on track to deliver its 2030 climate targets. It is therefore in Asia’s long-term interest to invest in a transition to more a sustainable business model.

Jenn-Hui Tan, chief sustainability officer, Fidelity International comments: “Unlike green finance where funds are allocated to projects that are already meeting ESG criteria, transition finance is about helping carbon intensive sectors become more sustainable over time. However, clearer definitions of credible improvements are needed to reduce greenwashing risks and improve investor confidence in the ‘transition’. Asia will play a significant role in supporting global energy transition efforts and doing so will also unlock investment opportunities.”

“As a global asset manager, Fidelity International has been actively monitoring investment opportunities in Asia including operational efficiency, renewable energy generation, electric vehicles and related materials and infrastructure, as well as supporting global regulatory and framework development related to transition finance. The next phase of economic growth in Asia needs to be cleaner, healthier and more sustainable. The region is well placed to capitalise on the potential of the transition by leveraging its rich natural and human capital as well as technological innovation.”

Global investors are acknowledging that clear disclosure guidance and a favourable regulatory environment, in addition to funding, are required to address systemic climate issues and catalyse transition finance. A range of initiatives has emerged to tackle the climate crisis, and we are seeing an accelerating response from governments, regulators, corporates and the financial sector. Gradually, frameworks are emerging to help companies put in place robust strategies to meet their net zero targets.

Governments are also seeking to close policy gaps to make green technologies cheaper while regulators are working to channel transition financing to the right places. System-wide initiatives such as the United States’ Inflation Reduction Act provide support to develop technologies like green hydrogen and sustainable aviation fuels. The Transition Plan Taskforce in the UK aims to standardise private sector climate transition planning by providing general and sector specific best practices. Global regulations on fund products such as the UK Sustainability Disclosure Requirements (SDR) also recognises ‘transition’ as an investment category. These developments are expected to drive improvements in corporate transition planning and disclosures as well as speed up relevant capital allocation.

Stewardship is key to supporting corporates to prioritise transition

Transition planning and implementation may involve broader stakeholders such as regulators, resulting in additional hurdles for corporates. Investors are well-placed to support investees to understand systemic climate risks and opportunities and share their expectations of robust transition roadmaps. While investors conduct extensive research to analyse the technical nuances of climate transition, stewardship activities such as engagement and voting also play a significant role in highlighting the uniqueness of individual corporate transition plans and allowing investors to make decisions accordingly. Where companies’ actions and efforts are deemed inadequate, investors can escalate engagement intensity and express their position through voting, emphasising the board’s role in ensuring a credible transition through cultivating an enabling corporate culture and behaviour, right incentive structures, and transparency to investors.

Tina Chang, Associate Director, Sustainable Investing at Fidelity International comments: “Transition often does not happen in a linear fashion and requires a strategy that is unique to the market, the industry, and the company. Our engagement with companies focuses on the local challenges and opportunities presented and highlight the importance of effective communication for investors to evaluate whether a transition strategy is credible. Such communication is especially important in Asia because climate and ESG disclosure is relatively nascent, so companies are often tackling the dual challenge of building out disclosure capacity while setting targets.”

“Fidelity’s transition pathway mainly focuses on bottom-up investment research integration and top-down stewardship engagement. Our proprietary ESG rating tool coupled with our climate rating allows the investment teams to consider long-term transition prospects of companies in a holistic manner. Our thematic engagement prioritising thermal coal phase-out on the other hand starts from the top-down identification of material thermal coal exposure to strategize and conduct timebound engagements with companies with the aim to phase out thermal coal.”

In line with Fidelity’s ambition to achieve net zero across its investment portfolios by 2050, including halving its portfolios carbon footprint by 2030, and to phase out investment in thermal coal in OECD countries by 2030 and globally by 20401, Fidelity continues to reinforce its approach to addressing climate issues.

