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Fidelity International

PRI reporting framework 2020

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ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
99 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
99 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
99 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
99 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

We are an active manager and believe a diversified approach to managing risk in portfolios is the best way to generate superior risk-adjusted performance. This philosophy is based on the belief that fixed income markets are semi-efficient and that through rigorous research, investment opportunities can be identified. The investment process is team-based, combining the strengths and skills of separate disciplines including portfolio management, credit research, quantitative research (including ESG aspects) and trading. This process is designed to ensure that the best investment ideas are identified and incorporated efficiently within client portfolios. ESG integration naturally fits into this approach.

We focus our credit investments in optimal portfolios of high conviction bonds issued by companies where fundamental credit worthiness is not represented by current credit spreads. The strength of our fundamental view is affected for those companies whose businesses are influenced by ESG factors, which will in turn affect the decision to own the bonds.

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

specify description

          Sustainable Investing Analysts are responsible for periodically reviewing quality of ESG research providers and changing if considered necessary to ensure the highest quality research
        

03.2. Describe how your ESG information or analysis is shared among your investment team.

          Quarterly ESG Analyst Reports; ESG Fund Reviews, Controversy alerts, Carbon Footprint Analysis, ESG Research reports at Issuer and Sector level, Proxy voting research
        

03.3. Additional information. [Optional]

Our global Sustainable Investing team provides our PMs with a breakdown of their portfolio according to external ESG ratings. This analysis grounds the discussion our ESG specialists have with the PMs on high risk ESG factors in their portfolios. We provide a similar report to our analysts based on their coverage, this feeds into their investment analysis.

Our global Sustainable Investing team publish "Controversy Alerts" on our Research Management System. These reports include information on companies within our coverage who have been involved in a high risk controversy.

Analysts and PMs can now access external ESG data directly on our internal Research Platform, Insight. This include proxy voting research by ISS, ESG research by MSCI and Carbon Data from Trucost.

Additionally, Insight is also the platform where we have built an app for the analysts to complete the Proprietary Sustainability ratings of their coverage companies and for the whole investment team (including Sustainable Investing Analysts and PMs) to upload company level engagement information.

ESG Information (ratings and carbon footprint) has also been including within the QFRs (Quarterly Fund Review), which is a quarterly meeting the Fund Manager holds with the CIO to discuss the fund’s financial and ESG performance.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

See below - FI 04.3

04.3. Additional information. [Optional]

Sustainable Family

 

Negative Screening/Exclusion

The Sustainable Family Funds adhere to Fidelity’s Firm Wide Exclusion List and as well as an additional Sustainable Family Exclusion List.

 

Firm wide 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 or not 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.

 

In addition, for Funds, included in the Sustainable Family, we exclude:

a) Controversial weapon manufacturers (nuclear, biological, chemical, non-detectable fragment and blinding lasers).

b)Tobacco production companies

c)Companies which violate the 10 principles of UN Global Compact

d)Manufacturers of Semi-Automatic Weapons

An internal advisory group with authority to determine and govern the application of these exclusions will meet every six months to review the exclusions list.

 

Best In Class Approach

The Sustainable Family funds follow a best-in-class approach. The investment universe is driven by selecting companies with strong and improving ESG characteristics, whilst aiming to achieve compelling long-term financial performance and outperformance of its benchmarks. The investment process actively seeks to select companies that are high ESG performers relative to peers and with a target to outperform its benchmarks. The Sustainable Family funds must invest at least 70% of portfolio in securities with strong ESG characteristics and up to 30% of portfolio with low(er) but improving ESG characteristics.

We use a waterfall approach to monitor the sustainable characteristics and compliancy with the framework for the Sustainable Family fund range. MSCI is the primary source for corporates and backfilled by Fidelity Sustainability Ratings, if they don’t have a rating for a security. A security is deemed to have good sustainable characteristics if its rating is AAA - BBB from MSCI or A - C from Fidelity.  MSCI ESG Sovereign Ratings is used for Sovereign securities and good sustainable characteristic requires a rating between AAA – BB”.

