Aditya Shivram, Fidelity Sustainable Global Equity Income Fund
There have been no shortage of major issues and events for global equity investors to deal with over the last 12 months.
Fidelity Sustainable Global Equity Income Fund portfolio manager Aditya Shivram identifies four developments that have been particularly significant for sustainable focused investors, highlighting how this is impacting portfolio companies and the broader opportunity set.
Delivering sustainable investment returns requires patience and a long-term approach. The same can be said for assessing and participating in the sustainability journey of investee companies as they take steps to improve their environmental and social impact. One year on from the launch of the Fidelity Sustainable Global Equity Income Fund* we look at four key developments we've witnessed over this tumultuous period.
1. Environmental progress has been steady but meaningful change will take time
Companies have faced a number of intense challenges over the last year, with war, rising input costs and risk of recession weighing heavily on management and shareholders' minds. This has led some investors to question whether sustainability goals would be displaced from the priority list.
However, as revealed in Fidelity's 2023 Analyst Survey, encouragingly, the vast majority (90%) of Fidelity analysts report that their companies are placing the same or greater emphasis on ESG as they were a year ago.
Within the portfolio, although we have not seen a big bang change in company goal setting over the course of the year, we have witnessed promising incremental changes. When we launched the fund a year ago, the percentage of the portfolio with approved Science Based Targets (SBTs) was 39%. As at the end of March 2023, this figure had increased to 44%. The percentage of the portfolio with committed SBTs (not yet approved) has also risen from 20% to 23%, whilst the percentage of the portfolio with no target has fallen from 13% to 5%.
The path to Net Zero for corporates is not straightforward and the internal changes required take time. For example, companies must build out the ability to capture data effectively before being able to analyse and report on that information and use it to formulate appropriate targets. We therefore take comfort from this steady progress as well as the fact that the fund was launched from a solid starting point: the portfolio was aligned with the IEA Sustainable Development Scenario (associated with a potential temperature increase of 1.5 degrees by 2050) at launch and that remains the case today.
2. Long-term engagement is supporting social outcomes
We've also seen steady improvement from the companies in our portfolio on the social front in the fund's first year. Engagement with portfolio holdings has allowed us to build conviction that companies are moving in the right direction. Our focus here has been on Diversity, Equity & Inclusion (DEI) within holdings in our largest sector weighting, financials. As outlined in our recent update, we've seen evidence of progress, with board and senior leadership representation showing improvements as companies implement a number of DEI tools such as education and training and Enterprise Resource Groups.
Despite these promising signs, our portfolio companies still have a long road ahead of them. As companies look forward, the key area of focus is to improve the collection and robustness of their data to better understand the current state of DEI within their organisations and inform future initiatives.
3. Sustainable investing doesn't just mean growth investing
Many ESG funds have typically had a bias towards growth and technology stocks, providing a strong boost to performance pre-2022. However, the investing landscape shifted in 2022, with inflation and higher interest rates putting pressure on equity valuations and the most severe contractions seen in growth stocks.
Our fund looks for sustainable businesses that trade at reasonable valuations with high levels of earnings persistence. This stylistic focus within sustainable investing proved valuable in 2022, allowing the fund to deliver downside protection against a falling market. As a result, the one-year returns for the fund stand at +3.7% versus -1.4% for the MSCI ACWI. This approach should continue to support performance if valuations and earnings come under pressure this year.
Although the fund sits firmly outside of the growth camp, focusing instead on dividend-based total returns, we remain encouraged by our portfolio companies' exposure to sustainable end markets which continue to offer attractive growth opportunities. For example, electrification and automation offer structural sources of growth for tech hardware and capital goods businesses which we have exposure to in the portfolio.
4. Sustainable businesses continue to offer an attractive source of income growth
The dividends of portfolio companies grew at the aggregate level in 2022, illustrating that sustainable businesses can provide an attractive hunting ground for income-focused investors. This is as at a time when a growing income stream has become increasingly important.
Dividends can play a vital role for investors during periods of high inflation, such as we currently find ourselves in. Unlike bonds, which in most cases pay a fixed level of interest, dividends are paid from company earnings which have the ability to grow in line with inflation. This is particularly the case for high-quality businesses with high margins and pricing power, supported by strong competitive positions, that are able to raise their prices to offset cost increases.
However, not all dividend paying companies are able to pass through higher costs with the same effectiveness, making a selective approach key as we look ahead.
Aditya Shivram, Portfolio Manager, Fidelity Sustainable Global Equity Income Fund
This post is funded by Fidelity International