Jenn-Hui Tan, Chief Sustainability Officer, Fidelity International comments: “At Fidelity, we continue to evolve our approach as the sustainable landscape changes. As more businesses publish credible transition plans, it is important for asset managers to champion further developments in transition finance and engage with regulators and governments to close policy gaps to make green technologies cheaper and channel transition financing to the right places.”

Jenn-Hui Tan

A rapid change in investment trends is unfolding in Asia as governments, regulators and investors sharpen their focus on climate change and corporate governance. Jenn-Hui Tan, Fidelity International’s Global Head of Stewardship and Sustainable Investing; Yuanlin Lang, Senior Equity Analyst & Portfolio Manager; and Tina Chang, Associate Director, Sustainable Investing, assess the embedding of environmental, social and governance (ESG) factors and explore the near-term outlook for sustainable investing in Asia’s diverse markets.

Even though Asia ex-Japan still accounts for around 4 per cent of global ESG assets under management (AUM) , the region has taken significant strides in ESG adoption over the past few years. According to a recent survey of Fidelity’s analysts, 70 per cent see a growing emphasis on communicating ESG policies among Asian corporates. That’s on par with the global average and slightly ahead of North America, with a good deal of that momentum driven by regulation.

“It’s not particularly well-appreciated that the amount of ESG regulation in Asia has doubled since 2016, matching the output of European regulators,” says Tan. Much of this is driven by entity-level reporting of products and services, activity-level reporting and due-diligence requirements.

The journey towards full disclosure

In terms of disclosure, the landscape is improving rapidly. “Five years ago, a minority of the companies I cover published annual ESG reports; now most do,” notes Lang.

But while companies are disclosing more information in areas like energy consumption, greenhouse-gas emissions and hazardous waste treatment, many are either not setting improvement targets, or issuing targets with inconsistent metrics, making comparative analysis difficult.

Equally, it remains challenging for businesses to establish the type of information investors require on social issues. “Based on our conversations with companies, they have multiple guidelines and internal policies on compliance training, responsible marketing, diversity and inclusion, but they are trying to establish what is relevant for investors,” adds Lang.

Accelerating ESG adoption in China

Fidelity recently conducted a study of around 260 executives in China to gauge ESG adoption. The results show that it is gathering pace. Almost two-thirds of companies surveyed already publish annual ESG reports, and 29 per cent plan to do so within three years.

On one level, this acceleration is being propelled by regulatory requirements, particularly among China’s state-owned enterprises (SOEs). However, the study also found that the top two drivers of action on ESG were customer and investor demand, both global and domestic, indicating that the mindset of Chinese investors is shifting as expectations grow for companies to be more socially responsible.

Challenges remain. The largest of which is the collection and deployment of data. “It’s tough at the moment to gather all the data required for ESG disclosure, though that is something firms are looking to tackle in the next 12 months,” says Chang, “Although disclosure and ESG strategies are maturing, they’re not using international frameworks yet, so it’s still tricky for stakeholders to process the data and make a global comparison.

“At the same time, it’s an opportunity for analysts to explore the detail and make our own judgments, given companies aren’t disclosing it in a way that third-party providers can digest.”

An uneven regulatory backdrop

Unlike in Europe, there is no unifying set of regulations across Asia. “We still lack consistency in the region, with each regulator taking their own approach,” explains Tan. “When you aggregate those and combine them with the rules in Europe and the US, it creates a patchwork environment that we have to navigate.”

Despite this, individual Asian markets are progressing towards a broadly aligned set of standards, albeit at different speeds.  “There are common themes to the regulations,” Tan continues. “If you think about the rules that have emerged, you have agreed taxonomies, climate reporting that is generally aligned to the TCFD (Task Force on Climate-Related Financial Disclosures), growing carbon pricing, supply chain due diligence requirements, corporate ESG disclosures and ESG fund-labelling requirements.”

The push for more robust governance

Chang notes that the trend towards governance enhancement is not as prominent or well-known as these regulatory developments.

