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Fidelity International

PRI reporting framework 2020

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
99.1 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
0.25 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
0.65 %
Total actively managed listed equities 100.7%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

At Fidelity International, we believe that high standards of corporate responsibility generally make good business sense and have the potential to protect and enhance investment returns.

Our investment process integrates analysis of ESG issues and focuses on instances where  these have a material impact on either investment risk or return in order to achieve the best possible risk-adjusted returns for our investors. We seek to gain an understanding of the relevant ESG issues applicable to our investments through our internal research process and to identify these issues before they escalate into events that may potentially threaten the value of our investment. We encourage integration of ESG issues into our investment decision-making process when it has a material impact on the investment or it has the potential to affect the long-term value of the investment. Our ESG integrated approach covers all the asset classes, sectors and markets in which we invest.

The cornerstone of our investment approach is bottom-up research. As well as studying financial results, our portfolio managers and analysts are dedicated to carrying out additional qualitative analysis of potential investments. They visit companies in person, examining everything that could have an effect on business, from the shop floor to the boardroom. Customers and suppliers also come in for scrutiny. In this way we can develop a 360-degree view of every company in which we invest and ESG factors are integral to this research process.

Our investment analyst team provides proprietary sustainability ratings across our investment universe. Comprising of Fidelity’s equities and fixed income coverage universe of over 3,000 issuers, the sustainable ratings leverage Fidelity’s extensive research capabilities and ongoing engagement with management teams to provide a forward-looking evaluation of a company’s performance and trajectory on ESG-related issues.  The ratings framework divides the investment universe into 99 subsectors, each with industry-specific criteria against which the issuer is assessed relative to its peers, using an A to E rating. The proprietary sustainability ratings draw upon the assessments of more than 180 equities and fixed income analysts who take part in more than 16,000 company meetings a year. The ratings are updated on an annual basis or following a change of policy or an exceptional event at the company. The proprietary ratings have been fully integrated into Fidelity’s investment process and internal research platform and are available to all our investment teams as an additional source of insight and to support investment decisions across Fidelity’s client portfolios.

In addition, we subscribe to a number of external data vendors to complement our internal ESG research. Our external research sources globally provide ESG-themed reports, research, ratings and data on themes such as corporate involvement in verified or alleged failures to respect international norms, for example the Ten Principles of the United Nations Global Compact as well as on carbon emission, fossil fuel and power generation. The coverage of companies varies by provider and the providers currently cover more than 14,000 companies globally. The external ESG ratings, full company reports, and ESG controversy alerts are included on our internal research platform. Moreover, on a quarterly basis the investment teams are provided with comprehensive set of reports summarising companies within our investment coverage that the external research vendor has rated high or low according to a multi-stage ESG ratings model. The report highlights companies that have been implicated in any substantial controversies and/or events during the quarter and also includes "best in class" ratings analysis to draw the attention of our analysts to the high level performers. ESG ratings and carbon intensity are included in the Quarterly Fund Review (QFR) process. The QFR is a detailed analysis of each portfolio, conducted by the relevant CIO and attended by the portfolio manager and representatives from the risk, portfolio construction and investment directing teams. An understanding of each portfolio's exposure to ESG related issues is a fundamental part of this review.

While Fidelity’s investment analysts have overall responsibility for analysing the ESG characteristics of the companies and assets under their coverage, they are supported by a specialist Sustainable Investing Team that sits within the Global Investment Team and works closely with the business and investment management teams globally across all asset classes. The Sustainable Investing Team is comprised of subject matter experts and is responsible for, among other things, maintaining the firm-wide sustainability framework and providing expert thematic insight into ESG investment themes. The team also leads engagement initiatives on various sustainability themes.

We continue to invest in our internal research platform to support ESG integration and improve our investment process. This recently included the roll out of an Engagement App on our internal research platform to allow for an enhanced, systematic recording of engagement activities. ESG analysts, Fundamental Analysts and Portfolio Managers will be able to input the themes discussed at meetings and targets set with investee companies so as to be able to better track and monitor the development and outcomes of our Engagement efforts.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Fidelity’s Sustainable Family (“SF”) fund range is a carve out of FIL’s pooled product range and has a strict and coherent ESG framework to ensure consistent, transparent and credible ESG product family across asset classes. The investment universe is driven by selecting companies with strong and/or improving ESG characteristics whilst aiming to achieve compelling long-term financial performance and outperformance of its benchmarks. The SF offers two investment categories: best-in-class and sustainable thematic. The best-in-class funds actively seek to select companies that are higher sustainability performers relative to peers, while the sustainable thematic funds use an investment approach that contributes to addressing sustainability challenges or creates a positive value-add to society and the environment.

SF funds are required to invest a minimum of 70% of the portfolio in securities that maintain sustainable characteristics such as effective governance and superior management of environmental and social issues. SF funds are also subject to an additional level of exclusions on top of Fidelity International’s firm-wide exclusions list

As of the end of 2019, the SF including the following listed equity funds:

SF best-in-class funds: 

- Sustainable Global Equity Fund

- Sustainable Eurozone Equity Fund

SF sustainable thematic funds

- Sustainable Water and Waste Fund

 


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

As part of our approach to responsible investment, Fidelity considers the exclusion of companies from our investment universe based on ESG criteria. We place companies which we regard as unsuitable investments on an Exclusion List. When deciding on whether to exclude a company we are guided by international conventions, particularly the Convention on Cluster Munitions, the International Convention on the Prohibition of the use of, stockpiling, production, and transfer of Anti-Personnel Mines, guidance from the United Nations, The World Bank, and other global regulations upholding ESG principles.