 

Currently 2 of our Fixed Income Products are part of the Sustainable Family: (i) Sustainable Reduced Carbon Bond Fund (ii) Sustainable Strategic Bond Fund


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

06.2. Additional information. [Optional]

As highlighted in the previous section, our Sustainable Family of Funds need to comply with a stringent set of requirements both in terms of Negative Screening and Best in Class approach. Please see below:

 

Negative:

In the Sustainable Family, we exclude:

a) Controversial weapon manufacturers (nuclear, biological, chemical, non-detectable fragment and blinding lasers). (MSCI Data)

b)Tobacco production companies (MSCI Data)

c)Companies which violate the 10 principles of UN Global Compact (ISS Ethix Data based on violations of United Nations Global Compact principles, which cover the full E, S and G spectrum)

d)Manufacturers of Semi-Automatic Weapons (MSCI Data)

An internal advisory group (Sustainable Family Exclusion Committee) with authority to determine and govern the application of these exclusions will meet every six months to review the exclusions list.

 

Positive:

The Sustainable Family funds must invest at least 70% of portfolio in securities with strong ESG characteristics and up to 30% of portfolio with low(er) but improving ESG characteristics.

We use a waterfall approach to monitor the sustainable characteristics and compliancy with the framework for the Sustainable Family fund range. MSCI is the primary source for corporates and backfilled by Fidelity Sustainability Ratings, if they don’t have a rating for a security. A security is deemed to have good sustainable characteristics if its rating is AAA - BBB from MSCI or A - C from Fidelity.  MSCI ESG Sovereign Ratings is used for Sovereign securities and good sustainable characteristic requires a rating between AAA – BB”.

 

 

The Sustainable Investing Team reviews the data providers used for screening (negative and positive) at least once a year and this data is onboarded within Fidelity Internal Systems, including pre-trade compliance and Portfolio Monitoring so as to make sure that we are always compliant with the framework of the Sustainable Family.

Raw Norms based screening data is not fully onboarded on our technology systems but we update the list of violators on a bi-annual basis and the list of companies  is then fed into our compliance and trading systems so as to prevent any breach.


(B) Implementation: Thematic

FI 07. Thematic investing - overview (Private)


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

As an active manager, Fidelity regularly engages with investee companies on topics such as ESG and climate topics. In addition to which we also look to monitor much more closely how bonds are performing and whether they are fulfilling their covenant requirements. Where necessary we will engage issuers and sometimes push back on terms. https://fidelityinstitutional.com/en/bond-covenants-beware-of-slipping-standards-late-in-the-cycle-bee15e/#subheading_7

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]

As mentioned earlier in this document, in 2019 we launched our Proprietary Sustainability Ratings, where environmental and social considerations carry a considerable weight towards the final score, and we have carbon footprint data available for our range of fixed income products.  Additionally, one of the main thematic engagement we conduct is focused on enhancing corporate sustainability reporting.


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

Fidelity is dedicated to achieving the best possible risk-adjusted returns for our investors and we believe that responsible investment is essential in maximising returns to our clients. As part of our investment process, we assess and manage any foreseeable risks and opportunities and we consider ESG factors as an element in our assessment. Our ESG integrated approach is relevant across all the asset classes, sectors and markets in which we invest.

The cornerstone of our investment approach is bottom-up research. Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default.

Although our analysts have overall responsibility for analysing the environmental, social and governance performance of the companies and buildings in which we invest, we also have a dedicated global Sustainable Investing Analysts. This individual works closely with the business and investment management teams and coordinates ESG training with the Directors and Heads of Research around the world.

Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues. Credit analysts are cognisant of ESG issues and discuss these when making company visits and making stock recommendations. To this end, contact with the companies themselves provides an important data source.

Although our portfolio managers and analysts meet the companies in which they invest on an ongoing basis, our ESG specialists also attends these company meetings with them when specific ESG issues are being addressed. The specialists work with the portfolio managers and analysts to determine the objectives of the engagement, how best to achieve them and then will ultimately discuss the results of the engagement with the investment team and any additional information relevant to our investment decision.

Our Sustainable Investing Analysts. attend conference calls or face-to-face meetings with the relevant SRI/ESG professionals of our investee firms to address specific ESG concerns. Our eventual goal from these activities is to enable us to gain greater insight into the company's ESG processes, to further our understanding on the issues and to learn how these concerns are being managed by the company.

We use external providers of ESG research and ratings, together with internal research databases, to help identify those issues that could have a direct impact on the companies in which we invest.