In China, the Securities Regulatory Commission recently launched a consultation on the role of independent directors, clarifying their positions and strengthening their accountability and influence on corporate boards. There’s also a push to improve capital allocation at SOEs, which is a crucial part of the governance pillar. “It may not be a huge change, but we will see the situation develop in China. There’s also growing investor activism in markets such as South Korea,” says Chang. These developments are particularly valuable to investors in Asia.

Overall, the fundamental bottom-up analysis of ESG risks and opportunities is still emerging in Asia. However, this presents an opportunity for investors with an on-the-ground presence to develop unique first-hand insights.

By Jenn-Hui Tan, global head of stewardship and sustainable investing

Jenn-Hui Tan

Over 60% of retail investors in the Asia Pacific region now recognise the importance of sustainable investing, continuing a positive trend that has developed over recent years. However, more than a third (36%) feel there is a trade-off between investing sustainably and achieving a good return.

The annual survey, conducted with more than 12,000 respondents across six APAC markets including mainland China, Hong Kong, Taiwan, Singapore, Japan and Australia, aimed to analyse the sentiment of individual savers and investors towards ESG and sustainable investing.

The results this year continued the trend seen in 2021, with APAC investors becoming increasingly positive towards the concept of sustainable investing. More than half (54%) of respondents expressed their desire to use their money to make a positive change in the world, with 56% believing that investors have the power to change corporate behaviours through their own investing actions. From the six markets surveyed, mainland China and Singapore are the two markets where investors are most interested in realising positive change through investing.

However, respondents also indicated some concerns when it comes to the promises being made on sustainable investing at its current stage of development. Almost half (46%) of investors feel the definition for what qualifies as sustainable investing seems subjective, with a lack of clear definitions for investment managers to follow, and 49% feel sustainable investments and their providers lack regulatory oversight in relation to the promises they make. Interestingly, in mainland China and Singapore where there is the highest level of interest in sustainable investing, there is also the greatest level of concern over the lack of clear guidelines.

Among the range of ESG-related issues where investors are most keen to make a positive change, climate change tops the list in all surveyed markets followed by sustainable consumption and broader social issues. This aligns with the findings from the Fidelity ESG Analyst Survey 2022^[1]  that highlights greenhouse gas emissions as one of the leading topics dominating discussions in meetings with boards and managements in the last 12 months. The ESG Analyst Survey also highlights the marked increase in interactions on social topics like employee welfare and supply chain-related environmental and labour issues.

“Sustainable investing is becoming a mainstream investment theme across the APAC region and we are encouraged to see retail investors’ interest in sustainability continue to grow,” says Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity International. “Clearly, there are concerns about how ESG-related financial products are living up to their promises, which the financial services industry needs to address. At Fidelity International, we want to be at the forefront of this effort. We’ve developed a proprietary rating system to guide our sustainability research and we are also dedicated to driving positive change in businesses through constructive corporate engagements with our investee companies. To further address questions of reliability, we believe broader industry collaboration on investor education and fostering a consistent sustainable investing framework will be critical.”

Fidelity is actively playing its part on the road to net zero through its Climate Investing Policy and net zero strategy. By 2030, Fidelity aims to halve the carbon footprint of its investment portfolios and achieve net zero emissions across its own corporate operations, and by 2050 plans to reach net zero across all investment portfolios.

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Sources:
[1] The Fidelity ESG Analyst Survey was conducted between 4 – 13 May 2022 and received 191 responses from 161 analysts (some responded more than once depending on their sector coverage).

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Jenn-Hui Tan

Over 60% of retail investors in the Asia Pacific region now recognise the importance of sustainable investing, continuing a positive trend that has developed over recent years. However, more than a third (36%) feel there is a trade-off between investing sustainably and achieving a good return.

The annual survey, conducted with more than 12,000 respondents across six APAC markets including mainland China, Hong Kong, Taiwan, Singapore, Japan and Australia, aimed to analyse the sentiment of individual savers and investors towards ESG and sustainable investing.

