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.