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Fidelity Investments

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
1 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
99 Integration alone
1 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
99 Integration alone
1 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 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.

ESG factors are linked to the creditworthiness of issuers. Companies who follow ESG best practices often tend to be more insulated from exogenous shock. Moreover, management teams who have a broader focus on all stakeholders often take debtholders more into consideration than do companies seeking purely to maximize profit. Understanding these drivers as part of our broader fundamental research background allows us to better understand the true risk profile of issuers and therefore make more accurate assumptions of fair value. Considering that fixed income returns are structurally more limited than equity, we are even more interested in the long-term overall risk profile of companies. Our ESG integration allows us to comprehensively assess the risk profile of issuers and help us more accurately price debt securities.
In the past, we've been asked to manage custom portfolios that incorporate ESG criteria for clients. We can accommodate these restrictions in a separate account structure. Typically, these custom portfolios will include restrictions or exclusions for specific companies or market sectors as requested by our client.

01.3. Additional information [Optional].

While we do not screen out companies from our investment universe, except for specific custom portfolios we manage for institutional investors, we adopt a positive engagement approach and discuss ESG issues with the management of the companies in which we invest or consider investing on behalf of our clients. We use the information gathered during these meetings both to inform our investment decisions and to encourage company management to improve procedures and policies. Fidelity believes that strong management creates long-term shareholder value and we generally support management of companies in which we have invested fund and account assets. We also recognize, however, that the company's shareholders, the owners of the company, have a responsibility to evaluate how management and directors are performing, and how shareholders' rights and ownership interests are handled. As shareholders, we may form our own views on the strategy and governance of a particular business, and our views may inform our interactions with companies and our proxy voting practices. We also engage with companies' management and directors, through visits and meetings, to confer on topics, such as ESG issues, that we believe could affect long-term performance. Fidelity believes that high standards of corporate responsibility generally make good business sense and have the potential to protect and enhance investment returns.

Generally, ESG matters serve as a factor in security valuation and investment management and have for a long time. One key to analyzing any security is to develop an understanding of the material factors that contribute to the value of that security. These factors are most often understood to be financial factors, yet other factors that may be construed as non-financial could be viewed as material to the value of a security. Our investment staff includes all material factors into their security analysis process as they assess the valuation and outlook of a security.


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

          ESG specialists are responsible for periodically reviewing quality of ESG research providers and making changes if necessary, to ensure our continued receipt of quality research.
        

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

03.3. Additional information. [Optional]

Our fixed income analysts may include in their research notes, assessments of material ESG factors pertaining to a portfolio company being evaluated. Some ESG issues are industry-wide or global, while others are specific to the individual company. Research notes posted to our global research database are generally available to all Fidelity investment professionals, subject to internal policies and procedures.


(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)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

In order to meet specific client objectives, Fidelity utilizes company-specific third-party ESG data and a unique filtering process to screen and identify negative list issuers from a baseline global index. Following the filtering process, the strategies leverage Fidelity's fundamental research across the organization to drive the selection process and advanced portfolio construction techniques to build a portfolio that meets the investment objective.

04.3. Additional information. [Optional]


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

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

Our portfolio managers and analysts incorporate ESG factors and research into the “mosaic” they use to evaluate investment opportunities, alongside other public filings made by subject companies.  ESG ratings from our third-party providers have been integrated within the proprietary holdings and research tools at Fidelity. Our investment professionals have the capability of seeing ESG ratings on their holdings and benchmark alongside other fundamental, quantitative, and technical ratings. The investment team has the capability to perform individual analysis of ESG risk exposures through our integration with various platforms such as Bloomberg. Fidelity is in the process of enhancing its internal real-time analytics and reporting to incorporate ESG risk exposures directly on the investment professional desktop. 

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 addressing ESG issues in their country analysis. Our fixed income team considers ESG factors when they are material to both the creditworthiness and investment performance of the country being analyzed. Our sovereign analysts also undertake a large amount of macro research, which is shared with our equity and solutions team.

Corporate (financial)

Our credit analysts are responsible for analyzing companies in order to develop a deep understanding of their business, outlook, and creditworthiness. This helps us to identify investment opportunities and avoid companies where poor fundamentals, which have not been recognized 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.

Corporate (non-financial)

Our credit analysts are responsible for analyzing companies in order to develop a deep understanding of their business, outlook, and creditworthiness. This helps us to identify investment opportunities and avoid companies where poor fundamentals, which have not been recognized 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.

Securitised

Our securitized analysts generally incorporate ESG factors into their fundamental credit analysis of asset-backed issuances, which serve as a vehicle to provide credit to businesses and general consumers.  Our analysts consider, among other factors, aggressive and/or predatory lending practices, regulatory standing and compliance, and underlying loan characteristics as part of the research mosaic.

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 addressing ESG issues in their country analysis. Our fixed income team considers ESG factors and works with the centralized ESG team to determine material factors that are integral to both the creditworthiness and investment performance of the country being analyzed. Our sovereign analysts also undertake a large amount of macro research, which is shared with our equity and solutions team.

Corporate (financial)

Our credit analysts are responsible for analyzing companies in order to develop a deep understanding of their business, outlook, and creditworthiness. This helps us to identify investment opportunities and avoid companies where poor fundamentals, which have not been recognized 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.

Corporate (non-financial)

Our credit analysts are responsible for analyzing companies in order to develop a deep understanding of their business, outlook, and creditworthiness. This helps us to identify investment opportunities and avoid companies where poor fundamentals, which have not been recognized 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.

Securitised

Our securitized analysts generally incorporate ESG factors into their fundamental credit analysis of asset-backed issuances, which serve as a vehicle to provide credit to businesses and general consumers.  Our analysts consider, among other factors, aggressive and/or predatory lending practices, regulatory standing and compliance, and underlying loan characteristics as part of the research mosaic.

12.3. Additional information.[OPTIONAL]


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