The results this year continued the trend seen in 2021, with APAC investors becoming increasingly positive towards the concept of sustainable investing. More than half (54%) of respondents expressed their desire to use their money to make a positive change in the world, with 56% believing that investors have the power to change corporate behaviours through their own investing actions. From the six markets surveyed, mainland China and Singapore are the two markets where investors are most interested in realising positive change through investing.

However, respondents also indicated some concerns when it comes to the promises being made on sustainable investing at its current stage of development. Almost half (46%) of investors feel the definition for what qualifies as sustainable investing seems subjective, with a lack of clear definitions for investment managers to follow, and 49% feel sustainable investments and their providers lack regulatory oversight in relation to the promises they make. Interestingly, in mainland China and Singapore where there is the highest level of interest in sustainable investing, there is also the greatest level of concern over the lack of clear guidelines.

Among the range of ESG-related issues where investors are most keen to make a positive change, climate change tops the list in all surveyed markets followed by sustainable consumption and broader social issues. This aligns with the findings from the Fidelity ESG Analyst Survey 2022^[1]  that highlights greenhouse gas emissions as one of the leading topics dominating discussions in meetings with boards and managements in the last 12 months. The ESG Analyst Survey also highlights the marked increase in interactions on social topics like employee welfare and supply chain-related environmental and labour issues.

“Sustainable investing is becoming a mainstream investment theme across the APAC region and we are encouraged to see retail investors’ interest in sustainability continue to grow,” says Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity International. “Clearly, there are concerns about how ESG-related financial products are living up to their promises, which the financial services industry needs to address. At Fidelity International, we want to be at the forefront of this effort. We’ve developed a proprietary rating system to guide our sustainability research and we are also dedicated to driving positive change in businesses through constructive corporate engagements with our investee companies. To further address questions of reliability, we believe broader industry collaboration on investor education and fostering a consistent sustainable investing framework will be critical.”

Fidelity is actively playing its part on the road to net zero through its Climate Investing Policy and net zero strategy. By 2030, Fidelity aims to halve the carbon footprint of its investment portfolios and achieve net zero emissions across its own corporate operations, and by 2050 plans to reach net zero across all investment portfolios.

——–

Sources:
[1] The Fidelity ESG Analyst Survey was conducted between 4 – 13 May 2022 and received 191 responses from 161 analysts (some responded more than once depending on their sector coverage).

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In this newly created role, Daniela will work with Fidelity’s investment team to help further integrate sustainability considerations into the firm’s investment process. She will work closely with Fidelity’s large research function on the firm’s proprietary sustainability ratings, support engagement and voting activities with investee companies and contribute to the development of Fidelity’s sustainability product offerings. In addition, Daniela will act as a spokesperson for Fidelity and represent the firm’s sustainable investing capabilities in Australia and New Zealand.

Daniela will report to Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International, who comments: “Daniela is a welcome addition to an already strong sustainable investing team, and I’m delighted to have her on board. She brings extensive experience in ESG strategy and policy, including integrating the Sustainable Development Goals into investment strategy, which will be highly additive to the continuing integration of sustainability practices into our investment process.”

With more than 15 years of experience, Daniela joins Fidelity from HESTA where she was most recently Senior Responsible Investment Adviser. During her time at there, she founded 40:40 Vision, an investor led initiative to drive gender diversity in the C-suite of ASX listed companies. Prior to HESTA, she held roles in sustainable investment across the US (Wespath Investment Management) and UK (Legal & General Investment Management). She is currently a board member of the Responsible Investment Association Australasia (RIAA) and has also served as a member of the PRI Stewardship Advisory Committee. Daniela holds an MSc. in Environment and Development from London School of Economics and a B.A in Journalism from Universidad San Francisco de Quito.

Daniela’s appointment follows Fidelity’s recent hire of Gabriel Wilson-Otto to the position of Director, Sustainable Investing, in Hong Kong and brings the size of the firm’s dedicated Sustainable Investing Team in Asia Pacific to 13 across five markets and 26 globally.

