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Fidelity International

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(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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