This article has been written by an expert contributor from Fidelity International.
Our third annual ESG Analyst Survey has identified a gap between the action needed to deliver net zero and how the corporate world is currently performing. Fidelity’s Head of Fixed Income Research Gita Bal met with portfolio manager Dhananjay Phadnis to examine the results and highlight the key messages emerging from the study, with additional input from Jonathan Neve, airline specialist and Senior Credit Analyst.
It’s only seven years until 2030. This is when Fidelity’s analysts want to see most companies achieve their carbon net-zero targets. Yet, there’s a sense that too many are not on track, and the transitionary pace needs to quicken. “I think there’s insufficient capital expenditure, and we need a tighter focus on regulation and government incentives to aid an effective transition,” notes Bal. That said, there are still a lot of positive takeaways from this year’s survey, with, for instance, our analysts observing increasing focus among businesses on environmental, social and governance (ESG) factors.
Company engagement is central to Fidelity’s sustainability drive
The study among Fidelity’s analysts also reveals that company engagement has improved, particularly in China and Japan. For the past few years, what our analysts saw as effective engagement has hovered around the 30 per cent level for China, but in 2023, this is up by 20 percentage points. “Investors incorrectly perceive Asia as an engagement laggard, but we are enjoying fruitful meetings and conversations with many companies,” says Phadnis.
Typically, Fidelity’s analysts undertake two types of conversations when they meet with businesses. One centres around broader ESG matters, while the other concerns proxy voting. “With the former, we cover, for example, emissions disclosure, diversity, or data privacy,” explains Phadnis. Regarding the latter, Fidelity actively encourages companies to improve their governance frameworks. “As shareholders, we are exercising our right through the proxy voting mechanism,” he continues. Bal points out that almost 40 per cent of Fidelity’s interactions with companies include some level of ESG engagement. Indeed, there is a sense that we are “pushing at an open door” when talking about ESG, with businesses keen to understand what is considered good practice. “Overall, a company that improves its ESG profile is reducing business risk,” continues Phadnis.
Sector progress will be uneven
However, not all market segments find the path towards net zero straightforward. On a positive note, communications and IT are largely on track, partly because many of the leading players in these sectors have achievable ambitions. On the other hand, businesses operating in, for instance, the energy and airline space rely more on the developmental pace of transformative technologies. “I estimate that 10 per cent of the airlines’ path to net zero will happen this decade,” says airline specialist Neve. Savings will come from investments in more fuel-efficient aircraft and sustainable aviation fuel. “The key problem is that the technology to get there has still to be developed.”
The drive for tighter regulation
Company engagement is crucial, but “Government regulation and incentives are also essential to drive change,” says Bal. Both investors and consumers have roles to play, but if environmental and social goals are to be achieved, common standards are needed. In the ESG Analyst Survey, 98 per cent of those questioned say that regulation helps accelerate progress towards sustainability goals. Meanwhile, only a quarter of the companies covered by Fidelity currently use carbon markets as a part of their net-zero ambitions. As such, they need clearer price mechanisms and international functionality.
ESG factors will remain in scope but are being viewed differently
From a broader economic perspective, Fidelity’s base case is that the US will enter a recession, and other leading economies should remain weak. Disrupted supply chains and energy markets have been an issue for many economies, but despite a recovery in select territories, such as India and Indonesia, Phadnis admits that there is no escape from the fact that the world economy is slowing. “While ESG remains pertinent, we need to keep an eye on some areas where it’s “slipping down the list of priorities,” says Bal. This includes real estate, which is experiencing challenging conditions globally. She is also cautious about companies that overlook the ‘S’ or social element of ESG, “They’re not doing an effective job, which introduces risk” concludes Bal.
Learn more about sustainable investing at the Fidelity website and explore case studies of how Fidelity engages with their investee companies.
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