Jenn-Hui continues: “ESG continues to be a top priority at Fidelity. Building out the capability and coverage of our global Sustainable Investing Team both here in APAC and in Europe, signals just how important this is to us as a firm and to our clients.”

Jenn-Hui Tan

Fidelity International, a global asset manager with total client assets of $787.1 billion, has published its Sustainable Investing Voting Principles and Guidelines, introducing new global policies on climate change and gender diversity.

Through engagement and voting, Fidelity aims to improve the governance and sustainability behaviours of its investee companies. The new policy will see Fidelity increasingly hold investee companies to account, utilising its right to vote against boards that do not meet expectations.

“At Fidelity, we believe that exercising our ownership rights by voting at company meetings is a fundamental responsibility for shareholders,” said Jenn-Hui Tan, global head of stewardship and sustainable investing, Fidelity International. “Through the use of engagement and voting, we aim to improve the governance and sustainability behaviours of our investee companies.”

The Sustainable Voting Principles and Guidelines cover 12 topics focusing on key environmental, social and governance (ESG) areas detailing summary voting principles and Fidelity International’s expectations for its investee companies.

Tackling climate change

Fidelity International recognises that climate change poses one of, if not the most, significant risks to the long-term profitability and sustainability of companies. To limit global warming to not more than 1.5°C above pre-industrial levels, the global economy will need to go through a radical transformation, affecting most areas of human activity.

Fidelity expects investee companies to:

• take action to manage climate change impacts and reduce their greenhouse gas (GHG) emissions
• make specific and appropriate disclosures around emissions, targets, risk management and oversight.

From 2022, where companies fall short of its minimum expectations, Fidelity will vote against company management.

“Our message to investee companies is clear; the climate crisis must not and cannot be ignored,” Jenn-Hui Tan comments. “It impacts the very nature of major industries in which we invest, and as such must be high on the agenda of all companies. At Fidelity, we’re working collaboratively with peers in the Net Zero Asset Managers initiative, supporting and the transition towards global net zero emissions.

“We expect investee companies to do the same and have policies in place to reduce carbon and other greenhouse gas emissions. This includes setting and reporting on ambitious targets aligned to the UN’s Paris Agreement on climate change including an approach to Net Zero.”

Gender diversity on boards

While progress has been made in some markets in recent years, new research in the UK has revealed that more needs to be done to build a balanced, fair and representative corporate sector. The new report -The Hidden Truth About Diversity and Inclusion in the FTSE All-Share^[1] – from Women on Boards, exposed that more than half of all companies listed in the FTSE All-Share ex350 have all-male executive leadership teams.

Fidelity will actively engage and consider voting against company management in most developed markets that do not have at least 30 per cent female representation on the board of directors. In markets where standards on diversity are still developing, an initial 15 per cent threshold is targeted.

Paras Anand, CIO – Asia Pacific, Fidelity International, comments: “An increasing body of research has shown that organisations that promote diversity are more productive and better performing. We know from our own company that a diverse and inclusive workplace brings benefits for our customers, our business and our people. At Fidelity, we are committed to actively engaging with our investee companies in the UK and globally; driving them towards more ambitious gender diversity goals, and ensuing we are holding them to account where our expectations are not met.”

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[1] Source:  Women on Boards, June 2021, The Hidden Truth About Diversity and Inclusion in the FTSE All-Share

In this new role, Gabriel will work with Fidelity’s investment professionals to help further integrate sustainability considerations into the firm’s investment process. He will also work closely with Fidelity’s large research function on the firm’s proprietary sustainability ratings and support the execution of Fidelity’s sustainability-related regulatory programme, which continues to grow.

Gabriel will report to Jenn-Hui Tan, global head of Stewardship and Sustainable Investing at Fidelity International, who comments: “As we continue to expand our ESG capabilities and integration across the firm, I am delighted to have Gabriel join our growing team. He brings deep industry expertise in ESG research and stewardship, which will be a great asset to Fidelity. Gabriel will play an important part in helping the Sustainable Investing function identify long-term sustainable investment trends and strategic opportunities for our clients.”

