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There is no one-size-fits-all approach for integrating ESG considerations into an investment process. However, we believe it is important to ensure the broad and deep integration of sustainability into our research, particularly as we head into the era of double materiality where non-financial sustainability objectives are considered alongside traditional financial risk and return goals.

Our approach to sustainability research helps provide us with a 360 view of the companies we monitor and avoids some of the limitations of third party solutions, such as a primary focus on financial materiality, a backward-looking bias and a difficulty in making useful comparisons across regions and sectors.

Adding value beyond third party ESG research

We designed our own sustainable research solution in line with our established fundamental investment philosophy and tailored to the objectives of our clients. This has involved the formation of innovative processes and the evolution of our global research platform to ensure that sustainability fully permeates our research-led culture.

Our analysts undertake qualitative and quantitative sustainability assessments for companies and issuers under their coverage. To do this, they collaborate with our dedicated sustainable research team and use ongoing corporate engagement to help ensure that sustainability assessments are forward-looking, as opposed to the backward-looking ratings of third-party providers that are often based on disclosures.

Our differentiated approach complements third party research

Our differentiated approach complements third party research
Source: Fidelity International, February 2022.

Integrating sustainability: four components of our global research platform

Integrating sustainability: four components of our global research platform
Source: Fidelity International, February 2022.

Our sustainable research is based on four key principles

Our sustainable research evaluates the extent to which issuers manage their material environmental and social impacts. We measure management of impact on an absolute basis, allowing for comparability across sectors and markets. By considering an extended time horizon (ten years), we believe most external material impacts are likely to be covered, which embeds the principle of ‘double materiality’ alongside ‘financial materiality’. We believe that non-financial and financial performance of companies tends to converge over the long-term.

We source specific and comprehensive quantitative inputs to conduct sustainability assessments, such as data from external research providers, data in the public domain, and company disclosures. However, purely quantitative assessments can give an impression of false precision (for example, due to the effect of averaging strong and weak performance) and may fail to detect strengths or weaknesses not directly evident in data.

As a result, we supplement and enrich these typically backward-looking quantitative assessments with qualitative input from our expert fundamental and sustainable research analysts. These experts have local footprints and sector specialisms, which positions them to contribute detailed relevant knowledge. They are also able to access companies’ senior and divisional management, and can therefore provide invaluable insight into their corporate culture, as well as being able to validate company claims. This ensures that our sustainability assessments are forward looking and focus on the issues that matter.

We created our own materiality maps to ensure that companies are assessed using the framework that is most appropriate for their ESG issues and priorities as existing materiality maps do not always capture sector nuances. Our materiality maps now cover an additional 127 individual subsectors formed from a unique selection and weighting of up to 40 individual ESG indicators, as well as additional custom indicators for certain industries such as fabless semiconductors, electric vehicles and nuclear power. The aim of this granularity is to create more focussed and relevant sets of meaningful indicators and metrics for each subsector.

The result of these processes is separate issuer scores for E,S and G, an overall score and a trajectory rating, and detail over the quantitative and qualitative inputs driving each score. This data is widely available to our investment teams. While each portfolio manager will consider these ratings in different ways and to different extents, the flexible output enables easy integration of complex and detailed sustainability data into different investment processes.

Sustainable research provides multiple integration opportunities

Integrating sustainability throughout our investment process enables a positive feedback loop - our research highlights opportunities for ESG engagement and positive change, while our engagement activity provides forward-looking views that can act as inputs into our research processes. Perhaps most pertinently, it will assist with our ongoing product and service innovation efforts and allow us to continue to meet our clients’ evolving needs.

Sustainable research: Multiple integration opportunities

Sustainable research: Multiple integration opportunities
Source: Fidelity International, February 2022.

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