Fidelity believes that ESG ratings should be used in conjunction with, rather than as a replacement for, other forms of analysis. These ESG ratings and the full company reports are also included on our Analyst Research Platform, an integrated desktop database, so that each analyst has a first-hand view of how each company under their coverage rates according to ESG factors. Our credit analysts work closely with our equity analysts and utilise the same underlying research system which captures these ESG ratings.

In addition, in 2019 we launched our Proprietary Sustainability Ratings. These ratings are solely for the use of Fidelity’s investment teams and are completed by more than 180 analysts around the world, across equity and fixed income, who participate in around 16,000 company meetings a year. The system allows analysts and portfolio managers to explore a proprietary sustainability database that, at the end of 2019 held information on more than 3,000 issuers. The investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the ESG issues that are the most material to its business. This helps us to determine which companies are following best practice and which are laggards

Our global Sustainable Investing Analysts. 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 our Sustainable Investing Analysts. have with the PMs on the most high 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.

Our global Sustainable Investing Analysts publish "Controversy Alerts" on our Research Management System. These reports include information of companies within our coverage who have been identified by our external vendor to have been involved in a high risk controversy that may potentially have a material impact on the company and its reputation.

Analysts and PMs can now access external ESG data directly on our internal Research Platform, Insight. This include proxy voting research by ISS, ESG research by MSCI and Carbon Data from Trucost.

Over 2019, we have also built a Rating app on Insight, for the Fixed Income and Equity analysts to complete the Proprietary Sustainability ratings of their coverage companies. Given that one of the main features of our Rating is that of being able to provide a forward looking view on the company’s management and actions taken on material ESG issues, we expect that this will also increase our dialogue and engagement with our investee companies so as to better assess their trajectory on said ESG issues. As such, we have also built an Engagement App on Insight for the whole investment team (including Sustainable Investing Analysts, Fundamental analysts and PMs) to upload company level engagement information. This  internal system allows for more efficiency and collaboration amongst the Investment teams and also allow us to monitor engagements by tracking goals, objectives and milestones. 

ESG Information (ratings and carbon footprint) has also been including within the QFRs (Quarterly Fund Review), which is a quarterly meeting the Fund Manager holds with the CIO to discuss the fund’s financial and esg performance.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

A key concern for our sovereign credit team is the long-term sustainability of a country's economic and political situation and therefore addressing ESG issues logically aligns with their country analysis. Our fixed income team will consider ESG factors when they are material to both the creditworthiness and investment performance of the country being analysed. Our sovereign analysts also undertake a large amount of quantitative macro research which is shared with our equity and solutions team. We are currently developing   framework, in line with our Sustainability Proprietary rating methodology, to also rate Sovereign issuers on their ESG profile and this will be put in place during 2020.

Corporate (financial)

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues. Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

Corporate (non-financial)

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues. Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

Securitised

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies.. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues.

We have a granular process for analysing our securitised assets where we meet companies and build a model based on these engagements.

Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

A key concern for our sovereign credit team is the long-term sustainability of a country's economic and political situation and therefore addressing ESG issues logically aligns with their country analysis. Our fixed income team will consider ESG factors when they are material to both the creditworthiness and investment performance of the country being analysed. Our sovereign analysts also undertake a large amount of quantitative macro research which is shared with our equity and solutions team. We are currently developing a framework, in line with our Sustainability Proprietary rating methodology, to also rate Sovereign issuers on their ESG profile and this will be put in place during 2020.

Corporate (financial)

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies.. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues. Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

Corporate (non-financial)

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies.. This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues. Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

Securitised

Our credit analysts are responsible for analysing companies in order to develop a deep understanding of their business, their outlook and, above all, their creditworthiness . and are now also responsible for completing the Proprietary Sustainability rating for their coverage companies.  This helps us to identify investment opportunities and avoid those companies where poor fundamentals, which have not been recognised by the market, could weaken performance and potentially lead to downgrade or default. Engagement with companies is also part of our credit analysts' fundamental approach and we engage with bond issuers communicating to them any specific concerns we may have in respect of ESG issues.

We have a granular process for analysing our securitised assets where we meet companies and build a model based on these engagements.

Within our proprietary rating system, the investment universe has been segmented into 99 distinct sub-sectors, each with industry specific criteria upon which each issuer is assessed relative to their peers using a A-E rating. We have developed a series of qualitative questions designed to capture how well a company proactively manages the E, S and G issues that are the most material to its business.

12.3. Additional information.[OPTIONAL]


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