With more than 15 years of experience, Gabriel joins Fidelity from BNP Paribas Asset Management where he was most recently global head of Sustainability Research. Prior to BNPP AM, he was an Executive Director in Goldman Sachs’ Global Investment Research division and Head of GS SUSTAIN for Asia. Gabriel holds a Bachelor of Commerce (Finance and Economics) and a Bachelor of Information Systems from the University of Melbourne. He is a CFA charter holder.

Sustainable investing at Fidelity International

At Fidelity International, we believe that high standards of corporate responsibility make good business sense and have the potential to protect and enhance investment returns. Consequently, we integrate Environmental, Social and Governance (ESG) issues into our research and investment decision-making process; we believe it has the potential to affect the long-term value of an investment.

Our objective is to act as responsible stewards of our clients’ capital and to influence corporate behaviours that will help to build and potentially increase investment returns. We do this in three ways by:

• integrating sustainability research and ratings into our fundamental research and security selection process
• using our corporate access to promote positive change and protect shareholder value
• offering sustainable investment solutions to meet our clients’ investment needs and objectives .

Jenn-Hui Tan

Eighty five investors representing over US$2trillion in assets, led by Fidelity International, have joined forces to urgently address an unfolding humanitarian crisis at sea and preserve the long-term sustainability of global supply chains.

Due to Covid-19, over 400,000 seafarers are stranded at sea, many have been working for up to 17 months, much longer than the industry norm and the regulatory limit of 11 months. A further 400,000 seafarers remain ashore waiting to relieve them, often with little or no pay. The International Chamber of Shipping has estimated that the number of seafarers affected could soon reach one million if this issue is not addressed urgently.

This issue is presenting significant health and safety concerns to the already elevated mental and physical stress seafarers are facing and has the potential to result in major safety risks when exhausted seafarers handle dangerous or perishable cargoes. The environmental consequences of a serious maritime accident involving these cargoes could be catastrophic for our oceans and our security.

In an open letter to the United Nations, and in consultation with key marine organisations such as the International Labor Organisation and the International Transport Workers’ Federation, signatories*, including Achmea Investment Management, ACTIAM, Ethos Foundation, Lombard Odier Investment Management and MFS Investment Management, identify the clear need for the following measures to be put into effect:

• Continuing to call for the official designation of seafarers as “key workers” and the establishment of systematic processes to enable safe crew changes such as safe corridors and testing regimes
• Raising awareness, through a targeted publicity campaign, of the scale and risks that this crisis is already creating for seafarers and sustainable supply chains
• Sharing the International Maritime Organisation’s (IMO) 12-step protocol with relevant entities to facilitate universal implementation
• Ensuring seafarers should not spend more than the legal maximum of 11 months on board and limiting any unavoidable crew contract extension
• Urging charterers, especially those that charter vessels on a frequent basis, to be flexible with route deviation requests from shipping companies to facilitate crew change and to consider financial support for the costs of crew repatriation.

The signatories have agreed to engage relevant portfolio companies to communicate their expectations around these measures.

Jenn-Hui Tan, Global Head of Stewardship & Sustainable Investing, Fidelity International, commented: “As investors, it is clear that this is no longer solely a shipping industry problem nor a crisis that the shipping industry can resolve on their own. Shipping is responsible for 90% of global trade and holds the key not just to a global economic recovery from the devastation of COVID-19, but to maintaining our current way of life. Seafarers must be classified as ‘key workers’ to enable them to perform their essential services in a safe and secure manner.

“We believe it’s imperative the industry collectively sounds the alarm on an overlooked global humanitarian issue and protect our global supply chains. Together, as stewards of capital, we have a broader responsibility to the communities and societies in which we operate.”

