Fidelity's Esg Investment Strategy: A Sustainable Future?

Fidelity offers a range of sustainable investing options for customers who want to invest according to their personal beliefs and values. Their active, broad-based sustainable investments seek out companies with strong environmental, social, and governance (ESG) profiles, while their thematic offering provides access to sustainability-linked investment trends. Fidelity's sustainable investment research helps uncover new opportunities for investors' portfolios.

Fidelity's sustainable investment funds include the Healthy Future Fund, which invests in companies working to improve life expectancy and decrease negative environmental impacts, and the Climate Action Fund, which focuses on companies mitigating the effects of climate change.

ESG ratings can help investors find investments with favourable sustainability scores, but these vary due to differences in factors considered and how they are interpreted and expressed.

ESG funds and sustainable investing

Sustainable investing is a way to evaluate companies by focusing on key factors that drive financial results. This includes assessing financially material environmental, social, and governance (ESG) factors. Fidelity offers multiple ways to invest sustainably, with diverse funds backed by decades of research and investment expertise.

Active Sustainable Investment Portfolios

Fidelity's active sustainable investment portfolios focus on key factors that their research shows drive financial results. This includes assessing financially material ESG factors.

Sustainable Thematic Offering

Fidelity's sustainable thematic offering provides access to sustainability-linked investment trends. This includes environmental, social, and governance themes.

Environmental Themes

Investing in companies that are responding to consumer demand for sustainable practices, such as the transition to clean energy sources.

Social Themes

Investing in companies that focus on more equitable relationships among their customers, employees, suppliers, and the communities they operate in.

Governance Themes

Investing in companies that exhibit accountable and transparent governance with diverse and independent boards.

Sustainable Funds

Fidelity offers a range of sustainable funds, including:

• Fidelity® Healthy Future Fund (FAPHX): Invests in companies working to improve life expectancy, enhance people's lives, and decrease negative environmental impacts.
• Fidelity® Climate Action Fund (FCAEX): Invests in companies that are working to remove, reduce, or mitigate the effects of climate change.
• Fidelity® Water Sustainability Fund (FLOWX): Invests in companies helping to deliver safe, reliable, and easily accessible water.
• Fidelity® Environmental Bond Fund (FFEBX): Invests in the debt of companies and projects that are recognizing, disclosing, and reducing environmental risk.
• Fidelity® Women's Leadership Fund (FWOMX): Invests in companies that prioritize and advance women's leadership and development.
• Fidelity® Environment & Alternative Energy Fund (FSLEX): Focuses on alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies, or other environmental support services.
• Fidelity® Clean Energy ETF (FRNW): Invests in companies that distribute, produce, or provide technology or equipment to support the production of energy from solar, wind, hydrogen, and other renewable resources.
• Fidelity® Women's Leadership ETF (FDWM): An actively managed ETF that invests in companies that prioritize and advance women's leadership.

ESG Ratings

ESG ratings can help investors find investments with favorable sustainability scores. However, it's important to note that ESG ratings and methodologies can vary among providers. When evaluating ESG ratings, consider the following:

• Factors Considered: Understand the methodology and ESG factors utilized by the ratings provider. Look for providers that identify key factors such as carbon and toxic emissions for an energy company's environmental rating or product safety and drug pricing for a healthcare company.
• Transparency: A provider's ratings methodology may not always be fully disclosed, so it's important to prioritize transparency when choosing a ratings system.
• Forward-Looking Analysis: Many ESG data providers focus on historical data rather than anticipating the future trajectory of a company's sustainability efforts. Fidelity believes that a forward-looking, fundamental analysis can provide a better assessment of how a company is considering sustainability risks and opportunities within its business model.

Fidelity offers a range of sustainable investing options, from active sustainable investment portfolios to sustainable thematic funds. ESG ratings can be a valuable tool for investors to find opportunities that align with their sustainable investing objectives, but it's important to consider the differences in methodologies and factors among ratings providers.

ESG ratings

There are several companies that provide ESG ratings, each with its own methodology and focus. For example, the MSCI ESG Ratings model identifies the ESG risks, or "Key Issues", that are most material to a specific sub-industry or sector. MSCI rates companies on a scale from leader (AAA, AA) to average (A, BBB, BB) to laggard (B, CCC).

The S&P Global ESG Score, on the other hand, measures a company's performance on and management of material ESG risks, opportunities, and impacts. This score is informed by a combination of company disclosures, media and stakeholder analysis, modelling approaches, and in-depth company engagement via the S&P Global Corporate Sustainability Assessment (CSA). The S&P Global ESG Score uses a double materiality approach, whereby a sustainability issue is considered material if it has a significant impact on both society or the environment and a company's value drivers, competitive position, and long-term shareholder value creation.

Fidelity, a well-known investment company, also offers sustainable investment options that consider financially material environmental, social, and governance factors. Fidelity's active sustainable investment portfolios focus on key factors that their research shows drive financial results. This includes assessing financially material environmental, social, and governance factors. Fidelity offers a range of funds and ETFs that seek out companies with strong ESG profiles or provide access to sustainability-linked investment trends.

Sustainable investing funds

Fidelity offers a diverse range of funds for customers interested in sustainable investing, backed by decades of research and investment expertise. Their active, broad-based sustainable investment strategies consider financially material environmental, social, and governance (ESG) factors, while their thematic offerings provide access to sustainability-linked investment trends.

Environmental Themes

Fidelity's environmental theme funds invest in companies that are responding to consumer demand for sustainable practices. For example, the Fidelity® Climate Action Fund (FCAEX) invests in companies working to remove, reduce, or mitigate the effects of climate change, while the Fidelity® Water Sustainability Fund (FLOWX) focuses on companies ensuring safe, reliable, and easily accessible water.