All funds managed by Fidelity International are subject to Fidelity International’s firm-wide exclusions list (cluster munitions and anti-personnel landmines). We also have extensive experience in managing institutional client portfolios with specific restrictions/guidelines in place. Some examples of client-requested exclusions that we have implemented include controversial weapon producers, alcohol and tobacco stocks, home country stocks, or stocks in which the investor has an economic interest.

Additionally, Fidelity has a Sustainable Family of Funds (“SF”) which is subject to an additional level of exclusions covering manufacturers of controversial weapons, civilian firearms, and tobacco.

Fidelity's firm-wide Exclusions Policy Framework can be found on our websites and we review the exclusion list on a quarterly basis.

https://www.fidelity.co.uk/assets/pdf/personal-investor/about-fidelity/corporate-governance/exclusion-policy-framework.pdf

Screened by

Description

Funds in Fidelity’s Sustainable Family (“SF”) range - which on the listed equity side are the Sustainable Global Equity Fund, Sustainable Eurozone Equity Fund, and Sustainable Water and Waste Fund -- are required to invest a minimum of 70% of the portfolio in securities that maintain sustainable characteristics which may include, but are not limited to, the securities the investment manager believes to have effective governance and superior management of environmental and social issues. The Sustainable Global Equity Fund and Sustainable Eurozone Equity Fund follow a best-in-class approach, with the aim of selecting companies that are higher ESG performers relative to peers or where we identify an improving outlook (i.e. an expected outperformer).

Screened by

Description

Funds in Fidelity’s Sustainable Family (“SF”) range - which on the listed equity side are the Sustainable Global Equity Fund, Sustainable Eurozone Equity Fund, and Sustainable Water and Waste Fund -- as well as the Fidelity Institutional European Smaller Companies Fund,  are subject to a norms-based screen applying the 10 Principles of the UN Global Compact to ensure that the funds do not invest in companies that are not compliant with these principles.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

We notify of changes to the investment process to investors via the relationship managers and also via shareholder letters where required by regulation if there are changes to the prospectus


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

We adopt a principles-based approach to ESG matters and as part of this we place companies which we regard as unsuitable investments on an Exclusion List. When deciding on whether to exclude a company we are guided by international conventions particularly the Convention on Cluster Munitions, the International Convention on the Prohibition of the use of, stockpiling, production and transfer of Anti-Personnel Mines, guidance from The United Nations, The World Bank and other global regulations which uphold ESG principles.

The ESG Oversight Group governs the definition and application of this Exclusion Policy and any security specific exclusion lists created as a result thereof, subject to the approval of the Fidelity Board. Our full exclusion list is reviewed quarterly unless a specific event necessitates an out-of-cycle review.

The compliance monitoring team monitors the portfolios with screening criteria systematically through hard coded restrictions in the investment guidelines


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

The Fidelity Funds (FF) Sustainable Water & Waste Fund is a thematic Environmental, Social, and Governance (ESG) fund that seeks to deliver long-term capital growth over the market cycle by investing globally in companies involved in the design, manufacture, or sale of products and services in connection with the water and waste management sectors. It invests across the water and waste value chains, including in companies developing new technologies to meet the ever-growing demand for such products and services.

The Portfolio Manager (PM), Bertrand Lecourt employs a distinctive, replicable bottom-up investment process, focusing on quality and growth, with an overarching emphasis on sustainable investments. It is a research-driven approach involving fundamental research, leveraging on Fidelity’s proprietary research and additional market data.

The FF Sustainable Water & Waste Fund believes that water and waste management related investments are driven by long-term mega trends and should potentially generate strong long-term investment returns. The PM aims to profit by achieving a long-term view of company fundamentals using substantial internal and external resources to analyse the profit drivers of each company by region, division and product. The PM also believes that by investing in companies which operate with high standards of corporate responsibility and overall ESG objectives, the fund can further protect and enhance investment returns for our clients.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Our investment analyst team provides proprietary sustainability ratings across our investment universe.  The ratings framework divides the investment universe into 99 subsectors, each with industry-specific criteria against which the issuer is assessed relative to its peers, using an A to E rating. The ratings are updated on an annual basis or following a change of policy or an exceptional event at the company. The proprietary ratings have been fully integrated into Fidelity’s investment process and internal research platform and are available to all our investment teams as an additional source of insight and to support investment decisions across Fidelity’s client portfolios.

We receive ESG ratings and company reports from an external vendor which are systematically incorporated into our research management system. The ESG ratings are also included in our analyst company reports. In addition, we provide the investment team with quarterly reports highlighting industry leaders and laggards within our holdings.

Our Sustainable Investing team concentrate on ESG factors in their engagements with investee companies and report this information back to the investment team.

Fidelity maintains a permanent in-house team of governance specialists who work closely with the investment team and who are responsible for conducting our voting activities.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

          ESG risk profile of analyst coverage
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          ESG Fund Reviews
        

09.6. Additional information. [Optional]

We use an external ESG research provider to supplement our analysis for both the equity and fixed income teams globally. These reports are forwarded by the vendor to the company for review by them.

Our Sustainable Investing team is responsible for periodically reviewing the quality of our ESG research provider and changing providers if considered necessary.

Our global Sustainable Investing team also provide our PMs around the world, on request, with a breakdown of their portfolio according to the external ESG ratings. This fund analysis forms part of the discussion members of our ESG team have with the PMs on the highest risk ESG factors in their portfolios. We also provide a similar report to our analysts based on their coverage and this forms part of their overall investment analysis.

ESG ratings and carbon intensity are included in the Quarterly Fund Review (QFR) process.  The QFR is a detailed analysis of each portfolio, conducted by the relevant CIO and attended by the portfolio manager and representatives from the risk, portfolio construction and investment directing teams.  An understanding of each portfolio’s exposure to ESG related issues is a fundamental part of this review.


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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