Vincent Kaufmann, CEO, Ethos Foundation, said: “The fact that an estimated 400,000 seafarers remain stranded across global supply chains is a humanitarian tragedy as well as a major supply chain risk for many companies. Therefore, Ethos Foundation and the members of the Ethos Engagement Pool International are proud to support this investor statement urging the UN Secretary General to facilitate a multilateral response to ensure that seafarers are designated as key personnel and to take swift action to improve their current working conditions.“

Corey Klemmer, Director of Engagement, Domini Impact Investments, said: “Seafarers, trapped by their jurisdiction and Covid-19 restrictions, are yet another group of essential workers facing a humanitarian crisis in this pandemic. We need companies and their industry groups to step up and address the issue for the sake of these workers and our global economy.”

The Reverend Canon Brian Grieves, Vice Chair, The Episcopal Church’s Committee on Corporate Social Responsibility, said: “For the Episcopal Church this is personal. We have had decades of ministry to seafarers, since 1834 in fact, through the Seamen’s Church Institute, and these mariners are an integral part of our Church family. Our concern for their welfare is urgent.”

Pat Zerega, Senior Director of Shareholder Advocacy, Mercy Investment Services, said, “We’re deeply concerned about the well-being of the hundreds of thousands of seafarers stranded for months. Life at sea for that length of time impacts both physical and mental health. Shipping is a critical part of the global supply chain, and the safety of both sailors and the ships are essential to our global economy. We join our fellow investors in calling for new and improved measures that will address this urgent crisis.”

Jenn-Hui Tan

The recent period of market volatility as a result of the coronavirus pandemic has shocked in its severity. But the broad-based sell-off did discriminate, as new data from Fidelity International reveals. Each additional level (from A – E) of Fidelity’s proprietary environmental, social and governance (ESG) ratings was worth 2.8 percentage points of stock performance versus the index during recent volatility, according to the research*.

Fidelity carried out a performance comparison across more than 2,600 companies, using its proprietary sustainability rating system**. The forward-looking ratings are derived from direct engagement with companies, aggregating approximately 15,000 individual company meetings per year.

The data found that a company’s market performance and ESG rating are positively correlated, even in a crisis. The equity and fixed income securities issued by companies at the top of Fidelity’s sustainability rating scale (A and B) on average outperformed those with average (C) and weaker ratings (D and E) in this short period, with a remarkably strong linear relationship.

In the 36 days between 19 Feb and 26 March, the S&P 500 fell 26.9 per cent. Meanwhile, the price of a share in companies with a high (A or B) Fidelity ESG rating dropped less than that on average, while those rated C to E fell more than the benchmark. A-rated companies performed on average 3.8 percentage points better, while E-rated companies performed on average 7.4 percentage points worse than the S&P 500 during the period examined.

Source: Fidelity International, April 2020

Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, Fidelity International commented: “No asset was spared as the severity of the economic shutdown needed to contain the coronavirus outbreak became apparent to investors. The quickest US bear market in history, from February to March this year, was also the first broad-based market crash of the sustainable investing era.

“Our thesis, when starting the research, was that the companies with good sustainability characteristics have better management teams and so should outperform the market, even in a crisis. The data that came back supported this view.

“While some caveats remain, including adjustments for beta, credit quality and the sudden market recovery, we are encouraged by evidence of an overall relationship between strong sustainability factors and returns, lending further credence to the importance of analysing ESG factors as part of a fundamental research approach.”

Bonds of A-rated companies outperform

 The research from Fidelity International also found the fixed income securities of higher-rated ESG companies performed better than on average than their lower rated peers from the start of the year up to March 23, in an unadjusted basis.

The bonds of the 149 A-rated companies returned -9.23 per cent on average, compared with -13.16 percent for B-rated companies and -17.14 per cent for C rated companies.

Chart 2: High quality ESG leads to better fixed income returns

 Source: Fidelity International, April 2020

Jenn-Hui Tan added: “The recent period of market volatility was shocking in its severity. A natural behavioural reaction to market crises is to lower investing horizons and focus on short-term questions of corporate survival, pushing longer term concerns about environmental sustainability, stakeholder welfare and corporate governance to the background.