Social Themes

The social theme funds focus on companies that foster more equitable relationships with their customers, employees, suppliers, and communities. For instance, the Fidelity® Healthy Future Fund (FAPHX) targets companies working to improve life expectancy, enhance people's lives, and decrease negative environmental impacts. The Fidelity® Women's Leadership Fund (FWOMX) and the Fidelity® Women's Leadership ETF (FDWM) invest in companies that prioritize and advance women's leadership and development.

Governance Themes

The governance theme funds target companies that demonstrate accountable and transparent governance, with diverse and independent boards.

Fidelity also offers a range of sustainable funds with broader focuses, such as the Fidelity® Sustainable International Equity Fund (FSYRX), which provides exposure to developed market companies with robust ESG practices, and the Fidelity® Sustainable Emerging Markets Equity Fund (FSYJX), which targets emerging market companies with attractive ESG profiles.

ESG Ratings

ESG ratings can be a valuable tool for investors to assess potential investments. However, it's important to understand the methodologies and factors used by different ratings providers, as they can vary significantly. Fidelity emphasizes the importance of forward-looking analysis to assess how companies are considering sustainability risks and opportunities within their business models.

Sustainable Personalized Portfolios

Fidelity also offers Sustainable Personalized Portfolios, which are professionally managed multi-asset class portfolios that seek to maximize returns while prioritizing sustainable investments. These portfolios are designed to help investors build a personalized plan that aligns with their financial goals and values.

ESG and corporate governance

The "G" in ESG stands for "governance" and refers to whether a company manages its business in a responsible way. Corporate governance is concerned with how companies interact with external stakeholders, including competitors, suppliers, shareholders, and governments. It is the most established of the three pillars of ESG investing, with many of the governance factors focusing on questions that prudent investors have always considered before investing.

Historically, investors cared most about governance issues that might affect shareholder rights. Today, corporate governance includes how companies interact with competitors, suppliers, governments, and other stakeholders, in addition to shareholders. The principle of "investor stewardship" suggests that investors should engage with companies to encourage them to improve their governance.

Good corporate governance is often associated with higher returns for shareholders. The analysis of corporate governance has expanded beyond shareholder rights to include other governance factors, particularly those that affect a company's interactions with competitors, suppliers, and governments.

The "G" in ESG can be further broken down into the following factors:

• Leadership and internal controls
• Board diversity and composition
• Strategies and policies
• Management structure
• Executive compensation
• Employee compensation
• Corporate behaviour
• Reporting and transparency
• Business ethics
• Board oversight
• Shareholder rights
• Stock buybacks
• Dark money given to influence elections

The inclusion of ESG criteria in investment decisions has attracted growing interest in the financial markets. However, the integration of ESG issues faces several challenges, including the inherent complexity of ESG criteria, the long-term nature of many benefits, and the lack of transparency and standardization in the information available.

ESG investing risks

Fidelity offers a range of sustainable investment options for its customers, including mutual funds and ETFs that focus on environmental, social, and governance (ESG) factors. While ESG investing has gained popularity in recent years, it is important to consider the potential risks associated with this type of investment strategy. Here are some key risks to consider:

Lack of Universal ESG Standards

There is currently a lack of universally accepted standards for evaluating ESG performance. This can lead to inconsistencies in ESG portfolios and funds, as different companies and investors may have varying interpretations of what constitutes a strong ESG track record. For example, some investors may be surprised to find that certain ESG funds include tobacco stocks, which may contradict the social and environmental goals of ESG investing. The lack of standardised criteria for ESG evaluation can make it challenging for investors to make informed decisions and compare different investment options effectively.

Limited Long-Term Data on Financial Performance

The relatively recent emergence of ESG investing means that there is limited long-term data available on the financial performance of ESG-focused companies. While initial research suggests that ESG companies may offer lower downside risk and comparable or superior financial returns, longer-term data could reveal different outcomes. If ESG companies are found to be less resilient or less profitable over an extended period, investors primarily focused on financial returns may shift their investments away from the ESG sector.

Voluntary Nature of ESG Reporting

ESG investing relies heavily on companies voluntarily reporting sustainability data and committing to ESG initiatives. However, there is a risk that companies may choose to deprioritise or discontinue their ESG efforts and reporting. A broad reduction in the number of companies voluntarily disclosing sustainability data would limit the pool of high-quality, investable ESG companies available to investors. This could impact the diversification and performance of ESG portfolios.

Regulatory and Compliance Risks

The complex and dynamic nature of ESG investing presents challenges for regulatory compliance. The US Securities and Exchange Commission (SEC) has issued a risk alert highlighting several key risks, including inconsistent ESG disclosures, weak monitoring of ESG guidelines, misleading investment claims, and inadequate control mechanisms. These issues can lead to regulatory, reputational, financial, and strategic risks for companies engaged in ESG investing. It is crucial for investors to conduct thorough due diligence and carefully assess the authenticity of ESG investment opportunities to mitigate these risks effectively.

Superficial Engagement with ESG Principles

Some investors may place a disproportionate emphasis on the environmental aspect of ESG, neglecting the social and governance components. This superficial engagement with ESG principles can lead to suboptimal outcomes. To effectively manage risks and ensure the long-term sustainability of their investments, investors should actively engage with all facets of ESG. This includes integrating ESG considerations into their decision-making processes, actively voting their shares, and holding companies accountable for their ESG commitments.

Frequently asked questions