Investors are now looking at sustainability through a different lens, trying to influence positive change by directing capital to address ESG challenges. As attitudes evolve, so too must the research strategies employed by the financial sector. Fidelity International’s Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, joined forces with Ned Salter, Global Head of Investment Research; and Matthew Jennings, Investment Director for Sustainable Investing, to assess how Fidelity’s holistic approach to ethical analysis can deliver positive outcomes.

Over the past few years, investors have shown a growing desire for a more sophisticated approach to sustainable investing. One that moves beyond the environmental, social and governance (ESG) 1.0 structure that is primarily a risk-management tool used to identify environmental or social factors that could impact a company’s financial performance. Mainly focused on equity investments, ESG 1.0 adopts an exclusion-first approach by, for example, avoiding exposure to ‘bad’ businesses. However, attitudes have evolved, particularly throughout the pandemic, and exclusion is now seen as ineffective vis-à-vis raising the cost of capital for issuers and changing their behaviour.

“At Fidelity, we have thought a lot about investing sustainably and where we want to be in five-to-ten years,” says Tan. He explained that the company’s focus is no longer solely on financial materiality. Instead, it now looks at double-materiality targets that also measure the non-financial impacts of businesses or other stakeholders.

The holistic assessment of a company’s ethical framework

As part of this evolution, Fidelity has enhanced its sustainable research platform by developing a set of core tools that build an in-depth assessment of how companies manage their environmental impact and mitigate any adverse effects on its employees and society.

“We now have ESG 2.0,” says Tan. Essentially, ESG 2.0 is a holistic analysis of a company’s opportunities and risks that encompasses corporate engagement and voting, thematic engagement campaigns, climate ratings, and contributions to the UN Sustainable Development Goals (SDGs). It is more forward looking and closely aligned with how Fidelity deploys its capital.


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Tan provides an example of ESG 2.0 in practice, describing how, until recently, data privacy was not considered material to Chinese internet companies, given they lacked tight regulation. However, last year’s announcement of new rules placed enormous downward pressure on their share prices. “With ESG 2.0, we’ve moved away from relative to absolute assessments.” In other words, his team want to know if a company is performing well on an absolute basis in terms of sustainability rather than simply relative to its peers. “With our approach, we identified companies that were already considering privacy issues and would, thus, be less affected by the new regulations.”

Engagement can drive positive change

Returning to the practice of exclusion and Tan remarks that, “If an investor sells, then there is, by definition, a buyer. So, the seller is simply relinquishing their responsibility.” “Instead, we believe that engagement should play a vital role in sustainable investing to alter corporate behaviour.” By working closely with a company, Fidelity can determine just how serious it is about its ethical responsibilities. The revised model uncovers additional information that published corporate social responsibility (CSR) reports often fail to provide regarding what is happening in the real world. “In addition, ESG 2.0 lets us assess smaller companies that might not have the capacity to invest in sustainability disclosure,” notes Tan. Jennings adds, “We are lucky to have relationships with senior management teams worldwide. This is not something that every firm can accomplish.”

Forward thinking to deliver potentially superior results

Another driver behind a bespoke ESG rating system is the subjectivity and judgement required within ESG research. This is highlighted by a low correlation between the current ratings of external sustainable research providers, which shows that contrasting processes measure different things. “We have the expertise and corporate access to assess companies’ sustainability on a forward-looking basis. In turn, this allows us to deliver solutions that we believe are superior to those currently available in the market,” says Tan.

Fidelity’s approach places a great deal of emphasis on qualitative assessment. Data is backward looking, but by talking to company management teams, customers, suppliers and competitors, it can make assessments that help its teams understand the direction of travel across industries. These appraisals deliver insights that may not be found in readily available data. “Making absolute evaluations and focusing on double-materiality targets that incorporate real-world outcomes is crucial,” says Jennings.

That said, Salter doesn’t overlook market research altogether, saying, “We will continue to report on our own ratings and those of MSCI to make things easier for our clients.”

Less can be more with sustainability assessments

The trade-off with Fidelity’s approach is that it is relatively limited in the number of companies it can effectively cover. “As an organisation, we look at approximately 4,000 stocks, which is lower than, for example, MSCI,” says Tan. Yet, he is comfortable with this number because the teams can cover a smaller amount in greater detail, deriving high-quality information that helps clients focus on their objectives.

Summarising how company behaviour may be changed, Tan says that sustainable investing is multi-layered. The first is system-wide influence, with climate, net zero and exclusion policies. Second is understanding entire value chains to fully comprehend a particular business. The third stage is an assessment of each stock or asset aided by active corporate engagement. “Most importantly, we can only accomplish our goals by having properly trained and incentivised employees,” concludes Tan.

Originally published by Jenn-Hui Tan, Global Head of Stewardship & Sustainable Investing, Fidelity