“But this short-termism would indeed be short-sighted. Our research suggests that, what initially looked like an indiscriminate selloff did in fact discriminate between companies based on their attention to ESG matters.

“It supports our view that a company’s focus on sustainability factors is fundamentally indicative of its board and management quality. This leads to more resilient businesses in downturns that will be better positioned to capture opportunities when economic activity resumes, more than earning its place at the heart of active portfolio management.” 

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*Source: Fidelity International, 19 Feb – 26 March, analysis of 2,689 companies
**Source: Fidelity International, 1 January – 23 March analysis of 1,398 companies

This year, 90 per cent of Fidelity International’s analysts report that some or all of the companies they cover are focusing more on ESG, up from 70 per cent in 2019. Following a pronounced increase in climate change awareness and corporate reforms, the change can be seen throughout most sectors and all regions, including areas where ESG interest had previously appeared to stall or be in decline.

Each year Fidelity International surveys its global analyst team to take the pulse of the corporate landscape. Unlike many other top-down macro-economic surveys, the research starts at the bottom, aggregating c. 15,000 individual company meetings until a big picture emerges.

While corporate governance is generally improving, with greater levels of investor engagement throughout the world, companies have made less progress on board diversity. Most Fidelity International analysts report that their companies’ boards have low to middling diversity, with almost no change on the previous year.

Chart 1: ESG issues shoot up the corporate agenda

Source: Fidelity International Analyst Survey 2020

ESG on the rise in China…and the US

While ESG has been increasing in importance for a while in Europe, it is now very much on the agenda in regions such as Asia and in particular, China where 80 per cent of analysts report an increase in ESG emphasis at some or all of their companies in 2020. This marks a dramatic rise from 63 per cent in last year’s survey and just 33 per cent in 2018.

Just over 90 per cent of Fidelity International’s analysts covering the US and Canada cite a growing emphasis on ESG at some or all of their companies, compared with just 57 per cent in 2019.

Chart 2: Regional breakdown

Source: Fidelity International Analyst Survey 2020

Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity International commented: “It is encouraging to see an increased focus on ESG from China corporates. We believe this is due a combination of factors including the Chinese authorities’ drive to improve governance, a rush among companies to invest in renewables before government subsidies are cut, and calls from investors for greater transparency around supply chains. More Chinese companies are also considering increasing dividends to shareholders and engaging with investors as a way of attracting further capital.

“In the US, despite a rolling back of environmental regulations at a federal level, interest is growing. Indeed, sustainability is bouncing back after appearing to be on the wane in 2019, spurred on by the very public re-definition of corporate purpose by the Business Roundtable.”

Global sentiment still positive…just

After correctly predicting an end to synchronised growth in 2019 but no recession, this year Fidelity International’s analysts believe the business environment will improve, but only slightly and at a slower pace. Recession again appears to have been postponed, at least until 2021, thanks to low interest rates, recovering global trade and a still-strong consumer. Only 36 per cent of analysts report that their companies are preparing for the end of the cycle, down from 49 per cent a year ago. Instead, Fidelity International analysts anticipate a calmer 12 months for corporate fundamentals in aggregate, even as geopolitical risks remain and the full impact of the coronavirus is still unknown.

Fiona O’Neill, Deputy Head of Equity Research at Fidelity International commented: “Fears of recession have certainly subsided since early 2019, especially in China where only 27% of analysts say companies are preparing for the end of the cycle, down significantly from 70% last year. In fact, the survey’s capex readings and a surprise spike in planned headcount across all sectors and regions (despite already low unemployment) suggest that many companies feel the cycle can be prolonged.

“The big unknown at present is the coronavirus: it’s just so difficult to gauge its length or severity. While we currently view this as a short-term disruptor to the China economy, if it is not effectively contained by Q2 it may well cause global forecasts to shift downward.”

Chart 3: Sentiment is down on last year, but still in positive territory

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